Income Tax Relief – PAYE and ETI

7th April 2020

Dear fellow entrepreneurs

Income Tax Relief Measures: 

Employees Tax (PAYE) and Employer Tax Incentive Scheme (ETI)

A media statement was issued by the National Treasury on the evening of 1st April, inviting the public to comment on the following two draft bills published by SARS and the National Treasury by the 15th April so as to give effect to the necessary legislative measures required to implement Covid-19 tax relief.

  1. the 2020 Draft Disaster Management Tax Relief Bill:

This bill deals with proposed amendments on the subject of:

  • Employment Tax Incentive Act,
  • Deductions in respect of donations made by the public to any “Covid-19 disaster relief trust” to be included in section 18A donations,
  • deeming any “Covid-19 disaster relief trust” to be a “public benefit organisation” as defined under the Income Tax Act, for a limited period of 4 months from 1 April to 31 July 2020 whereby receipts of “Covid-19 disaster relief” monies received will be exempt from income tax and donations made to the “Covid-19 disaster relief fund” will be exempt from donations tax.
  • the deeming of the “Covid-19 disaster relief trust” to a be small business funding entity in term of its assets that are not distributed by the 31st July 2020.
  1. the 2020 Draft Disaster Management Tax Relief Administration Bill

This bill addresses proposed amendments to the following legislation regarding:

  • Deferral of employees’ tax
  • Deferral of provisional tax
  • Deferral of interim payments by micro businesses

We will begin by dealing with the proposed income tax relief measures that affect employees’ tax in this communication.

Subsequent communications in the course of the week will address the other proposed income tax relief measures that will be immediately useful to our small business clients.

Small and medium sized businesses are the most vulnerable as they are unlikely to have cash reserves and are at a higher risk of shedding jobs under these conditions in an attempt to remain commercially and technically solvent and contain costs while generating very little income.

Moreover, many employees will not be able to report for work.  During this time the majority of employers are likely to experience severely reduced revenue, and may have to consider reducing staff numbers.

In order to minimize unemployment and the risk of the economy grinding to a halt during this difficult period, the Government proposes expanding current income tax legislation for a limited period.

Employment Tax Incentive (ETI)

The Employment Tax Incentive (ETI) programme was introduced to reduce the cost of hiring young people between the ages of 18 and 29 years of age earning a monthly remuneration of less than R6 500 (also referred to as qualifying employees) by allowing the employer to reduce the amount of employees’ tax  (PAYE) they pay to SARS while leaving the wage received by the qualifying employee unaffected.

Currently, the maximum monthly ETI claimable per qualifying employee is limited to R1 000 in the first year of employment and R500 in the second year of employment.  This means that the monthly ETI can only be claimed by the first 24 months of the qualifying employees’ employment by an employer.

In order to minimize the loss of jobs during this critical period, it is proposed that the ETI programme be expanded for to employers that were registered with SARS as at 1 March 2020 a limited period of 4 months, beginning 1 April and ending on 31 July 2020.

The proposed expansion to the ETI programme for employees’ earning R6 500 or less and commencing 1 April is as follows:

  • Allowing the monthly ETI claim in the amount of R500 to include:
    • Employees aged 18 to 29 who are no longer eligible for the ETI as the employer has claimed ETI in respect of those employees for 24 months;
    • Employees aged 30 to 65 who are not eligible for ETI due to their age
  • Increasing the maximum amount of ETI claimable during this four month period for employees from R1 000 to R1 500 in the first twelve months and from R500 to R1 000 in the second twelve months.
  • Accelerating the payment of ETI reimbursements from twice a year to monthly.

Examples:

Example 1

Employer A has 10 workers earning R4 500 per month each.  The employer can retain up to an additional R5 000 (10 workers x R500 each) from the employer’s PAYE liability each month between April and July.

Example 2

Employer B has 3 workers.  The employer claims ETI for Employee #1, the employer exhausted ETI claims for 27 year old Employee #2 two year ago, and Employee #3 is 34 years old and has never been a qualifying employee.  The employees each earn R4 500 per month.  Employer B will be able to retain R2 500 per month.

Remuneration ETI Expanded ETI Total
Employee #1 R   4 500 R 1 000 R 500 R 1 500
Employee #2 R   4 500 R 0 R 500 R    500
Employee #3 R   4 500 R 0 R 500 R    500
R 13 500 R 2 500

Since there are only 3 employees, the amount will likely be claimed as a reimbursement from SARS.

Deferral of Employees Tax (PAYE)

The purpose of the proposed deferral of the payment of PAYE for the limited four month period beginning 1 April and ending 31 July 2020 is to assist tax compliant small to medium sized businesses with liquidity (immediate cash flow relief) in a time where business activity is likely to see an unprecedented decline in turnover.

Qualifying and non-qualifying criteria:

  • Tax compliant;
  • Turnover not exceeding R50 million per annum;
  • Will not apply to an employer that has failed to submit any return imposed under a tax Act (income tax, VAT, Employees Tax, Security Transfer Tax, Estate Duty Tax, etc.) in the prescribed manner by the date specified;
  • Will not apply to an employer that has any outstanding tax debt (including VAT, Employees Tax, STT, etc.), but excluding tax debt in respect of:
    • which an agreement has been entered into with SARS;
    • that payment of tax has been suspended in terms of a pending objection or appeal; or
    • the tax amount due is less than R100.

It is proposed that:

  • Deferral of payment of 20% of the PAYE liability, without SARS imposing administrative penalties and interest for the late payment thereof (this proposal does not include Unemployment Insurance UIF and Skills Development levies SDL);
  • The deferred PAYE liability must be paid to SARS in equal instalments over the six month period commencing 1 August 2020, i.e. the first payment must be made on the 7th September 2020.

However, penalties and interest will apply if the employer has understated the PAYE liability for any of the four months.

The proposed PAYE deferral amendments is deemed to have come into operation on 1 April 2020.