D-BIT PAYROLL. Employer Tax Incentive. D-BIT SYSTEMS (Pty) Ltd D-BIT Systems 2015/03/09, 10:21 AM

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1 D-BIT SYSTEMS (Pty) Ltd RegNo: 87/ D-Bit Building 18 Bosbok Rd Boskruin South Africa PO Box 1950 Randpark Ridge 2156 South Africa D-BIT PAYROLL Employer Tax Incentive 2015/03/09, 10:21 AM

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3 Contents I Table of Contents Part I Employer Tax Incentive 3 1 Why... Employer Tax Incentive? 3 Part II Disclaimer 3 Part III When is the ETI being implemented? 3 Part IV How is the ETI going to be Implemented? 3 Part V Scope 4 Part VI What are the Objections and Opportunities for Abuse? 4 Part VII Employers who qualify 4 Part VIII Disqualified Employers 5 Part IX Definition of Employees by the ETI Act 5 1 Natural... Person 5 2 Directly Remuneration Independent... Contractor 6 5 Fourth... Schedule Employees Included by the ETI 6 6 Fourth... Schedule Employees Excluded by the ETI 6 7 Qualifying... Employees 6 8 Non... Qualifying Employees 7 9 Permanent... and Temporary Employees 7 Part X Concept of Partial Month Amended ETI Act 7 1 Why Hours? 7 Employed and... Worked Hours 7 Permanent Employees... 7 Temporary Employees... 8 Part XI Determining the Amount of the Tax Incentive 8 I

4 II Employer Tax Incentive Part XII How does an Employer deal with Part Pay Periods? 9 Part XIII What happens if the Employee leaves the Employer? 10 Part XIV What if the ETI is greater than the Tax Payable? 10 Part XV Aligning D-BIT with the ETI Bill 10 Part XVI Advising 'Non Eligible' Employees 11 Part XVII ETI Utility 11 1 Processing... ETI Utility 12 2 Commtting... ETI Values to Employees Tax Records 13 Part XVIII Take On ETI Periods 14 1 Miscellaneous... IMPORT/EXPORT Utility 15 Part XIX Gross Up 16 1 Gross... Up Methods 17 2 Date... Employed (Working Days) 17 3 Group... Date Employed (Working Days) 18 4 Date... Employed (Calendar Days) 19 5 Group... Date Employed (Calendar Days) 19 6 Worked... Hours from Temp Entry 19 7 Theoretical... Hours from Temp Entry 20 Part XX SARS ETI Supporting Data 21

5 Employer Tax Incentive 3 1 Employer Tax Incentive 1.1 Why Employer Tax Incentive? Unemployment is a problem in every country. When young people leave the education system with little chance of obtaining employment, their motivation to achieve is impacted. Statistics indicate that 50% of 15's to 25's are unemployed, and 29% of 25's to 34's are unemployed. The ETI Bill is directed at the 18 to 29 age year group, who are believed to be around 30% of the total unemployed which is sitting at approximately 25%. The concept of introducing a subsidy for employers who take on young employees is not a new one, but there is significant resistance. The draft Bill was released in September and the formal Bill published on the 4th November Disclaimer The purpose of this document is to show how the current legislation for ETI is implemented within D- BIT Payroll. While we have reproduced sections of: 1. SARS_PAYE_BRS 2. National Treasury Employment Tax Incentive Bill NB: To illustrate, the official Guideline For Employer Tax Incentive Bill should be referred to for full/ changed details. Reference Websites listed below: When is the ETI being implemented? The National Treasury has set a 'Go Live' date of January 1st The Bill is in effect for 3 years from 1st January 2014 to 31st December How is the ETI going to be Implemented? SARS together with the assistance of other Government Institutions will be responsible to administer and collect 'Penalties' for the fund. The subsidy will be set off against the PAYE Liability. Monthly submissions will be submitted using the currently available PAYE channels. Registration to participate in the subsidy will be done through SARS single registration process. The following forms will be upgraded to enable the submission: EMP201 EMP501 REG01/RAF01 IRP5/IT3(a)

6 4 Employer Tax Incentive 5 Scope The project is divided into 2 phases. Phase 1 ensuring Employers can submit their EMP201 on February EMP201 form will include 'ETI Claimable Field ETI Allowable Carried Forward Field Introducing the Gross PAYE Field Introducing the Net PAYE Field Phase 2 - will create the functionality to submit the EMP501 with the ETI amount. 6 What are the Objections and Opportunities for Abuse? A concern is, that Employers will terminate existing employees in order to hire people who are eligible for the incentive. Employees being displaced will result in the Employer being disqualified from receiving the tax benefit. 7 Employers who qualify Employers who are registered to withhold and pay employees tax (para 15 of the Fourth Schedule of the Income Tax Act). Apply within designated SEZ's and Industries where the age restrictions will not apply.

7 Disqualified Employers 5 8 Disqualified Employers Local, Provisional or National Government. Municipal Entities. Public Entities (Public Finance Act 1999), although the Minister of Finance may designate exceptions. Employers who are found to have displaced employees in order to benefit from the incentive. Employers who do not comply with the training conditions (as yet unspecified). Employers who do not meet the conditions based on the classification of trade (SIC). Employers who are not in good standing with SARS on the last day of the month. Penalties For noncompliance in terms of the wage regulating measures, the claimed sums must be remitted to SARS as a penalty. Displacement include a R penalty per displaced employee and possible disqualification from the Incentive Scheme 9 Definition of Employees by the ETI Act An employee means a natural person (a) who works directly for another person; and (b) who receives, or is entitled to receive remuneration, from that other person, but does not include an independent contractor; 9.1 Natural Person Includes only natural persons, the definition excludes all non-natural (or =legal ) persons such as companies and close corporations from being ETI employees. In other words, only individuals (human beings) can be an ETI employee. 9.2 Directly Only natural persons that work directly for the employer are ETI employees. 'Directly means that the employment contract (either written or verbal) is between the employee and the employer (i.e. there is no third party to the contract), and that the remuneration for the services rendered is paid directly by the employer to the employee. Workers supplied to a company by a labour broker are not ETI employees of the company because the employment contract is between the workers and the labour broker, and the labour broker pays the remuneration to the workers. The workers are therefore ETI employees of the labour broker, and the labour broker will benefit from the employment tax incentive, not the company. Some labour brokers pass on the tax incentive to the company through charging lower labour rates. Effective from 1st January 2015, the provision in the Labour Relations Amendments Act that deems workers who have been placed at a client company for 3 months or longer to be an employee of the client will not change this position. The labour broker will continue to pay the remuneration, and the workers who are deemed to be employees of the company will continue to

8 6 Employer Tax Incentive be ETI employees of the labour broker. NB: That so-called 'casual or 'temporary employees are not excluded from being ETI employees by the word 'directly. There is seldom a written contract of employment in these cases, but a simple I will pay you Rx per hour for doing the following? is a verbal contract and is sufficient because the Basic Conditions of Employment Act (BCEA) and the Labour Relations Act (LRA) provide the minimum working conditions. Temporary (or casual) employees are therefore 'ETI employees and can qualify to generate the tax incentive for the employer. 9.3 Remuneration The remuneration referred to in this definition is the full definition of remuneration in the Fourth Schedule to the Income Tax Act. An individual who is not paid remuneration as defined by the Fourth Schedule by the employer can never be an ETI employee. 9.4 Independent Contractor Any individual who is a common law independent contractor can never be an ETI employee. 9.5 Fourth Schedule Employees Included by the ETI 1. Permanent employees 2. Temporary employees 3. Seasonal workers 4. Fixed term contractors. 9.6 Fourth Schedule Employees Excluded by the ETI 1. Non-natural persons (Personal Service Providers) 2. Directors of private companies who are not paid remuneration (see note 1 below) 3. Independent contractors that are deemed to be an employee by the Fourth Schedule. 9.7 Qualifying Employees Having defined an employee, the ETI Act then goes on to provide further criteria which determines which of these ETI employees 'qualify to generate the employment tax incentive for the employer. These 'qualifying criteria are not important for this discussion, but for the sake of completeness the rules to 'qualify are summarised below in what is hopefully a logical manner and sequence. 1. The employee was employed by the employer on or after 1st October 2013 and 2. The employee is aged not less than 18 and not more than 29 at the end of the month and 3. The employee is in possession of: An RSA 13 digit bar coded ID card, or An Asylum Seeker Permit, or An Identity Document as contemplated in section 30 of the Refugees Act

9 Definition of Employees by the ETI Act Non Qualifying Employees A connected person to the employer, or A domestic worker (as defined by the Basic Conditions of Employment Act, or Paid remuneration that is equal to or greater than R6 000 pm, or Paid a wage that is less than the minimum wage or R2 000 pm (if no minimum wage). 9.9 Permanent and Temporary Employees 1. 'Permanent employees: Those employees who work in terms of an employment contract that specifies a contractual predictability of regular work in the future 2. 'Temporary employees: Those employees who work without an expectation or contractual predictability of regular work in the future, and would include so-called 'casuals or 'temps. 10 Concept of Partial Month Amended ETI Act 1. A 'full month is a month in which an employer employs an employee for 160 hours or more. 2. A 'partial month is a month in which an employer employs an employee for less than 160 hours Why 160 Hours? In order to classify as many of the various employment working period scenarios as possible to be a 'full month, the threshold was specified as low as possible, and is based on a month consisting of four weeks of 40 hours per week (5 days per week at 8 hours per day). Besides a month consisting of four weeks of 40 hours, this low threshold results in months that consist of 5 weeks, weeks that consist of 6 days, or any other working arrangements that result in 160 or more hours being worked on a regular contractual basis, being relatively easily classified as being 'full month scenarios. Only months that consist of less than 160 employed hours are 'partial months for the purposes of the ETI Act, and this should theoretically be the exception and not the rule. Whether or not certain types of hours 'worked must count along with 'employed hours towards the 160-hour threshold will be discussed in a later section. The important distinction between employed hours and hours worked follows Employed and Worked Hours 'Employed hours in terms of the ETI Act are the 'contractual hours as specified in the employment contract Permanent Employees The contract creates an expectation (or predictability) that the hours contracted for will be worked by the employee on a regular (usually monthly) basis in the future until the contract is changed or it comes to an end. This applies irrespective of whether the employment contract is written or verbal, and whether it is the normal 'open-ended contract or a fixed term contract that is ended by a date or by an event specified in the contract. The number of 'contractual hours is a relatively stable number as it can only change if the contract is changed. It will be easily available to the employer, and it can be captured into the payroll and used by the payroll system each month to determine whether or not the month is a partial month. The employee will normally work the hours as specified in the employment contract (or take 'paid leave which is equivalent to work), otherwise it will be a breach of contract.

10 8 Employer Tax Incentive When a permanent employee is employed for 1. Less than 160 hours in a month, then the month is classified as a 'partial month hours or more in a month, then the month is classified as a 'full month. NB: If an employee is permanently employed for 160 hours or more in a month, but works less than 160 hours in a certain month, the employee was still employed for more than 160 hours for that month, and therefore the month is still classified as a full month. However, if a permanent employee starts to work after the first day of the first month of employment, or stops working before the last day of the last month of employment, then the later starting date (or the earlier termination date) would determine the employed hours in those months. If these 'shorter employed hours are less than 160 in one of these months, then that month must be classified as a partial month, and as we will see later, wage and remuneration must then be 'grossed-up. As another example, an individual employed on a mornings-only basis would be employed for a month but for less employed hours than an employee who is employed to work for a full day. If the employed hours of the mornings only employee are less than 160 hours, then the month is classified as a partial month, and the 'gross-up calculation follows. It is important to note that the legislators have deliberately used the word 'employs' in the definition of monthly remuneration that states that a partial month occurs? where an employer employs a qualifying employee for less than 160 hours in a month Temporary Employees While temporary employees are also employed in terms of an employment contract (albeit a verbal contract), these contracts are usually 'once-off and there is no expectation (or predictability) that a fixed number of hours will be worked by the employee on a regular monthly basis in the future. As a result, there are no contractual hours that can be captured into the payroll as employed hours and used each month to determine whether or not the month is a partial month, as is the case for permanent employees. In the absence of employed hours, the only alternative is for the payroll to use the ordinary hours worked in the month as the employed hours, and to identify a month as being 'partial when the hours worked are less than 160 for that month. 11 Determining the Amount of the Tax Incentive The incentive amount should be calculated on a monthly basis. The incentive available is calculated on the aggregate of the incentive available for that month together with any roll over amount for any previous periods. The incentive will be available for a maximum of 24 months, broken into 1st 12 months and Next 12 months. Assuming Qualification There are effectively 6 calculations depending on the applicable employment period and the 'Remuneration' of the qualifying employee. Remuneration is defined fro in the Fourth Schedule of the Income Tax Act, without any exclusions and includes 80% or 20% of Travel Allowance and Company Car Fringe Benefit. R0 To R % 1st 12 months and 25% next 12 months. R2000 To R R1000 1st 12 months and R500 next 12 months. R4001 To R Formula R (.5 x (Monthly Remuneration - R40000)) in 1st 12 months, and Formula R500 - (.25 x Monthly Remuneration - R4000)) in next 12 months. Example 1st 12 Months

11 Determining the Amount of the Tax Incentive 9 Example Next 12 Months 12 How does an Employer deal with Part Pay Periods? If earnings represent part of a pay period they must be grossed up before calculating the incentive. Example: Employee starts on the 15th of the month and earns R2000 in the first month with the Employer. The remuneration must be grossed up to R4000 per month. The ETI on this value calculated = R1000 1st qualifying 12 months of employment. This result of R1000 is grossed down to result in R500 ETI for this employee for this month.

12 10 Employer Tax Incentive 13 What happens if the Employee leaves the Employer? The next Employer can start counting ETI qualifying months from the 1st month of employment. i.e. the employees 1st ETI month will be counted as month 1 for the new Employer. If the employee goes to an 'Associated Employer', the 'Previous' ETI months must be taken into account. If the employee returns to the 1st Employer after an interruption in service, the Employer must start counting ETI months from where they left off when the employee was disengaged/terminated. 14 What if the ETI is greater than the Tax Payable? The unclaimed amount may roll over to the following month. NB: These unclaimed amounts must be cleared every 6 months, aligned with the Tax Reporting Periods. The amount may not exceed R6000 per qualifying employee. There are still outstanding issue regarding the roll out of the ETI, but the EMP201 will now include the ETI. 15 Aligning D-BIT with the ETI Bill Calculations performed as per National Treasury requirements. ETI calculation written to a report per employee via the ETI Utility. ETI calculation to add to SARS Code '4118' on the employee Tax Record when calculations from the ETI Utility are 'Committed'. An ETI Utility to be run AFTER accepting the Final month end period. The ETI Utility will test the following to identify qualifying employees: Step 1 is the employee years of age? Step 2 is the employee employed in a Special Economic Zone? Step 3 is the employee in possession of a valid SA ID OR an Asylum Seeker Permit in terms of the Refugees Act? Step 4 Does the employee earn equal or more than the minimum wage? Step 5 is the monthly remuneration of the employee more than R6000? Step 6 Was the employee employed on or after the 1 st October 2013?

13 Advising 'Non Eligible' Employees Advising 'Non Eligible' Employees D-BIT has created a switch on the employee master file to tick if the employee is not eligible e.g employee is a domestic worker/family member. Select 'Maintenance'. Select 'Employee Masterfile' Personal Tab. Type of Employee - change to 'Not eligible for ETI'. 17 ETI Utility The ETI Utility must be run 'AFTER' the last run of the month has been accepted. The employee will be eligible from their NPHET0 (Tax Histroy Record) for the selected RunID. Select 'Reports' Select 'Monthly Reports'. Select 'Statutory Reports'. Select 'Employment Tax Incentive' and the ETI Utility will be displayed to screen

14 12 Employer Tax Incentive 17.1 Processing ETI Utility Employer Registration Number - enter the SARS registration number for ETI. Step 1 : Select Tax Year - use the down arrow and select the year. Step 2 : Select Payroll RunId - Double click on the payroll and select the month end 'RunId'. NB: For weekly and fortnightly payrolls ONLY month ends will be displayed i.e. those period marked as 'Fiscal Month Ends' on your Payroll Calendar. Configure - If the following Gross up methods are used, the 'Actions' making up the 'Gross Up' value need to be advised in order to get the hours worked from the temporary entries. Click on 'Configure' button and the NPETI.INI file will be opened in 'Notepad'..

15 ETI Utility 13 Create the Action List as above adding the relevant actions for your company Step 3 : Define Reporting Parameters - Use Group Date Employed? - tick this field if you use the 'Date Joined Group' on the employee masterfile, and this date is the 'Actual' date employed with the company and not the 'Date Employed' field. All other fields in this step are preselected. Enter the Minimum Salary For Your Industry Sector below which employees are not eligible - defaults to Gross Up Method - use the down arrow to make your selection. Details of these methods are under section 'Gross Up Methods'. Special Economic Zone (SEZ) - still to be announced by the Minister of Finance. Report on Employees Not Eligible For the Incentive - tick if you want 'Non Eligible' employees reported on.. Step 4 : Calculate Employer Tax Incentive for the Selected Period - the Payroll Data path will automatically be displayed, but you can browse and change to write the excel report to another directory etc. Click 'Export' and the ETI calculations will be processed for 'Qualifying' employees'. Click 'OK' and the 'Excel' report will be displayed to screen. Step 5: File (optional) - advise an address if you wish to the excel report to someone Commtting ETI Values to Employees Tax Records NB: BACK UP the Payroll Data Prior to committing. Step 6 ; Commit ETI Values to employees Tax records - ONLY commit if you are happy with the ETI calculations. Employees tax record - SARS Code 4118 updated with the ETI amount.

16 14 Employer Tax Incentive NB: If you commit the ETI Values for the same RunId twice the values will override what was previously there. The ETI Values are also saved per period on the employees tax record. Under 'Action Details' select 'Employer Tax Incentive'. 18 Take On ETI Periods For new D-BIT Clients where B/F ETI periods need to be inserted. The Miscellaneous Import/Export utility needs to be utilised.

17 Take On ETI Periods Miscellaneous IMPORT/EXPORT Utility NB: Please ask D-BIT Support for the Excel 'Export' Layout example below. NB2: A BACKUP MUST BE DONE OF THE DATA PRIOR TO THE IMPORT BEING PROCESSED. Click on 'Configuration'. Click on 'Utilities'. Click on 'Misc.Import And Export'. File - use the down arrow on the right and select 'NPET10.Employee Tax Incentive'. Click on 'Import data into selected file'. Click 'OK".

18 16 Employer Tax Incentive Import File - you can rename the export file to your own description but the extension must remain as.csv. Process Group - select a group from the finder on the right or create a new group by moving your cursor over the words 'Process Group'. Double click on the NPETI0.EmpNumber, NPETI0,RunId and NPETI0.EligableMonths in the 'Data Fields section, these will then move to the 'Selected data fields' section. Header? - Tick Keep - click on this button. Click 'Import'. 19 Gross Up From 1st March 2015 the new '160 hour' requirement comes into effect. The calculation of the value of the incentive be simplified and linked to an hourly rate where the grossing up mechanism is linked to a baseline of 160 hours of work per month, rather than through the use of a discretionary full time calculation. The effect of this is that the incentive can be claimed for qualifying employees who earn between R12.50 an hour (if there is no minimum wage) and R37.50 an hour (provided they work 160 hours or less per month). If an employee is employed for less than 160 hours in a month, then he or she should be seen to have worked for a part of a month. As such, his or her remuneration (and wage if there is no minimum wage) must be 'grossed-up' by using the ratio of the hours employed to 160 hours. An employee who has been employed for 160 hours or more in a month is seen to have worked for a full month, in which case there is no 'gross-up' calculation required. It is the numbers of hours employed not worked that must be used to gross-up to 160 hours. Permanent employment

19 Gross Up 17 The changes will have no impact for employees who work at least eight hours a day, five days a week since these employees will work 160 hours or more each month. It is only categories such as short time arrangements and mornings-only employment where the employed hours will contractually amount to less than 160 hours a month. In these cases, payroll systems will have to allow the employer to data capture the 'contracted' hours for qualifying employees who are employed for less than 160 hours pm. Temporary employment With temps and casuals, who work when they're called in because there is work for them to do. In this case, it is debatable whether there is a difference between hours worked and hours employed. One can only assume that the hours employed are the same as the hours worked for that month. This means that in order to be able to calculate the ETI benefit, the employer will have to record and capture the hours worked by each casual into the payroll every month. Without these hours, the payroll's ETI calculation will not comply with the law. It will mean a significant increase in the employer's workload for casuals who qualify for the ETI Gross Up Methods D-BIT at this stage has 6 types of calculations available to Gross Up ETI Earnings Date Employed (Working Days) The calculation will use the Gross Remuneration MTD for weekly/fortnightly and the Gross Remuneration CUR for monthly payrolls value to be the Eligible ETI Earnings from the employee tax history record for weekly/fortnightly payrolls, This method takes the ETI value and grosses up by using the working shift pattern from the employees 'Payrule' tab

20 18 Employer Tax Incentive E.G. Employee starts in the middle of the month i.e. 'Date Employed' =15/01/2014 Employee works a 5 day week calculated working days for the employee = 13 days for January Actual working days = 23 for January Calculation - ETI earnings x by 23 divided by Group Date Employed (Working Days) The calculation will use the Gross Remuneration MTD for weekly/fortnightly and the Gross Remuneration CUR for monthly payrolls value to be the Eligible ETI Earnings from the employee tax history record for weekly/fortnightly payrolls, This method takes the ETI value and grosses up by using the working shift pattern from the employees 'Payrule' tab E.G. Employee starts in the middle of the month i.e. 'Date Joined Group =15/01/2014

21 Gross Up 19 Employee works a 5 day week calculated working days for the employee = 13 days for January Actual working days = 23 for January Calculation - ETI earnings x by 23 divided by Date Employed (Calendar Days) The calculation will use the Gross Remuneration MTD for weekly/fortnightly and the Gross Remuneration CUR for monthly payrolls value to be the Eligible ETI Earnings from the employee tax history record for weekly/fortnightly payrolls, This method takes the ETI value and grosses up by using the calendar days in the month. E.G. Employee starts in the middle of the month i.e. 'Date Employed' =15/01/2014 equates to 17 days ( ) Calculation - ETI earnings x by calendar days for the month i.e 31 days in January divided by Group Date Employed (Calendar Days) The calculation will use the Gross Remuneration MTD for weekly/fortnightly and the Gross Remuneration CUR for monthly payrolls value to be the Eligible ETI Earnings from the employee tax history record for weekly/fortnightly payrolls, This method takes the ETI value and grosses up by using the calendar days in the month. E.G. Employee starts in the middle of the month i.e. 'Date Joined Group' =15/01/2014 equate to 17 days ( ) Calculation - ETI earnings x by calendar days for the month i.e 31 days in January divided by Worked Hours from Temp Entry The 'Worked Hours from Temp Entry' should only be used by 'Temporary Employment Service Companies' who pay temporary employees This calculation will take the Eligible ETI Earnings multiplied by Theoretical Calendar Working Hours i.e 184 divided by the hours worked (NB: ONLY if less than 160 hours) by the employee for the month. Theoretical Calendar Working Days being calculated from the payroll calendar.

22 20 Employer Tax Incentive E.G January has 23 theoretical working days, which converted to hours (from shift pattern from the employee masterfile) i.e. 23 x 8 = 184. Calculation - ETI earnings x by calendar working days for the month i.e 23 days * 8 in January divided by number of hours employee worked in the month. NB: The NPETI.INI file MUST contain the 'Actions' to be incorporated in the calculation of the working hours. e.g. Regular Earnings etc To configure this file you need to click on the 'Configure' button on the ETI Utility Theoretical Hours from Temp Entry The 'Worked Hours from Temp Entry' should only be used by 'Temporary Employment Service Companies' who pay temporary employees This calculation will take the Eligible ETI Earnings multiplied by Theoretical Working Hours i.e divided by the hours (NB: ONLY if less than 160 hours) worked by the employee for the month. Theoretical Working Hours being calculated from the employee shift pattern on the Payrule tab. Calculation = X 8 = theoretical hours for the month. NB: The NPETI.INI file MUST contain the 'Actions' to be incorporated in the calculation of the working hours. e.g. Regular Earnings etc To configure this file you need to click on the 'Configure' button on the ETI Utility.

23 Gross Up SARS ETI Supporting Data All Employers participating in the ETI must keep supporting data of eligible employees for which ETI is claimed. SARS will from time to time request such supporting data to authenticate the eligibility of those employees. The information will be required on an individual employee level (Tax certificates marked with an 'X' in SARS Code 3026).