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South Africa Consults On Employment Tax Incentive Bill

by Lorys Charalambous,, Cyprus

25 September 2013

The South African Government has approved the publication for public comment of the draft Employment Tax Incentive Bill, which is aimed at encouraging employers to give young people their first job experience, as well as boosting employment within firms operating in the Special Economic Zones (SEZs).

The Bill gives effect to the announcement by the President in his 2010 State of the Nation Address. In the 2013 Budget Review, tax revenue of ZAR500m (USD50.6m) was set aside for the incentive for the 2013/14 tax year.

The proposed employment tax incentive will reduce the cost to employers of hiring young people through a cost-sharing mechanism with government, while not having an impact on the wage the employee receives. The employment tax incentive will operate by decreasing the amount of tax that is owed by an employer through the pay-as-you-earn system.

Employers usually withhold the amount of tax that is owed by their employees and pay this amount over to SARS. Under the incentive, if the employer was to hire a "qualifying employee," they can deduct the amount of the incentive from the amount of the employees' tax that is owed to SARS. The amount of tax that is owed by the employees will still be recorded as being paid (there will be no shortfall on assessment), while the employer may retain the cash value of the incentive.

Qualifying employees must be between the ages of 19 and 29, possess a South African ID and must receive a salary that is between the minimum wage for that specific sector and ZAR6,000 per month. The incentive will be available for the first two years of employment, and its value is prescribed by a formula, which has three components for different wage levels.

For monthly wages of ZAR2,000 or less, the incentive value is 50 percent of the wage for wages that are above sectoral minima. For monthly wages that range from ZAR2,001 to ZAR4,000, the value of the incentive is ZAR1,000 per month per qualifying employee in the first twelve months. For monthly wages between ZAR4,001 and ZAR6,000, the value of the incentive tapers down from ZAR1,000 per month to zero. The value of the incentive is halved for the second year of employment.

The incentive will also apply within South Africa's Special Economic Zones (SEZ) and designated industries, where the age restriction will not apply. Public entities identified by the Minister of Finance in subsequent regulations may also be eligible.

While the first phase of the employment tax incentive is intended to be simple and easy to implement, using existing tax administration platforms, the National Treasury and the South African Revenue Service will monitor the incentive closely to evaluate the impact. After a review of the effectiveness and impact of the incentive after two years, the second phase could include additional policy features and possible refinement.

While the parliamentary Standing Committee on Finance is expected to announce its process for considering the Bill, including taking public comments and having hearings, written comments on the draft should also be submitted to the National Treasury by the close of business on October 11, 2013. It is intended that the revised Bill will then be introduced in Parliament in late October for the formal parliamentary legislative process.

The employment tax incentive is expected to commence on January 1, 2014, and it will be available until December 31, 2016. However, to avoid the possibility of employers holding off hiring decisions until January 1, 2014, the incentive will apply to all qualifying employees who were hired after October 1, 2013.

TAGS: South Africa | Finance | tax | business | tax incentives | law | employees | legislation | tax breaks | individual income tax | Employment | Africa | Tax

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