How did an employer’s Employment Tax Incentive (ETI) claims over several years turn into an adjusted tax liability of R13 million?
Bronwin Richards
Team Lead: Tax Technical
What did they miss? The agreement appeared straightforward: the training facility procures student employees, the employer appoints them on limited-duration contracts, the employees are seconded to the training facility to undergo training, and the employer reduces its PAYE liability by claiming the ETI.
Then the South African Revenue Service (SARS) came knocking, and the cracks started showing.
When SARS Reverses Years of ETI Claims
A SARS audit spanning several years resulted in the adjustments against ETI calculated over a two-year period. SARS reversed the taxpayer’s historical ETI deductions and in the Audit Findings letter stated its intention to raise an additional assessment “to correct the prejudice arising from the incorrect application of the ETI Act as a result of invalid claims which have now been disallowed.”
It gets worse: the prescribed period (the legal time limit during which the tax authority can issue, reopen, or revise a tax assessment) assessments would be re-opened in terms of Section 99(2)(b)(ii) of the Tax Administration Act which allows for that due to negligent misrepresentation (alternatively fraud or negligent non-disclosure of material facts).
Furthermore, SARS reserves the right to amend the proposed understatement penalty percentage(s) depending on the circumstances of the case.
It is important to note that understatement penalties are imposed over and above the amount of ETI that must be repaid. From March 2025, a further dedicated penalty equal to 100 percent of the ETI received applies specifically to claims involving remuneration that should have been disregarded.
This is not the pickle employers want to find themselves in as their options may be limited. The critical question is whether the taxpayer can discharge its burden of proof, on a balance of probabilities, that the arrangement was genuinely implemented to create employment for the young people involved, rather than principally to obtain the PAYE relief associated with the ETI.
SARS’s Extensive Requests
During the audit, SARS selected a sample of the limited contract employees and required the taxpayer to provide details of, amongst other, manual attendance registers of training attended, physical workbooks and outcomes of the training (including marks obtained and certificates issued).
Besides directly contacting some of the employees, SARS went on to ask for details of how the 160 hours per month which the student employees were required to work in terms of the ETI Act, were distributed between the work and study activities, as well as proof of annual and sick leave taken with appropriate supporting documentation.
The taxpayer could not provide this, the reason being that the Supplier Agreement provided for the training facility to keep these records, but it transpired that all the information was transferred to a new training entity, which could not provide the records.
The case provides a warning to employers claiming ETI that when SARS asks the difficult questions, the forms, contracts and payroll entries must satisfy the lawful requirements.
It can be argued that the actual intention behind the institution of this scheme could be the more crucial question the employer must prove.
The Intention of the ETI
The ETI allows eligible employers to reduce the amount of employees’ tax (PAYE) they pay over to SARS each month, for every qualifying employee they hire.
The scheme was introduced in 2013 to encourage employers to take on young, inexperienced workers to help address youth unemployment in South Africa. It was designed to reduce the cost of hiring young people to employers through a cost-sharing mechanism with government, while leaving the wage the employee receives unaffected.
The ETI was always meant as a temporary programme to stimulate demand for young workers, with a sort of government subsidy.
Employers claim the ETI monthly, provided the employee is between 18 and 29 years old, earns below the qualifying remuneration threshold, and meets a list of other requirements set out in the ETI Act.
Closing the Gaps to Curb Abuse
Several years ago, National Treasury flagged possible abuse of the ETI where an intermediary recruits participants, a training institution provides the instruction, and a “participating employer” signs an employment contract and claims the ETI on an amount that, in substance, is a training fee rather than a wage.
Treasury and SARS introduced several statutory updates to tighten the net and curb abuse of the ETI system, including defining “employee”, and clarifying that an employee must also assist, directly or indirectly, in carrying on the employer’s business.
Can Your ETI Claims Withstand SARS Scrutiny?
This case is a wake-up call that SARS can look well beyond the payroll when testing an ETI claim. Payroll records may indicate that an arrangement existed, but SARS is increasingly willing to verify claims directly with the individuals concerned.
The real risk emerges when the evidence does not align with what was reported to SARS. The consequences can extend beyond the disallowance of the ETI, potentially bringing reopened assessments and understatement penalties that could result in a significant, and unexpected tax exposure.
Employers should therefore not wait for SARS to test their claims before testing them themselves. Current and historical ETI arrangements should be capable of holding up against the evidence that SARS is likely to request: the actual work performed, supervision, attendance, remuneration, training, leave, working hours and last, but not least the actual intention behind the institution of this scheme.
Employers who are benefiting from ETI claims without undertaking this assessment may be carrying a tax liability they may not even know exists. Those who are uncertain whether their ETI claims will withstand SARS’s questions should seek advice now, while there is still an opportunity to identify any weaknesses, address outstanding issues and determine an appropriate way forward.
