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Understanding the Tax Implications of the Youth Wage Subsidy

03 June 2016   (0 Comments)
Posted by: Author: Gareth Hardy
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Author: Gareth Hardy (BCE Consulting)

Although the controversial Youth Wage Subsidy, made possible through the Employment Incentive Act (EIA) has been with us for a while, many businesses don’t realise that they should be receiving monetary benefits from it. With its extension beyond 2016 in doubt, businesses have limited time to apply for an ETI reimbursement. 

The Youth Wage Subsidy,which came into being through the Employment Incentive Act No 26 of 2013 (ETIA),allows employers to claim a deduction on the amount of PAYE they have to pay over to SARS based on the number and salary of qualifying employees, provided that certain conditions are met.

Since its inception in January 2014, the Employment Tax Incentive (ETI) has been both fiercely criticised and praised. It will no doubt again draw the political spotlight before it either comes to an end in December 2016 or is extended.

There are number of compelling reasons why some companies find the ETI to be a powerful mechanism. For one it is immediately accessible, in other words, a business does not need to go through a special application process to gain access to its benefits.There are no Black Economic Empowerment or gender requirements.The ETI is not taxable and it doesn’t have an impact on other allowances such as the Learnerships’Allowance. Perhaps its most alluring aspect is that the ETI can result in a physical cash refund or reimbursement to a business.

 In this way, the ETI immediately affects your bottom line and frees up cash reserves to grow and enhance your business. Lastly, the  ETI is a self-assessment tax claim, no audit or pre-approval are required before claiming the benefit.

I have studied the ETI in detail and consulted across various industry sectors. Without a doubt one of the biggest challenges ETI faces are that few are actually aware that the ETI program exists. Those that do know of its existence may not understand the ETI’s computations and compliance requirements; and may be under the misconception that the ETI is easy to calculate and manage.


Who Qualifies For the ETI?

Although the ETI provides potential benefits there are a number of criteria that the employer must meet. 

Step 1 - It is important to ensure that the employer qualifies to claim ETI and has qualifying employees. For the most part - provided the employer is registered for PAYE, is not a sphere of government, and does not fall foul of any of the anti-avoidance measures - they will be eligible an employer.

Step 2 - The employer must be ETI Tax compliant on the day of the submission of the ETI claim via the Monthly Employer Declaration (EMP 201) form.

Step 3 –The employer needs to claim the ETI deduction for "qualifying employees” – these are employees who meet the following criteria:

  • they must be employed on or after 1 October 2013;
  • the employee must have a green ID book or valid asylum seekers work permit;
  • employees must be younger than 29, unless the employer is located in a  special economic zone in which case this requirement falls away, and;they must earn less than R6000 per month.

You may not terminate an existing non-qualifying employee in favour of hiring those that meet the ETI requirements. The penalty for doing so is severe.


Alright, so your business qualifies for ETI, but how much does it have on the bottom line?  

An employer who is entitled to an ETI credit for "qualifying employees” receives the benefit through the offset of the gross monthly ETI value against any PAYE payable. In other words, PAYE liability is reduced.

This credit is calculated per employee per month in accordance with a SARS formula and submitted with your monthly PAYE return. You may only claim an ETI credit for a maximum of 24 months for any one employee and the ETI credit is decreased after 12 months.  There are 28 ETI critical events in the full claim period for any one employee that the employer must manage.

When calculating ETI, please note that since 1 March 2015 hours are to be used instead of days when apportioning ETI.

Let’s have a look at an example of how an ETI claim works

Assumptions: The employer has ten qualifying employees which all earn R2 000 per month and a total PAYE bill of R50 000 per month. 

Claim: The employer submits the monthly PAYE return showing that they have a R50 000 PAYE liability. However, because they employ 10 qualifying workers, they also have R10 000 in ETI credit. This means that the employer needs to pay SARS R40 000. The R10 000 credit is treated as if it had been actually paid to SARS.

What does this mean from a business perspective? 

This translates into a reduction of 37.5 per cent in direct labour costs in the example above.

The hoops you need to jump through

In order to claim ETI you must be ETI compliant on the day you submitted your ETI claim. This means that there may be no outstanding tax return for any tax type, nor must there be any tax amounts outstanding. Timing of the submission is important.

A tax clearance certificate will not be adequate to proof compliance.

The ETIA is still subject to the provisions of the Tax Administration Act.  The most important of these is "Burden of Proof”. When your ETI claim is eventually audited by SARS I would recommend that you have already compiled a bare minimum SARS audit pack that includes including the following:

  • proof that employees were paid minimum wage or where there is no minimum wage paid at least R2 000 p.m;
  • proof that there were no returns outstanding or taxes due on the date of each submission;
  • very detailed computations per month per employee. Remember, SARS can ask for the data electronically and as such could request a report and verification of every single employees ETI computation, and;
  • copies of contract of employments together with company policies regarding working hours, salaries, copies of ID documents, etc.

The ETIA contains numerous anti-avoidance measures. Although non-compliance with these measures is a common pitfall,  sadly the pitfalls are not widely publicised.

Example 

Company A has a monthly PAYE cost of R50 000 per month. In January of 2014 they were subjected to a VAT audit and SARS adjusted the input VAT leaving a R2 000 balance payable. The company submitted an objection in January 2014, which is likely to succeed.  However, before the objection was conceded Company A calculated that their ETI Benefit was R10 000 and used this value going forward. In July 2014 SARS concedes to the VAT objection and there is no more outstanding VAT.

Consequences

The ETI was disallowed because at the time of submission there was an outstanding tax debt due to SARS. The ETI loss is R60 000, penalties and interest are levied at +- R6000. The company now owes SARS +- R66 000. Furthermore all the PAYE monthly returns are wrong from January 2014 to June 2014. 

The July 2014 ETI benefit may not be utilised until the outstanding PAYE balance is settled. Not only does Company A now owe +-R66 000 to SARS but they can no longer utilise their ETI benefit. 

Solution

Had Company A made use of the relevant relief provisions in the Tax Administration Act in terms of section 164, the VAT debt would not affect the ETI Compliance. Alternatively the other simple option - if viable - is to pay the outstanding VAT balance and object thereafter.

How ETI reimbursement works

Most companies who qualify to claim for ETI never receive a refund paid into their bank accounts. The PAYE owed is offset against the ETI credit and because they usually owe SARS more in PAYE each month than what their ETI credit is worth, they do not receive payment from SARS.

That said, as a taxpayer you may find that your ETI credit is greater than the amount of PAYE owed to SARS every month and /or you never utilised your ETI before, so this  results in a once off reimbursement.

These cash refunds will only happen every six months after the physical returns submitted together with the monthly and annual calculations as well as the source documents have been rigorously audited.

Industries with high staff turnover, lean management structures and low wages usually give rise to material ETI reimbursement.

What is in it for the stakeholders?

Taxpayers – ETI Claimants

Taxpayers will benefit financially by releasing working capital into their business and be able to grow them in line with the intention of this incentive. By reducing the cost of employment, ETIs make firms more competitive locally and globally. The additional freed up cash could also be utilised towards training and education programs for employees.

However, in order to claim these benefits corporates will need to raise their level of education in relation to tax as a whole and specifically when it comes to matters concerning ETI.

National Treasury

The potential and efficacy of the ETI will hopefully be realised leading to the extension of the ETI beyond 2016. At this point treasury is unable to gauge the magnitude of the potential liability of ETI going forward. This is a valid concern, however it may be possible for changes to be made to the legislation that would negate the unknown liability factor and have the desired employment effect.

SARS

SARS benefits from the ETI because it increases Tax compliance as taxpayers need to make sure that that their tax affairs are in order to claim ETI. These improved processes and compliance at taxpayer level will stay in place going forward.

Independent Audit firms – Assurance

In the months to come, I believe the level of assurance required in order to deal with the "ETI Factor” will only become an issue once the audit has begun. It is near impossible for an audit firm to predict the materiality of the ETI and risk involved for any one client and thus account for it in the audit budget.

This will become especially important where ETI employees are transferred between group companies. ETI is complex and will provide challenges especially where we have used the word refund and re-imbursement interchangeably above. ETI is a re-imbursement and not a refund. Reimburse means that the ETI cash benefits belong to the taxpayer already. They need only claim the benefit.

Conclusion 

There is very little time left to claim your ETI benefits. The preparation and compliance checks may require more time than expected so we would urge all qualifying tax payers to begin as soon as possible. ETI is simple in theory but in reality it is a complex affair. An ETI strategy should try to address the following questions in order to maximise benefit and minimise risk:

  • How far back am I claiming?
  • How much to claim?
  • When to claim?
  • How to claim?

If you are unsure, we recommend consulting your SAIT professional for assistance in claiming what you are entitled to, this incentive could make a tangible difference in your business.

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This article first appeared on the May/June 2016 edition on Tax Talk. 


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