The taxman has a new target

The taxman is cracking down on abuse of the Employment Tax Incentive (ETI) by rejecting questionable claims and disallowing related salary deductions for corporate tax, exposing employers to severe financial penalties.

Tax Consulting South Africa’s André Daniels and Micaela Paschini explained that the ETI is an incentive to encourage employers to hire young work seekers.

They said it has been a cornerstone of the government’s efforts to combat youth unemployment since its introduction on 1 January 2014.

“By reducing the cost of hiring young workers, the ETI has incentivised businesses to employ first-time job seekers while ensuring they receive fair wages,” Daniels and Paschini said.

“With the scheme extended until 28 February 2029, employers have relied on it as a vital cost-saving mechanism.”

However, in recent years, the South African Revenue Service (SARS) has intensified its audits and disallowances of ETI claims, citing widespread abuse of the incentive.

Now, in a significant escalation, SARS is increasing the financial consequences for employers who seek to abuse the incentive.

Not only is the taxman rejecting ETI claims, but it is also attacking the corporate income tax deductions linked to “salaries” subject to ETI claims.

According to Daniels and Paschini, SARS’ heightened scrutiny of ETI claims has primarily focused on whether the individual employees claiming the incentive are really “employees” under the EIT Act.

“Where employers fail to substantiate this, SARS has reversed the Pay-As-You-Earn (PAYE) benefits derived from ETI schemes, often with crippling penalties and interest,” the experts said.

They explained that SARS has been taking an even more aggressive approach lately.

If an employer’s ETI claim is denied on the basis that the individuals in question are not employees as defined in the ETI Act, SARS is concluding that the salaries paid to them are not salaries at all.

As a result, they do not qualify as deductible expenses for corporate income tax purposes.

The consequences are substantial. Employers forfeit their PAYE benefits and face additional corporate tax liability, interest, and penalties based on their disallowed salary deductions.

ETI abuse crackdown

Daniels and Paschini explained that, over the years, SARS and the National Treasury have continuously tightened the ETI legislation to curb abuse.

“A key concern has been the aggressive use of ETI by certain training institutions, where students are classified as employees but never actually receive cash wages,” they said.

“Instead, their ‘salaries’ are offset against training fees, shifting the cost of education onto the very individuals the ETI was meant to uplift.”

While SARS has primarily targeted these high-risk cases, the ripple effect has been felt across countless employers, they said.

“Routine ETI audits have become a widespread reality, even for businesses that believed they were compliant,” they said.

“And now, SARS’ new tactic – disallowing corporate tax deductions for so-called ‘salaries’ – could prove far more damaging than the loss of the PAYE benefit itself.”

Although SARS’ aggressive stance aligns with its strategic objective of making non-compliance “hard and costly”, Daniels and Paschini said it also raises serious concerns for businesses that have claimed ETI in good faith.

With the stakes as high as they are now, they explained that employees and employers should take special care to comply with tax rules.

This means ensuring that ETI claims are fully substantiated with clear evidence that the individuals in question are legitimate employees under both tax and labour law.

Employment records and payroll structures must be watertight and capable of withstanding a SARS audit.

Additionally, business structures should not be designed primarily to gain tax benefits, as SARS is increasingly scrutinising and challenging such arrangements.

“SARS has sent a clear message – the ETI is no longer just about reducing PAYE liabilities,” they said.

“Employers who have claimed the incentive, particularly those under ongoing audits or disputes, now face a very real risk that their corporate tax deductions for salaries will also come under scrutiny.”

Daniels and Paschini stressed that the financial consequences of this shift cannot be ignored.

“Employers who have relied on ETI as a legitimate tax-saving mechanism must urgently reassess their exposure before SARS does it for them,” they said.

“It is always prudent for employers to seek advice from a qualified tax attorney when considering entering into any employment-related tax arrangement or where there is uncertainty regarding compliance with the legal requirements.”

“Proactive engagement with a tax specialist can help employers navigate the complex ETI and corporate tax landscape, ensure that all necessary documentation is in place, and avoid the risk of unexpected assessments, penalties, and interest down the line.”