A cautionary tale? SARS ruling places Employment Tax Incentive under microscope
On 6 July 2021, the South African Revenue Service (SARS) published Binding Private Ruling 367 (BPR 367) which determined that students in a proposed training programme would not be considered “employees” as contemplated in the Employment Tax Incentive Act 26 of 2013 (ETI Act) and that the applicant taxpayer would not be entitled to claim an employment tax incentive (ETI) in respect of them. This ruling was published on the back of much public discussion around certain schemes utilising the ETI and is important for all advisors, taxpayers and proposed employees or beneficiaries of these schemes. This article discusses the background facts and SARS’ ruling as well as the implications for all relevant stakeholders of the ETI.
How does the ETI work and who can claim it?
Before unpacking BPR 367 it is worthwhile revisiting how the ETI generally works and what requirements need to be met in order to claim it. If an employer is eligible to receive the ETI in respect of a “qualifying employee”, the employer may reduce the total amount of employees’ tax generally payable to SARS thereby incentivising organisations to employ youthful job seekers.
Importantly, to claim the ETI, an organisation must qualify as an “eligible employer”. In addition, the eligible employer must hire a “qualifying employee”. “Employee” is specifically defined in section 1 of the ETI Act as a natural person:
Who works for another person; and
Who receives, or is entitled to receive remuneration, from that other person, but does not include an independent contractor.
The definition of “employee” in the ETI broadly encompasses a combination of the labour law concept of an employee and the tax law concept of an employee as contemplated in the Fourth Schedule to the Income Tax Act 58 of 1962 (ITA). We previously wrote in our Special Budget Alert on 24 February 2021 that the National Treasury proposed amending the definition of “employee” to counter certain abusive schemes in the market. While the publication of draft legislation giving effect to the proposal is imminent which will give one a better idea of the policy rationale behind the proposed pending change to the definition of “employee” (and the extent of the amendment), BPR 367 may give some further clues as to SARS current thinking around the concept.
Background facts of BPR 367
In BPR 367, a resident company (Applicant) and a resident non-profit company (Company B), proposed entering into an agreement with the stated purpose that students would be employed by the Applicant for purposes of obtaining a qualification.
The Applicant would then sign agreements with the students for a period of 12 months and pay the students a monthly salary. The Applicant would not be under any obligation to employ the students after the 12-month training programme had been completed.
The students would then consent to forfeit their monthly salaries in order to be trained by Company B. The students would be on the Applicant’s payroll and protected by its group life policy, however, importantly, the students would not be required to do any work for the Applicant. The main duty of a student would be to attend training courses “virtually” at the skills centres hosted by Company B. Furthermore, there would be no expectation that a student would have to report to the Applicant’s offices on a daily basis.
However, there was the possibility that the students would be expected to make themselves available to perform specific forms of work such as marketing, printing and distribution of pamphlets for the Applicant. Practically, the Applicant would only call on them to perform these ad hoc activities to the extent that doing so would not interfere with their studies. Company B would, for all intents and purposes, exercise supervision and control over the students by way of mentors assigned to each of them, and these mentors would monitor and supervise the students to ensure they progressed successfully through the training course.
Based on the specific set of facts, SARS ruled the following:
No student would meet the definition of an “employee” in section 1(1) of the ETI Act; and
The Applicant would not be entitled to claim an incentive, as contemplated in the ETI Act, in respect of any of the students.
The ETI was introduced in 2014 for purposes of encouraging employers to hire young and less experienced work seekers. It was thus specifically aimed at increasing employment and skills levels in South Africa’s unemployed youth. Notwithstanding this critical purpose, the recent unrest in South Africa raises important questions in relation to its efficacy. There is no question that South Africa faces an ever increasing unemployment problem, particularly for the youth, and incentives such as the ETI are intended to play a critical role in rectifying these issues.
However, considering the proposed amendments announced in the 2021 Budget, it appears that the National Treasury identified schemes similar to the one described in BPR 367, which it believes are not within the original purpose and ambit of the ETI Act. BPR 367 evidently builds on the revenue authorities’ circumspection of these types of ETI arrangements.
Implications of BPR 367 for taxpayers
In terms of section 83 of the Tax Administration Act 28 of 2011 (TAA), a binding private ruling applies to a person only if:
The provision or provisions of the Act at issue are the subject of the “advance ruling”;
The person’s set of facts or transaction are the same as the particular set of facts or transaction specified in the ruling;
The person’s set of facts or transaction fall entirely within the effective period of the ruling;
Any assumptions made or conditions imposed by SARS in connection with the validity of the ruling have been satisfied or carried out; and
The person is an applicant identified in the ruling.