ETI (Employee Tax Incentive) Scheme — the rules and the pitfalls

Author: Ian Hurst — Managing Director, Paymaster People Solutions

Don’t be fooled. The Employment Tax Incentive (ETI) scheme is a great way of encouraging companies to employ young people, thereby giving them the much-needed experience they need in order to start off their careers on a good footing.

The ETI scheme however has a somewhat narrow set of guidelines, which if not followed, may result in unnecessary issues being encountered.

To illustrate the complexity of the process, let’s consider the fact that, Paymaster People Solutions submitted in excess of 500 reconciliations for the month of August (2016). From this particular batch of ETI submissions, 19 came back with ETI issues. The following error messages were received:

ETI submissions often return with errors

• @ Employees do not qualify (yet when you do the manual calculations they do qualify)
• @ Outstanding returns/debt (PS — which must be paid within 21 days or the ETI will be reversed)

Possible consequences

• You run the risk of your ETI reconciliation being rejected and thus disallowed.
• This exposes you to the vulnerability of having to pay back the ETI claimed.
• And, last but not least, you may incur liability for penalties and interest.

It seems that this is going to become an issue and so Paymaster People Solutions have resolved to carefully scrutinise every ETI request in order to make absolutely certain that:

• The employee meets the stipulated qualifying criteria.
• Our clients’ tax affairs (i.e. their PAYE, UIF and SDL) are 100% up to date.

Quick recap of the ETI basics

Knowing the ETI basics will help you to understand the submission process surrounding ETI reconciliations. Firstly, let’s look at the question of who qualifies.

Who qualifies?

The following employees will qualify if he/she: ^[i]

• is 18 to 29 years old (please note that the age limit is not applicable if the employee renders services inside a special economic zone (SEZ) to an employer that is operating   inside the SEZ, or if the employee is employed by an employer that operates in an industry designated by the Minister of Finance);
• is in possession of a valid South African identity card, Asylum Seeker permit or identity document issued in terms of the Refugees Act;
• has been employed by employer on or after 1 October 2013;
• earns monthly remuneration of at least R 2 000 (where the qualifying employee was employed for 160 hours in a month) and not more than R5,999.

If your new employee meets the aforementioned criteria, then you qualify for an employment tax incentive (ETI). Consequently, the net-effect is that your PAYE tax will qualify for a reduction in the amount due to be paid to SARS.

How do I calculate my ETI?

Follow these four steps (on a monthly basis) in order to calculate the correct ETI amount which you are entitled to claim:

1. Identify all qualifying employees for the month
2. Work out the applicable employment period for each qualifying employee
3. Then work out each employee’s “monthly remuneration”
   1. When working out the remuneration amount to be used to calculate the ETI, if the qualifying employee has been employed for:
      1. 160 hours in the month, the actual remuneration amount paid must be used
      2. Less than 160 hours in the month, the remuneration amount must be ‘grossed up’ to 160 hours per month to calculate the value of the ETI. The amount can then be calculated and be ‘grossed down’ in the same ratio.

ETI calculation example

If the qualifying employee was employed for 80 hours in the month and is paid R1 500, the remuneration must be ‘grossed up’ to 160 hours to check whether the amount falls within the wage requirements.

• Determine the remuneration amount for 160 hours a month: “Gross up to 160 hours”: 160/80 hours = 2
• Actual remuneration received X 2 = R1 500 X 2 = R3 000 (within the wage requirements).

4. Calculate the amount of the incentive per qualifying employee as per the table below.

ETI calculations explained — brief overview

Before you get started, make sure that you are a qualifying employer.

Note: Where the employee has been employed for less than 160 hours ‘gross down’ in the same ratio as ‘grossed up’. This means that the ETI amount which may be claimed must be divided by the 2 from the example above.

The monthly calculated ETI amount per qualifying employee is determined as follows:

For the first twelve months of employment

For the second twelve months of employment

This article addresses the most salient issues. For more in-depth treatment of ETI calculations (and examples) we recommend consulting this handy ETI calculator on this SARS webpage which includes a comprehensive explanation for all ETI calculation scenarios.

^[i] Source: http://www.sars.gov.za/TaxTypes/PAYE/ETI/Pages/default.aspx

Paymaster People Solutions is a subsidiary of Grant Thornton Advisory (Cape Town)