SARS Binding Private Ruling confirms concerns regarding the abuse of the Employment Tax Incentive
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The Employment Tax Incentive (ETI) was introduced in 2014 to encourage the employment of younger workers – 18 to 29 years old – by offering an incentive which is set-off against the employees’ tax due each month, thereby reducing the related tax liability for the relevant month/s – for the first two years of employment, subject to specific requirements being met.
These requirements are set out in the Employment Tax Incentive Act, 2013 (the ETI Act), writes Somaya Khaki, SAICA Project Director for Tax.
SARS issued Binding Private Ruling 367 (BPR 367) on 6 July 2021, wherein it determined that students in a proposed training programme are not “employees” as contemplated in the ETI Act and that the applicant, that is the potential employer, will not be entitled to claim an ETI in respect of any of them.
This ruling confirms the views held by SAICA regarding certain ETI schemes brought to our attention by members over the last couple of years. SAICA and other recognised controlling bodies have been engaging on this matter with National Treasury and SARS since 2019. A formal submission to SARS was made in 2020 regarding this matter. At the time, a media release was also issued, as part of recognised controlling bodies’ ethical obligation to not only properly advise and inform members, but also to release information in the public interest, so that unsuspecting parties are forewarned regarding these tax abusive ETI schemes.
Earlier this year, SAICA was pleased to note a positive step towards countering the abuse, in that one of the 2021 budget proposals included the amending of the definition of an “employee” in the ETI Act to specify that work must be performed in terms of an employment contract that adheres to record-keeping provisions in accordance with the Basic Conditions of Employment Act, 1997.
However, in addition to the fact that the incentive was being mis-used, a further concern was the exploitation of the youth purportedly ‘employed’ as part of the scheme, but who were not receiving work experience, nor receiving a minimum wage on the basis that training was in lieu of payment. Furthermore, it is uncertain as to whether the ‘training’ provided (where this was part of the scheme) would have assisted in securing the employment promised at the end of the ‘easily terminated’ employment contracts.
Whilst we are aware that SARS has issued assessments to some taxpayers involved in ‘abusive’ ETI schemes and binding private rulings may have been issued in the past, this is the first binding private ruling that SARS has published in relation to this matter, following permission by the applicant to make this public.
In terms of the proposed transaction in respect of which BPR 367 was issued, the applicant would enter into an agreement with Company B, whereby the applicant would employ students that would participate in a 12-month training programme offered by Company B. The students would have to perform certain tasks every week and meet for bi-weekly group discussions. Company B would supply a tablet, data, and cash to incentivise the students to participate in the programme.
The applicant would invoice Company B for payroll related services, per participating student. A 12-month employment contract would be signed between each student and the applicant, with no obligation to retain the student once the 12-month training programme is completed. No work would be done by the students whose main duty would be to attend virtual training provided by Company B, which would also be responsible for supervision and control over the students, using assigned mentors. The mentors are to monitor and supervise the students to ensure that they are progressing successfully through the training course.
The students would not have to be present at the applicant’s work premises except on an ad hoc basis, for example, to assist with marketing, printing and distribution of pamphlets, only to the extent that this does not interfere with their studies. The students would consent to receive the training in lieu of payment – basically, forfeiting their monthly salary.
The proposed transaction is similar in many respects to some of the schemes that our members were concerned about and we hope that BPR 367 will provide more clarity as to SARS’ views regarding these types of schemes.
Unfortunately, should SARS find that an employer is involved in an abusive ETI scheme and raise an additional assessment in this regard, it is the employer who is effectively ‘receiving’ only a percentage of the monthly ETI that would be liable for any taxes, penalties and interest imposed, far in excess of any ‘benefit’ to cash flow as a result of participating in the scheme.
We again call on employers to exercise vigilance regarding any tax scheme that seeks to undermine the intention of a specific incentive, particularly since the ‘employer’ would carry all the risk in respect of the tax and labour obligations. Tax practitioners should also apply appropriate professional scepticism to any tax structuring arrangement before promoting the scheme as it could also impact their ‘licence to trade’ as a registered tax practitioner, should the scheme turn out to be unlawful.
If you become aware of such schemes and would like to report these, please use the channels available on the SARS website.
We are grateful to those SAICA members who took an ethical stand against such abuse, despite the resistance they may have faced. We hope that the recent developments will encourage employers to reconsider whether or not to participate in certain schemes and importantly, serve to ensure that the incentive is used for the purpose for which it was intended: to benefit the vulnerable youth in our society.