The South African Revenue Service (SARS), in Interpretation Note 145 published on 27 July 2026, clarifies sections of the Employment Tax Incentive Act regarding the definition of employee. While the note specifically deals with composite arrangements involving learning institutions, it should be viewed as part of SARS’ broader campaign to curb abuse of the Employment Incentive Tax (ETI) by ensuring that the incentive is claimed only in respect of individuals who meet the statutory requirements of an “employee”.

The ETI allows eligible employers to reduce the amount of employees’ tax (PAYE) they pay over to SARS each month, for every qualifying employee they hire. The incentive was introduced in 2013 to encourage employers to take on young, inexperienced workers, and it remains one of the more widely used tax incentives in South Africa.

Employers claim the ETI monthly, provided the employee is between 18 and 29 years old, earns below the qualifying remuneration threshold, and meets a handful of other requirements set out in the Employment Tax Incentive Act. Crucially, the individual must also meet the legal definition of an “employee” under the Act. This means the person must actually work for, and be remunerated by, the employer claiming the benefit, not merely be named on a contract.

Interpretation Note 145 states:

The ETI is not intended to be an incentive for training unskilled workers, but rather to ensure sustainable employment.

In recent years, SARS has increasingly found that the requirement of “employee” is not being met. Employers have claimed the ETI in respect of individuals who, on closer inspection, never performed any real work for them at all. SARS has been auditing this specific issue hard, and Interpretation Note 145 confirms that the scrutiny is set to continue and intensify.

Where the Scrutiny is Landing

SARS’s audit teams have, in a string of recent cases, unwound ETI claims running into tens of millions of Rands once the underlying “employment” was tested, and the damage has not stopped at the ETI itself. In each instance, the arrangement on paper looked entirely in order: contracts were signed, remuneration fell within the ETI thresholds, ages qualified. It was only when SARS went behind the documentation, contacting the individuals concerned and asking what work they had actually performed, that the claims fell apart.

Employers who use third-party recruitment agencies or training providers to source these “employees” have been hit hardest. In several cases, once SARS established that no genuine employment relationship existed, it did not stop at simply disallowing the ETI going forward. 

Under the Tax Administration Act, SARS is entitled, in cases of negligent or fraudulent misrepresentation, to reopen assessments for tax years that would ordinarily already be closed to further review. On top of this, understatement penalties are then imposed over and above the amount of ETI that must be repaid. This means a single audit can unwind several years of assumed certainty at once, with the incentive an employer once relied on to reduce its wage bill converting into a multi-year tax debt.

SARS did not arrive at this position by accident. The National Treasury flagged the underlying scheme type in its own explanatory memoranda several years ago: an intermediary recruits participants, a training institution provides the instruction, and a “participating employer” signs an employment contract and claims the ETI on an amount that, in substance, is a training fee rather than a wage. Little or no actual work is done for the employer claiming the benefit.

A Decade of Tightening the Net

This legislative response has come in stages, starting in 2018, when the requirement that an employee works “directly” for the employer was removed, closing a gap that had excluded genuine labour broker and personal service provider arrangements. 

In 2022, the definition was expanded further. An employee must now also assist, directly or indirectly, in carrying on the employer’s business, and must be documented in the employer’s records in the manner required by the Basic Conditions of Employment Act. A companion provision now disqualifies anyone who is, in substance, mainly studying rather than working during the month in question, measured by actual hours and not by the label on the contract.

The penalties have kept pace, and they are not gentle. From September 2022, the definition of “tax” for understatement penalty purposes was extended to cover ETI claims, exposing incorrect claims to penalties of up to 200 percent of the shortfall on top of the amount disallowed. From March 2025, a further dedicated penalty equal to 100 percent of the ETI received applies specifically to claims involving remuneration that should have been disregarded. An employer that gets this wrong is not simply repaying a benefit it should not have claimed. It can end up paying SARS several times over for the privilege.

Interpretation Note 145 pulls all of this together and, notably, spells out the indicators SARS will look for when testing whether real work took place: whether the employer actually supervised and controlled the person, whether tasks were assigned and monitored, whether leave was taken and recorded, and whether remuneration was genuinely paid in cash rather than absorbed into a training fee. Taken together, this reads less like general guidance and more like a published checklist for SARS’s own audit teams.

There is Still a Way Out, But the Window is Closing

Employers who suspect that some of their ETI claims may not hold up to this level of scrutiny are not without options, provided they act before SARS acts first. SARS’s Voluntary Disclosure Programme (VDP), provided for under the Tax Administration Act, allows a taxpayer to come forward voluntarily and disclose a default, such as an incorrect ETI claim, before SARS notifies them of a pending audit or investigation into that specific issue. 

A valid VDP application still requires payment of the outstanding tax and interest, but it can secure significant relief from understatement penalties and protects the employer from criminal prosecution in respect of the default disclosed. Once SARS has already begun looking into a matter, this door closes, and the employer is left to face the full consequences described above.

No Employer is Too Small to be Caught

Employers who rely on the ETI, particularly where recruitment agencies, labour brokers or training providers sit anywhere in the arrangement, should treat this as an immediate compliance priority, not a future risk to be revisited at some point. SARS has demonstrated, repeatedly, that it is willing to bypass the payroll altogether and verify claims directly with the individuals concerned. A single mismatch between what an employer has claimed and what an employee can confirm is now enough to trigger a full disallowance, reopened assessments stretching back years, and penalties layered on top of penalties.

At minimum, employers should be able to produce, for every single qualifying employee, a genuine job description, evidence that work was actually assigned and monitored, records of hours worked and leave taken in accordance with the Basic Conditions of Employment Act, and proof that remuneration was paid in cash rather than dressed up as a training benefit. Where any element of the arrangement runs through a third party, whether a recruiter, a labour broker or a training institution, the employer remains the one who answers to SARS and cannot hide behind a third party’s records if those records cannot be produced on demand.

The message from Interpretation Note 145 and from SARS’s recent audit conduct is unambiguous: the ETI is no longer a low-risk payroll adjustment that can be claimed and forgotten. Employers who have not stress-tested their claims against this standard are carrying a liability they may not even know exists. Employers who are uncertain whether their current ETI claims would survive this level of scrutiny should have their arrangements reviewed now, and consider whether voluntary disclosure is available to them, before SARS makes that decision instead.

Submitted by Tax Consulting SA