The abuse of the Employment Tax Incentive (ETI), designed to stimulate youth employment in South Africa, has long been on the radar of the South African Revenue Service (Sars). Now, after years of refining the legislative framework, the tax authority has shifted its focus toward active enforcement.

This is evident from a test case in court, where Sars seeks clarity on the interpretation and application of the ETI. The outcome is expected to have bearing on more than 330 employers, identified for allegedly improperly claiming ETI credits. 

 A recent matter before the court, although relating to a joinder application for participation in the test case, sheds light on the core issue to be decided and signals that Sars is stepping up to enforce the rules and curb perceived abuse. 

From Legislative Amendments to Active Enforcement

While legislative changes have been ongoing, industry sentiment has often been that Sars’ enforcement action has lagged behind.

Legislative amendments introduced in 2021 and 2023 were specifically aimed at addressing practices inconsistent with the intent of the ETI.

“For some time, legislative changes have been introduced with comparatively limited visible enforcement from Sars. The test case, however, may suggest a growing focus by the tax authority in this area,” says André Daniels, Head of Tax Controversy and Dispute Resolution at Tax Consulting South Africa.

The Tax Administration Act (“TAA”) and the Rules thereof empower Sars to designate a dispute as a ‘test case’ where multiple taxpayers are affected by substantially similar legal and factual issues. In this instance, the test case is intended to provide clarity on the efficiency and consistency of the interpretation and application of the ETI, particularly where arrangements may be structured to obtain benefits not aligned with the incentive’s purpose.

According to Daniels, the use of a test case can serve as an appropriate mechanism to promote greater certainty. “Where Sars identifies practices among multiple taxpayers involving substantially similar legal and factual issues that may not fully align with the spirit of the law, or with National Treasury’s intended amendments, it may be worthwhile for Sars to consider a test case as a constructive step in its enforcement approach.”

A Well-Known Risk Area

Both Sars and National Treasury have, for several years, flagged concerns that the incentive was being used by taxpayers to benefit in ways that fall outside its intended purpose.

Since its introduction on 1 January 2014, the ETI has aimed to reduce the cost of employing young South Africans and encourage job creation through a cost-sharing mechanism between government and employers.

The incentive allows qualifying employers to reduce their Pay-As-You-Earn (PAYE) liability, without affecting employees’ wages.

However, government communications, including Budget Speeches and Sars revenue announcements, have repeatedly highlighted schemes designed to extract unintended tax benefits from the incentive.

ETI abuse has been acknowledged as a systemic issue, undermining both the fiscus and the policy intent of the incentive. Sars’s own reporting reflects this concern, with ETI-related audits and investigations forming a consistent part of its compliance focus.

The 2024 Budget Review emphasised this point, proposing that punitive measures to support amendments be refined in the legislation to address the abusive behaviour of certain taxpayers towards the incentive.

Similarly, Sars’s 2022/23 revenue announcement highlighted ETI as an audit focus area, with significant recoveries linked to PAYE ETI audits.

A Message to the Market

The move toward a test case has been broadly welcomed within the industry, particularly as it reflects a shift from ongoing legislative changes to tangible enforcement action. Tax incentives rely not only on clear rules but also on consistent enforcement to maintain their integrity and achieve their intended outcomes.

This development serves as a broader caution to taxpayers. Structures or solutions marketed as mechanisms to access ETI benefits should be approached with care to ensure it does not fall outside the spirit and requirements of the law. 

For professional advisors and taxpayers alike, the message is clear: ETI arrangements are likely to face increased scrutiny and enforcement, particularly in light of the number of employers already on the Sars radar. 

Written by Tax Consulting SA