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South Africa Defends Employment Tax Incentive

by Lorys Charalambous,, Cyprus

28 October 2013

The South African National Treasury has defended its introduction of a proposed employment tax incentive, following the responses it received during the public consultation on the Bill arranging for its introduction.

The employment tax incentive 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, at a total revenue cost of ZAR500m (USD51m) in the 2013/14 tax year.

It will reduce the cost to employers of hiring "qualifying employees" between the ages of 18 (reduced from 19 after the consultation) and 29 through a cost-sharing mechanism with government, while not having an impact on the wage the employee receives.

The incentive will operate by decreasing the amount of tax that is owed by an employer through the pay-as-you-earn system. 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.

Firstly, the National Treasury pointed out that, with some of the highest rates of unemployment worldwide, the incidence of unemployment in South Africa is highest for young people. About 42 per cent of young people under the age of 30 are unemployed, compared with 17 per cent of those 30 years and older.

The Government, it added, is to implement the cost-sharing mechanism with employers in the private sector to encourage them to hire young and less experienced employees, as only one part of a youth employment strategy. However, it is only meant as a temporary program to complement longer-term skills upgrade programs, and therefore has a three-year sunset clause.

The incentive will be available for the first two years of employment. One of the responses to the draft Bill was that it would result in the displacement of older and unsubsidized workers, with a hiring bias toward younger people where these employees could easily be replaced after two years of employment. That, however, was not accepted by the National Treasury as the legislation has specific provisions to penalize potential abuse by employers where current employees have been displaced in order to access the incentive.

It is emphasized that the National Treasury and the South African Revenue Service will monitor the incentive closely in order to evaluate and explore what works and which design can make the best use of taxpayers' money. These findings will be shared with interested stakeholders and the public to illustrate the extent of the impact of the proposal.

It is intended that a revised Bill will 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.

TAGS: individuals | South Africa | tax | economics | tax incentives | employees | unemployment | legislation | tax breaks | individual income tax | Africa

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