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Nuts and Bolts of the Proposed Youth subsidy

Saturday, 09 July 2011   (0 Comments)
Posted by: Author: Rob Cooper
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Nuts and Bolts of the Proposed Youth subsidy

Now that the municipal elections are something of the past, the government can proceed with a number of reforms and projects that are in the pipeline in the employment arena. One of these is the Wage Subsidy, which reappeared in the February 2011 Budget as the Youth Subsidy, signifying intent on the part of the government to implement this scheme.In the face of some strong opposition, why is this scheme back in focus, and how is it expected to be implemented?

Unemployment is the driver

Statistics SA has recently released figures for the first quarter of 2011 showing that the unemployment rate in South Africa has risen by 1% from 24% to 25%, representing one of the most pressing socio-economic challenges facing the government. Labour statistics show that only two in five working age adults (those between 15 and 64 years of age) have a job.More than 4 million people are currently unemployed.

The high unemployment levels are compounded by the drive, initiated at the ruling party’s Polokwane conference in 2007, to create ‘decent jobs’ by doing away with labour brokers and by replacing contract jobs with permanent jobs as far as possible.This, in the face of strong perceptions that the main inhibitors of investment and job growth in South Africa are inflexible labour regulations and the low level of skills in the country.

The purpose of the Youth Subsidy is to encourage employers to take on young people by contributing towards the cost of their wages. Treasury anticipates that a youth employment subsidy could subsidise more than 423 000 new jobs for less-skilled young people over three years at a cost of R5 billion in tax expenditure.

Over and above job creation, there are other valuable spin-offs from the project. Youngsters will be working instead of being on the street, a reasonable amount of money will flow back to the youth’s family, some working skills and, importantly, work experience will be gained.

Opposition to the project is mostly the concern that employers will lay off existing employees and replace them with cheaper (subsidised) youths. The legislators are of the opinion that this is unlikely to be a serious concern – our labour laws prevent dismissals that are not in accordance with the provisions of the Labour Relations Act.

Principles of the youth subsidy

Only full-time workers will be eligible for the subsidy, where ‘full time’ is defined as 35 hours of work per week or more. Of these, both existing and new employees are targeted as potential beneficiaries of the subsidy.

Existing employees

Full-time employees between 18 and 24 years of age are eligible, but only those who earn below R60 000 pa. The value of the subsidy is proposed to be up to 20% of annual earnings for those who earn R24 000 pa or less, tapering down to zero at R60 000.

Treasury estimates that approximately 520 000 to 650 000 young workers aged 18 to 24 will be eligible, which is about half of all 18 to 24-year olds currently working in South Africa. This estimate could vary if employers increase the number of hours that part-time employees work to 35 hours per week in order to qualify for the subsidy.

New employees

Full-time employees between 18 and 29 years of age are eligible but again only if they earn below R60 000 pa. The value of the subsidy in the first year is proposed to be up to 50% of annual earnings for those who earn R24 000 pa or less, tapering down to zero at R60 000. In the second year, these employees are treated as existing employees and are eligible for the subsidy as outlined above.

The average subsidy paid to new workers is estimated to be approximately R7 500 pa.Eligibility for both new and existing employees will commence on the date of the employee’s 18th birthday and ends on the last day of their 24th or 29th year.

It is interesting to note that under the current proposals, a youth under the age of 24 years who is already employed at one employer is eligible for a subsidy of 20% of annual earnings.If he changes employment, as a new employee he is eligible for a subsidy of 50% of annual earnings.

Administration of the youth subsidy

The Youth Subsidy will be administered through the PAYE system, which means that the key players are SARS, the employer and the payroll system.Once the project is approved, the legislation will presumably be changed to define a ‘youth’ for the purposes of the subsidy. Payroll systems will have to be changed to allow employers to flag youths as defined, and then the details of these employees will have to be submitted to SARS. This will more than likely be in the form of tax certificates, which are currently submitted twice a year to SARS, though this frequency might increase to quarterly at some stage in the future.

SARS will then have the detail of the youths who have been employed, and will be able to calculate the total value of the subsidy owing to the employer. It is a fair assumption to make that the subsidy will be made available to the employer by way of an amount credited by SARS to the employer’s PAYE account, allowing the employer to reallocate this credit amount to offset future PAYE payments.

The requirements to differentiate between new and existing eligible employees, including only those that work at least 35 hours per week and earn below R60 000, will pose new challenges to the suppliers of payroll systems.In addition, managers will require sophisticated tools to record and analyse not only the cost saving, but also the performance of these youths.

Closing thoughts

The concept of a youth subsidy is not a new one – it has been implemented in many countries including Australia, Canada and most European countries in various forms and with varying degrees of success.

In South Africa, we are faced with high unemployment levels, an education system that is struggling to improve the low skills levels in the country, and a large number of unemployed people who have no work experience. Something must be done, and it seems that the Youth Subsidy is as good a start as any; though to be of real benefit, it should be complemented by training initiatives, skills upliftment projects and job search assistance.

However, the magnitude of the youth employment challenge (approximately 500 000 school leavers have to be absorbed into employment each year to maintain the unemployment rate at 25%), means that the Youth Subsidy on its own is not enough. Both the public and the private sector have important roles to play to grow the economy and to create jobs in the future.

Barring serious challenges to the proposals, the Youth Subsidy is expected to be implemented in early 2012, and will be in force for an initial period of three years.

Source: By Rob Cooper (TaxTalk)



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