Employment Tax Incentive helping but needs work

Employment Tax Incentive helping but needs work

South Africa’s Employment Tax Incentive (ETI) needs some work if it is to serve as a strong weapon in the fight against youth unemployment, says Rob Cooper, tax and legislation expert at Sage HR & Payroll. Formerly known as the “youth wage subsidy”, the legislation was introduced in early 2014 to encourage employers between the ages of 18 and 30, with the government subsidizing half the wage bill.

The National Treasury states that, in the period from 1 January 2014 to the end of February 2015, 31 825 employers had claimed the incentive for at least 270 000 employees at a total cost of R2.8 billion. The incentive is set to expire on 31 December 2016, pending a review from the National Treasury.

Cooper believes the law must be renewed next year, but with some changes. because the youth unemployment rate is 52%, which is four times the rate in sub-Saharan Africa as a whole.

“So it qualifies as a crisis,” he says.

Despite he benefits of the ETI, however, he says there is no reliable data on how many would have been employed if the scheme did not exist.

“There is reason to fear that some employers are profiting from the scheme by claiming the incentives for workers they would have employed in any case,” says Cooper. In other words, they are benefiting from a taxpayer-funded tax break without necessarily creating new jobs.

Phumza Macanda, National Treasury spokesperson, says that is something that was anticipated when the policy was drafter, and still achieves its intention of getting young people employed.

“It is expected that some employment for which an employer claims the incentive would have occurred in the absence of the subsidy… It is not “exploitation” in our view, this is n anticipated part of the policy and has been described in the previous (policy document discussions),” says Macanda.

There is no other way.

Given the seriousness of the employment problem, it would come as a surprise if the ETI was not renewed for another term. Especially now that no job losses have been reported as a result of the incentive so far.

Before its inception, trade unions fought strongly against arguing it would cause employers to lay off older employees to replace them with younger ones, subsidized by the state and therefore cheaper to employ. According to Macanda, however, the data does not reflect this.

“The incentive will be reviewed before the end of 2016 when more tax data becomes available for analysis to investigate the success of the scheme and what possible amendments could be used to improve its effectiveness.”

Cooper has some ideas on that

The ETI refund is only paid to employers that are tax compliant. This means that all tax returns have been submitted and there is no outstanding tax debt. But, if it were up to him, Cooper says he would remove this requirement, or limit it substantially to reduce the risk of being penalized for inadvertently claiming ETI while not tax compliant.

He would also remove the minimum wage compliance test. Currently, employers don’t qualify for ETI if the employee is paid a wage below R2 000 per month, or below the minimum wage for that sector.

“At the very least make it clear that an hourly wage rate can be used for the wage qualifying test. Because many people do not even understand what ‘wage’ is and confuse it with ‘remuneration’,” says Cooper.

Cooper also thinks the ETI should be made more flexible so that employers are allowed to appoint young people on a probationary basis so that employers can employ young people without fearing that it will be difficult and expensive to dismiss them if things don’t work out.

ETI states that an employee must be employed for at least a full month and at least 160 employed hours for an employer to qualify, but Cooper feels this is too loosely defined.

“They should simplify the current definition for the hours per month an employee under the ETI is ‘in employment’. Some people are confused by the distinction between the hours someone worked in a month and the hours they were employed.”

But, ultimately, Cooper says the ETI can only be a partial answer to the youth unemployment crisis. Because South Africa’s unemployment problem will persist as long as there is a lack of quality education.”