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Streamline your corporate taxes – Employment Tax Incentives (ETI) are, in fact, exempt income

Streamline your corporate taxes – Employment Tax Incentives (ETI) are, in fact, exempt income

Wesley Green

The Employment Tax Incentive (“ETI”) scheme aims to share the cost of youth employment between Government and the employer. The ETI is a temporary tax incentive that may be claimed by eligible employers and is aimed at encouraging such employers to employ young employees between the ages of 18 and 29, amongst other qualifying criteria.
 
Payment of the incentive is affected by eligible employers being able to reduce the employees’ tax due by them by the amount of the ETI that they may claim – provided of course that they meet the requirements of the ETI Act. The ETI is administered by SARS through the employees’ tax system that is deducted, withheld and accounted for to SARS (usually monthly) via the Pay-As-You-Earn (PAYE) system.
 
Certain employers record the gross PAYE amount as an employment expense and record the ETI as “other income”, whilst others reduce their effective PAYE expense by offsetting the ETI received (aligning the net amount to the PAYE paid to SARS). Either way - the employer is effectively recording an income – which has its own tax consequences, unfortunately often overlooked.
 
A common misperception is that the ETI amount received is included in the income of the employer when the employer’s tax is calculated and submitted to SARS – thereby erroneously levying tax on the ETI amount.
 
ETI is specifically legislated to be exempt income in accordance with section 10(1)(s) of the Income Tax Act No. 58 of 1962, as amended (the ‘Act’).
 
As such, the amount of ETI received for the year of assessment by the employer should be added back as “exempt” income and no tax should be levied on such amount.
 
For larger corporations, the amount of ETI can become material and we have found that it is rarely accurately treated for corporate tax purposes. The result of this is an overpayment of income tax for the year of assessment.
 
If you are unsure whether your corporate tax is as efficient as it could be and whether your ETI is being accurately treated for income tax purposes, feel free to contact local Moore firm here.