
The Employment Tax Incentive (ETI) has been a cornerstone of the South African government’s strategy to tackle youth unemployment since its introduction in 2014. By incentivising employers to hire young job seekers, the ETI has offered significant cost-sharing benefits, helping many young South Africans gain valuable work experience. However, recent misuse of the scheme has prompted National Treasury to propose legislative changes aimed at curbing abuse and ensuring the integrity of the ETI.
The purpose of the ETI
The ETI was designed to encourage the hiring of young, inexperienced individuals by reducing the cost of employment for businesses. Employers who hire eligible young workers are rewarded with tax incentives, making it more affordable to provide jobs without cutting wages. This initiative has been a key element in the government’s efforts to reduce youth unemployment, which remains a significant challenge in South Africa.
However, as with any incentive program, some entities have taken advantage of the system. Certain training institutions have found ways to exploit the ETI by classifying students as employees under the ETI Act. These institutions then claim the ETI without passing on direct cash payouts to the individuals. Instead, they deduct training fees from wages, shifting the financial burden onto the very individuals the ETI was designed to help.
Why change is necessary
The abuse of the ETI undermines its primary goal: to reduce youth unemployment and increase economic participation. With millions of young South Africans still excluded from the workforce, the misuse of this incentive creates a further barrier to their entry into the job market. National Treasury has recognised the need to address these issues and ensure that the ETI is being used as intended.
When employers or institutions misuse the ETI, it impacts all taxpayers, leading to increased scrutiny from SARS. In response, SARS has been auditing and disallowing ETI claims that are found to be in violation of the rules. This has created a need for more stringent measures to ensure that the scheme benefits young workers and employers who use it correctly.
Proposed amendments to the ETI Act
To tackle the ongoing misuse of the ETI, National Treasury has proposed amendments to Sections 1(1) and 5(3) of the ETI Act. These changes are aimed at closing loopholes and imposing penalties on employers who engage in abusive practices. The key goal is to reinforce the ETI’s purpose of providing genuine employment opportunities for young South Africans.
The proposed amendments, set to take effect on 1 March 2025, will apply to all years of assessment starting on or after that date. They will introduce punitive measures for employers found guilty of misusing the ETI, with the intention of ensuring that the incentive is used for its intended purpose: to create jobs and promote fair wages for young workers.
While these changes may not cause immediate hardship for employers who have applied the ETI correctly, those who have engaged in incorrect practices will likely face long-lasting financial consequences.
A clear message from National Treasury
This isn’t the first time that the ETI Act has been amended to combat misuse. However, the latest amendments represent a significant step forward in tightening the rules and imposing harsher penalties for non-compliance. National Treasury is sending a clear message: the misuse of the ETI will no longer be tolerated, and those found guilty of abuse will face serious financial repercussions.
Employers who have incorrectly applied the ETI should take these proposed changes seriously. Consulting with a tax professional is critical to ensure compliance and to avoid falling foul of the new regulations. While there are relief mechanisms available, such as disputes and compromises, these are not designed to aid wilful non-compliance.
Final thoughts
National Treasury’s proposed amendments to the Employment Tax Incentive Act represent a crucial step in preserving the integrity of the scheme. By addressing the misuse of the ETI, the government aims to ensure that the incentive continues to provide genuine employment opportunities for young South Africans, helping to reduce youth unemployment and promote economic growth.
At MMS Group, we understand the complexities of tax compliance and the importance of adhering to the rules of the ETI. If you have any concerns about how these changes may impact your business or want to ensure that your ETI claims are compliant, contact us today.