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A SECOND BITE AT THE SAME CHERRY – ELIGIBILITY TO CLAIM ETI ON PREVIOUSLY EMPLOYED INDIVIDUALS

Author: Leanne Wium & George Carinus

Employers hiring individuals who have previously worked for an unconnected employer can still benefit from the Employment Tax Incentive (ETI). Despite a previous employer claiming the ETI for the same qualifying employee, the new employer remains eligible to claim this tax incentive and reduce their PAYE liability. This article explores how the ETI applies in such cases and clarifies the legal provisions that support it.

INTRODUCTION

ETI is a tax relief mechanism introduced by the South African government to encourage employers to hire young and less experienced workers, thereby reducing youth unemployment. Implemented under the Employment Tax Incentive Act, 2013 (“ETI Act”), ETI allows eligible employers to reduce their Pay-As-You-Earn (“PAYE”) tax liability.

The incentive applies to employees between the ages of 18 and 29, earning below a certain threshold (currently R6,500 per month). Employers can claim the ETI for qualifying employees for up to 24 months, with the benefit tapering over time. The ETI aims to stimulate job creation and help young people gain valuable work experience without increasing the overall wage bill for businesses.

PERTINENT LEGAL QUESTION

According to the ETI Act, an employer may only claim ETI on the employment of a qualifying employee for a period of 24 months. The question which naturally arises is whether a separate employer is able to claim ETI on an employee who has already been part of an ETI employment arrangement and whose previous employer has already claimed ETI.

LEGAL ANALYSIS

The ETI Act extensively defines “qualifying employee” under section 6 of the ETI Act. The requirements to qualify as a qualifying employee speak to factors such as age, the industry of employment, the possession of an identity card or similar record of identity, and remuneration. An employee is not disqualified from being a qualifying employee by virtue of being the subject of previous ETI claims or previous employment.

Section 7(1) of the ETI Act is the relevant provision which empowers employers to claim ETI credits. Section 7(1) of the ETI Act provides as follows:

“During each month, commencing from 1 January 2014, that an employer employs a qualifying employee, the amount of the employment tax incentive available to that employer is the sum of the amounts determined in respect of each qualifying employee of that employer stipulated in subsections (2) and (3) and section 9.”

[own emphasis added]

In terms of section 7(1) the requirements are that an employer employs a qualifying employee and an employee is not prohibited from qualifying as a qualifying employee by virtue of any previous employment.

A proviso is however contained under section 7(4) of the ETI Act. This section applies to associate employers, and states as follows:

“If a qualifying employee was previously, on or after 1 January 2014, employed by an associated person in relation to the employer that employs the qualifying employee, the number of months that the qualifying employee was employed by the associated person must be taken into account by that employer for the purposes of this section as if that employee had already been employed by that employer for that number of months.”

[own emphasis]

Section 7(4) therefore provides that if a qualifying employee has previously been employed by a person associated with the current employer, only the remaining ETI credits which would have been available to the previous associated employer will be available to the current employer.

An ‘associated person’ is defined as defined in s1 of the ETI Act as:

“associated person”, in relation to an employer—
(a) where the employer is a company, means any other company which is associated with that employer by reason of the fact that both companies are managed or controlled directly or indirectly by substantially the same persons;
(b) where the employer is not a company, means any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member; or
(c) where the employer is a natural person, means any relative of that employer;”

Simply put, an ‘associated person’ in relation to an employer refers to any other entity or individual connected through control or management. If the employer is a company, it includes another company managed or controlled by the same people. If the employer is not a company, it refers to any company controlled by that employer or by a partnership in which the employer is involved. If the employer is an individual, an associated person would be any of their relatives.

CONCLUSION

An employer can claim ETI benefits on a qualifying employee who has previously been employed by an unconnected employer and such previous unconnected employer has claimed ETI benefits under the previous employment arrangement.

Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.