Why Tax Law Changes Could Threaten The Uptake Of The Employment Tax...

Why Tax Law Changes Could Threaten The Uptake Of The Employment Tax Incentive

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The 2014 Taxation Laws Amendment Bill (TLAB) includes a proposed change that may burden companies that are taking advantage of the youth Employment Tax Incentive (ETI) with more administration. It could harm the uptake of this excellent scheme among South African employers.

The change comes in the form of a seemingly harmless definition adjustment with big implications. For the purposes of the ETI Act, a “part of a month” will be redefined to mean when an employee is employed for less than 160 hours. The result could be more paperwork for employers who employ individuals for less than 160 hours per month and who wish to benefit from the Employment Tax Incentive.

Related: Incentives to Promote Job Creation

Current Law

The ETI Act currently requires payrolls to ‘gross-up’ remuneration and wages for a month under circumstances where the qualifying employee was employed for a “part of a month”. The working period specified in an employment contract can vary considerably, including scenarios such as:

  • six-day or five-day weeks
  • three-day weeks
  • mornings-only
  • irregular shifts

The current consensus is that if an employee is employed for a full month to work the periods listed in the above examples, then these employment arrangements are not regarded as being for a “part of a month” and a gross-up calculation need not be done.

However, when an employee starts work after the first day of the first month of employment, or when an employee stops working before the last day of the last month of employment, he or she is regarded to have worked for part of a month.

 

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These tidy definitions are somewhat complicated by temporary or casual employees who work irregular periods that are not contractual or predictable.

Proposed Law

The draft TLAB proposes that if an employee is employed for less than 160 hours in a month, then he or she should be seen to have worked for a part of a month. As such, his or her remuneration (and wage if there is no minimum wage) must be ‘grossed-up’ by using the ratio of the hours employed to 160 hours.

An employee who has been employed for 160 hours or more in a month is seen to have worked for a full month, in which case there is no ‘gross-up’ calculation required. It is the numbers of hours employed – not worked – that must be used to gross-up to 160 hours.

Permanent Employment

The changes will have no impact for employees who work at least eight hours a day, five days a week since these employees will work 160 hours or more each month.

It is only categories such as short time arrangements and mornings-only employment where the employed hours will contractually amount to less than 160 hours a month. In these cases, payroll systems will have to allow the employer to data capture the ‘contracted’ hours for qualifying employees who are employed for less than 160 hours pm.

Temporary Employment

The biggest challenge lies with temps and casuals, who work when they’re called in because there is work for them to do.  In this case, it is debatable whether there is a difference between hours worked and hours employed.  One can only assume that the hours employed are the same as the hours worked for that month.

This means that in order to be able to calculate the ETI benefit, the employer will have to record and capture the hours worked by each casual into the payroll every month. Without these hours, the payroll’s ETI calculation will not comply with the law. If this interpretation of the draft amendment is correct, it will mean a significant increase in the employer’s workload for casuals who qualify for the ETI.

A feature of the ETI when it was implemented in January 2014 was that it made it relatively easy for employers to receive an ETI benefit by employing casuals without a lot of administration. This is a great way to encourage employers to employ young people, even on a part-time or casual basis. But there is now a real danger that many employers will no longer feel that the scheme is no longer worthwhile because of the additional admin.

Related: How To Motivate Employees In Less Than Five Minutes