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Employment tax incentive works

Study shows growth of up to 15.9 percentage points in first year.

The employment tax incentive has had a positive impact on employment growth and is set to be extended for another two years. It is supposed to expire by the end of December this year.

According to National Treasury one in ten of the jobs supported by the employment tax incentive (ETI) would not have existed without it (the employment tax incentive).

An impact study done for treasury also showed “significant positive impacts” on employment growth of between 2.4 and 15.9 percentage points in 2014-‘15.

However, treasury says it has not been able to research what happens to an individual – whose job has been supported by the ETI – once the employer’s claim period comes to an end.  

The incentive aims to stimulate employment for young people between 18 and 29 years and has supported around 646 000 youth jobs in 2014-’15. This represents 5.7% of all the individuals in the tax base.

Treasury says research has shown that in the South African labour market, experience is a key driver to both obtaining a job and to obtaining higher wages.

“However, for younger people there is a vicious circle since they do not have any form of work experience to get their first job,” treasury said.

“Even if their current jobs do not continue, they are more likely to be able to find their next job than without the experience that an ETI supported job gave them.”

Nedlac, a labour, business and civil society representative body, says in its recent review of the employment tax incentive (ETI) it is clear that the scheme had a positive impact on employment.

Employers get a monthly incentive – depending on the salary offered – for two years.

Government has proposed the continuation of the incentive, but with a cap of R20 million on the value which an employer can claim.

This has not been met with huge enthusiasm. Tanya Cohen, Business Unity SA’s representative on the Nedlac ETI task team, is not in favour of a monetary cap.

She says if one considers the 2014-’15 statistics 92 000 jobs would have been excluded from the scheme if there was a cap.

Cohen says research is inconclusive about the impact of a cap. “It would therefore be irresponsible to impose the cap based on the limited evidence available. Every youth job that can be supported is critical.”

Jaco la Grange, chair of the personal tax technical work group at the South African Institute of Tax Professionals (SAIT), says it could have an adverse effect on companies operating through different divisions within the same company as opposed to companies who operate through different subsidiaries.

La Grange says a company which pays young employees between R2 000 and R4 000 per month will be eligible for a R1 000 tax incentive per employee. 

This means that only 1 666 jobs will be supported (R1 000 x 12 x 1 666= R19.9 million).

Treasury says the reason for introducing a cap is to target the incentive towards those employers who are creating new jobs more effectively and to mitigate the total tax revenue foregone.

Government has forgone tax revenue of R6.06 billion from the start of the incentive in January 2014 until February this year.

Business Unity SA said in a presentation to the standing committee on finance in parliament last week the cap would unintendedly penalise firms that are leveraging the incentive to create youth jobs in conjunction with skills development.

Rob Cooper, chairman of the industry body Payroll Authors Group of South Africa, says he has been a vocal supporter of the incentive, but has also been critical of the complexities in the design of the incentive.

It undermines efficient, easy and low cost administration, and outweighs the economic rationale of the incentive.

He refers to the formula that payrolls must use to calculate the incentive. Cooper explains that the three-step formula requires “grossing-up” and “grossing down” calculations when someone did not work a full month.

“The identification of a partial month in the face of modern, flexible working arrangements has been an ongoing problem since the first day. The calculations and the data that the employer must provide for the grossing-up puts a significant administrative burden on the employer and the payroll.”

Cooper says the complexities result in expensive administration, and increases the risk of getting it wrong with painful results in the form of penalties and interest.

“Sadly, many thousands of employers are simply not interested in the incentive for these reasons.”

However, many of those who do participate, is quite keen on its continuation. Many are getting a massive tax incentive for what they are in any case supposed to do.

Cooper says it is difficult to determine if the jobs supported by the incentive will be sustained once the incentive comes to an end.

There is no training linked to the appointment of the young worker, who will generally have limited skills and very little experience.

“It is not a good recipe, but the youngsters who apply themselves and make the best of their opportunity, could easily become star employees in the future.  At least they are given a chance,” says Cooper.

Cohen refers to a survey done by Singizi Consulting which indicates that employers have retained a number of employees after the conclusion of the incentive as they have required the necessary skills and experience.

“The fact that firms continue to employ in the second year of the incentive when it is half the original value also signals that the scheme is working,” she says.

Treasury says the benefit for business lies in being able to share the cost of a new employee with government – while developing a young work force through the on-the-job experience.

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