The new tax free employment incentive - More than meets the eye?

A hot topic on many lips is the new employment tax incentive that was implemented with effect from 1 January 2014. The aim of the incentive is to encourage employers to hire young and inexperienced individuals looking for work. This article gives an idea of what the incentive entails and how to account for the incentive in your accounting records, taking into account that it is tax free.

Requirements for employers to qualify:

• Must be registered for Pay-As-You-Earn (PAYE)
• Must not be in national, provincial or local government
• Must not be a public entity, other than those that the Minister of Finance may designate by notice in the Gazette
• Must not be a municipality
• Must not be disqualified by the Minister of Finance from receiving the incentive

Requirements for employees to qualify:

• Has to be between the ages of 18 and 29
• Must have a valid South African ID
• Must not be a domestic worker
• Must not be a connected person to the employer
• Was employed by the employer or an associated person on or after 1 October 2013
• Must be paid the minimum prescribed remuneration, or a remuneration not below R2 000 a month where a minimum remuneration is not applicable

There is no limit to the number of qualifying employees that the employer can hire.

Even though an employer can claim for qualifying employees employed on or after 1 October 2013 claims can only be made from January 2014 as this is the date on which the Act was implemented.

How does it work?

Employers who are registered for PAYE can reduce their PAYE liability with every qualifying employee they hire.  The incentive can be claimed on the EMP201 that is submitted to SARS every month.

An employer can claim the incentive for 24 months for every qualifying employee that is hired. The incentive amount is calculated based on the qualifying employee’s monthly remuneration. 

When calculating the 24 month period mentioned above, the period should be reduced by the number of months that the employee was employed by that associated person (if the employee was hired on or after 1 October 2013 and still in employment of the associated person on or after 1 January 2014). An associated person is a company, CC or partnership managed or owned by the same person or, where the employer is a natural person, any relative of the employer.

If an employee was only hired for a part of a month the incentive must be apportioned.

If an employee receives remuneration of R2 000 per month, 50% of his/her remuneration can be claimed as an employment tax incentive in the first 12 months and 25% in the second 12 months of employment. If the employee earns between R2 001 and R4 000, the employer can claim R1 000 per month for the first 12 months and R500 for the second 12 months of employment. If the employee earns between R4 001 and R6 000 per month the incentive is calculated based on the following formula for the first 12 months, R1 000 – (0.5 x (Monthly remuneration – R 4 000), and R500 – (0.25 x (Monthly remuneration – R 4 000) for the second 12 months.

The tables below indicate the actual cash costs for the employer in rands:

First 12 months:

An employer will not be able to claim the incentive if, on the last day of that month, the employer has failed to submit any tax return or has any outstanding tax debt. Outstanding tax debt excludes debt which has been suspended or debt for which an agreement has been entered into with SARS.

Penalties

Where an employer claims the employment tax incentive even though the employee earns less than the minimum prescribed remuneration, or R2 000 where a minimum remuneration is not applicable, a penalty equal to 100% of the incentive will be charged over and above penalties and interest due to underpayment of employees tax.

Where an employer dismisses an employee to employ a qualifying employee a penalty of R30 000 per employee that was dismissed will be charged.

Roll over

There are 3 instances where the available incentive amount may be rolled over to the next month:

• If the incentive amount available exceeds the amount of PAYE due in that specific month.
• If the employer did not claim the incentive against its PAYE payable despite it being available. This means that an employer who has not claimed the employment tax incentive up to date will still be able to do so as the amount would have rolled over.
• Where the incentive was not available due to non-compliance (for example tax returns not submitted up to date) the incentive can be deducted in the month in which the non-compliance is corrected.

At the end of each period covered by an employer reconciliation, the rolled forward amount may not exceed an accumulated amount of R6 000 for every qualifying employee that is still employed on that date.

Accounting and tax treatment

The incentive received will be accounted for as an income in the accounting records of the employer. Section 10 of the Income tax Act of 1962 was amended to include the employment tax incentive. This means that in terms of section 10(1)(s) the amount received in the form of the above incentive is exempt from income tax.

The incentive amount should therefore be deducted from the employer’s taxable income. What about the incentive which is rolled over to the next month? This timing difference creates a deferred tax asset that should be accounted for in the balance sheet of the employer.

Conclusion

the employment tax incentive can bring welcome relief for employers who are willing to hire young and inexperienced individuals. As was shown in the tables above, the incentive reduces the cash cost of such employment substantially. This is an opportunity that should be considered by any business. Remember to also take all other employment consequences into account, for example the Labour Relations Act, before employing new employees.

Gavin Aveling

Audit Senior, Tshwane

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