In the 2021 Budget, there are proposals to halt abuse of employment tax incentives and expand the scope of what constitutes a long-service award
The 2021 Budget Review contained several proposals in relation to individuals, employment tax and associated benefits and incentives.
While some of these proposals are rather unclear, certain other proposals are noteworthy.
In this article, we discuss curbing abuse in the employment tax incentive (ETI) space and reviewing the nature of long-service awards for fringe benefit purposes.
Curbing abuse in the ETI space
The ETI initiative was established in terms of the Employment Tax Incentive Act, 2013 (ETI Act) and applied from 1 January 2014. The aim of the ETI Act was to promote increased employment in South Africa.
ETI entitles a registered employer to reduce its pay-as-you-earn (PAYE) tax payments to SARS for the first two years in which they employ qualifying employees (currently between the ages of 18 and 29) who earn a monthly income within a particular threshold (currently between ZAR 2 000 and ZAR 6 500).
SARS and National Treasury have observed that there are certain abusive schemes using training institutions which seek to benefit employers using the ETI claims. These employers make an ETI claim for students in these training institutions, which undermines the spirit of the ETI initiative.
To counter this abuse, the 2021 Budget Review proposes that the definition of "employee" in the ETI Act be amended with a new requirement, namely that work performed by a qualifying employee in terms of the ETI must be performed under an employment contract that complies with the record-keeping provisions of the Basic Conditions of Employment Act, 1997. The amended definition of "employee" is proposed to be effective from 1 March 2021.
Employers claiming ETI should confirm with their preferred tax adviser whether they comply with the proposed amendment to the ETI Act to prevent the risk of additional assessments from SARS disallowing the ETI claimed.
Reviewing the nature of long-service awards for fringe benefit purposes
In terms of the Seventh Schedule to the Income Tax Act, employers may grant a long-service award to employees. Long-service awards which are not subject to PAYE are restricted to employees who have been employed for an uninterrupted period of at least 15 years, and in intervals of 10 years after that.
A long-service award will be recognised as a no-value fringe benefit only if the value of the award does not exceed ZAR 5 000. The amount of any award over ZAR 5 000 shall be taxed at an employee's marginal rate.
2021 Budget Review
The 2021 Budget Review proposes that paragraph 5(2)(b) of the Seventh Schedule to the Income Tax Act be expanded to consider the range of long-service non-cash benefits awarded by employers to long-service employees. The proposed expanded scope would still not be subject to PAYE if the value of non-cash benefits is within the ZAR 5 000 limit.
While we welcome the move to expand the scope of what qualifies as a long-service award, in our view this may also have been an opportune time to significantly increase the ZAR 5 000 threshold, which has been in place since 2009.