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  • Taxpayer Wins R66 Million Employment Tax Incentive (ETI) Case Against SARS

Taxpayer Wins R66 Million Employment Tax Incentive (ETI) Case Against SARS

23 January 2019

In a recent Tax Court Judgement handed down on 13 December 2019 in Cape Town (Case 14426), in the matter between ABC (Pty) Ltd (Appellant) and the Commissioner for the South African Revenue Service (CSARS), the Taxpayer Appellant was victorious. The case dealt with the application of the Employment Tax Incentive Act, 2013 (ETI Act), which provides for an employment tax incentive (ETI) through a deduction from employees’ tax (PAYE) by the employer. The Tax Court had to consider whether the taxpayer was entitled to claim the ETI in respect of:

- Wage increases prescribed in the wholesale and retail sector Sectoral Determination 9 (SD9) that were paid to non-union member employees retrospectively (and not from when SD9 became applicable every year);

- A qualifying employee’s employment that started and/or ended in the middle of the month; and

- Qualifying employees that were paid less than the minimum prescribed wage, due to unpaid leave taken in a month.


The ETI provides a tax incentive to employers to encourage job creation for employees under 30 years of age. The ETI Act entitles an eligible employer to receive an ETI “in respect of a qualifying employee in respect of a month” through an employee tax (PAYE) deduction. The purpose of the ETI Act is “to encourage employment creation” as “government … need to share the costs of expanding labour market opportunities with the private sector” and “…support employment growth by … labour market activation, especially … young work seekers”. An eligible employer may claim the ETI for a “qualifying employee”. An employer is not eligible to receive the ETI “in respect of an employee in respect of a month if the wage paid to that employee in respect of that month is less than (a) the amount payable by virtue of a wage regulating measure applicable to that employer…”. A wage regulating measure means a collective agreement in terms of the Labour Relations Act (LRA); a sectoral determination in terms of the Basic Conditions of Employment; or a binding bargaining council agreement as contemplated in the LRA. The collective agreement between the taxpayer and the union are wage regulating measures that apply to the taxpayer as employer. Although the collective agreement did not bind non-trade union employees, there was no restriction on extending its terms to benefit of all employees which was voluntarily done by the taxpayer. The taxpayer extended the terms, accepted by the employees, to avoid workplace discord and achieve commercial efficiency.


The taxpayer treated all non-management employees, whether unionised or not, alike and paid annual increases agreed with the union, retrospective to the effective date of the SD9 increase. The taxpayer applied this policy for business reasons and commercial necessity to avoid labour relations issues. The taxpayer calculated the monthly remuneration of an employee who took unpaid leave to determine whether it was entitled to the ETI benefit in respect of such employee, and if so, in what amount. The taxpayer then claimed the ETI based on the pro-rated wages paid to the employee for the days worked. CSARS disallowed the ETI claims in full for employees who had taken unpaid leave. The same happened for employees who worked for less than a month on the basis that the ETI is available to “a qualifying employee in respect of a month” in terms of the ETI Act and, to qualify the minimum wage had to be paid to the employee for the month worked. CSARS assessed the taxpayer for R66 million, including tax and penalties. CSARS accepted that the SD91 increase could be paid retrospectively to trade union members in terms of the collective agreement. As a result, it is apparent that administratively, CSARS and the taxpayer accepted it to be possible to determine the ETI retrospectively and that the ETI Act did not require that the ETI only be granted to qualifying employees calculated on a monthly basis during or immediately following the actual month worked.


The ETI Act defines the term “monthly remuneration” as “the amount paid or payable…in respect of that month” clearly conceives of the fact that it may be an amount “paid or payable” to an employee. In Singh v Commissioner, South African Revenue Service, the meaning of “payable” was considered in the context of the Value-Added Tax, 1991 (VAT Act), and it noted that the word can mean “(a) that which is due or must be paid, or (b) that which may be paid or may have to be paid... The sense of (a) … a present liability – due and payable – ... (b) ... a future or contingent liability”. In the context of the VAT Act the term “payable”, in distinguishing it from “due”, was held that it must be given the meaning of a “future or contingent liability”. CSARS contended that from the definition of “monthly remuneration” in the ETI Act, the definition of “remuneration” in the Fourth Schedule of the Income Tax Act should be considered, which refers to “paid” in contra-distinction to “due”, the word “payable” means that the employer has an unconditional liability to pay remuneration for services rendered by the employee. CSARS argued that since the determination of the wage paid to the employee is done on a monthly basis, the employer is required to comply with the wage regulating measures for each month in which the ETI is claimed, and that the ETI Act does not provide for a retrospective application of the payment of a minimum wage. However, as an accrued right to remuneration is a right to remuneration which is not paid but is payable, the ETI Act expressly contemplated retrospective payment of wages.


The Tax Court found that the collective agreement was “applicable to the employer” and that the taxpayer voluntarily extended it to non-trade union members. And, although the agreement was entered into by the trade union on behalf of its members, the taxpayer could extend its terms to all employees whether members of the trade union or not. The Tax Court, as a result, found in favour of the taxpayer that CSARS’ refusal to allow the ETI deduction for non-trade union employees was without merit. The Tax Court then considered whether the taxpayer was entitled to claim the ETI in respect of employees who had taken unpaid leave or who had not been employed for a full calendar month, the relevant starting point being the definition of “monthly remuneration” in the ETI Act which applied at the time that the assessments were made. The ETI Act definition of monthly remuneration was amended (effective 1 March 2017) and now provides that (a) where an employer employs and pays remuneration to a qualifying employee for at least 160 hours in a month, means the amount paid or payable to the qualifying employee by the employer in respect of a month; or (b) where an employer employs a qualifying employee and pays remuneration to that employee for less than 160 hours in a month, means an amount calculated in terms of section 7(5). The reference to “in respect of a month” contained in “qualifying employee in respect of a month” is one of the factors that assist with the determination of whether an employee is a “qualifying employee”, given the earnings threshold imposed to qualify for the ETI for an employee. This requires a calculation of remuneration which would notionally have been earned by the employee if a full month had been worked. The ETI applies to employees who have not worked a full calendar month if their remuneration, had they notionally have done so, fell within the prescribed ETI threshold. Then it would be permissible to claim the ETI based on a pro-rated basis of the days actually worked.


This was a victory for the taxpayer on the ETI, and the Tax Court rightfully so held in favour of the taxpayer. Although not specifically addressed by this extract of Case 14426, the substance of ETI structures need to be considered very carefully to ensure full compliance with the law.