Since its launch on 1 January 2014, the Employment Tax Incentive (ETI) has played a vital role in the fight against youth unemployment in South Africa. Designed to lower the cost of hiring young, first-time job seekers, the ETI has empowered thousands of businesses to grow their workforce while reducing tax obligations. With the program extended until 28 February 2029, it continues to be a critical lever for cost-saving and youth development.
But as the incentive gained popularity, so too did efforts by some to manipulate the system, prompting the South African Revenue Service (SARS) to sharpen its focus. And now, SARS is doing more than reversing questionable ETI claims. It’s also challenging the deductibility of salaries associated with those claims exposing employers to unexpected corporate tax liabilities.
A New Era of ETI Enforcement
SARS has zeroed in on whether individuals included in ETI claims actually meet the definition of an “employee” under the ETI Act. Where they do not, the tax benefits can be entirely reversed sometimes years later, with interest and penalties to match.
But the stakes are now even higher.
SARS’ latest approach includes disallowing salary deductions from corporate income tax where ETI claims are denied on technical grounds. In effect, SARS argues that if someone wasn’t an eligible employee for ETI purposes, then any salary paid to them cannot be considered a legitimate business expense.
The result? A double tax whammy: the loss of the ETI benefit plus a significantly larger corporate tax bill.
The Real Risk: When Salaries Don’t Count
A growing number of cases involve businesses, particularly those operating training programs, where so-called “employees” never receive their pay as cash. Instead, their wages are offset against tuition fees. SARS views this as a red flag and has frequently found that these individuals don’t meet the employment criteria, leading to disallowed claims and further scrutiny.
Even employers operating in good faith, who believe they’re fully compliant, have found themselves the subject of routine SARS audits.
This is no longer just about reclaiming PAYE rebates. It’s about defending the legitimacy of your payroll expenses.
What Employers Should Do Now
In light of SARS’ new enforcement posture, employers must take proactive steps to protect themselves:
Verify Employment Relationships
Ensure that all workers for whom ETI is claimed meet the legal criteria as employees under both tax and labour law.
Audit Your Paper Trail
Employment contracts, job descriptions, payment records, and tax filings must all be accurate, up to date, and defensible.
Review Payroll Structures
Avoid overly complex or unconventional payroll setups that could raise red flags during an audit.
Engage a Tax Specialist
A qualified tax attorney or consultant can help assess your current exposure and ensure your documentation aligns with SARS requirements.
Why This Matters
SARS’ mission is clear: make non-compliance costly and difficult. But the collateral impact on honest businesses could be severe. Many employers simply aren’t aware that a denied ETI claim can spill over into corporate tax assessments—leading to unplanned costs and reputational risk.
ETI is a powerful incentive, but it must be used correctly. Employers need to understand that the window for leniency has closed. With tighter legislation, increased audits, and a more aggressive SARS approach, it’s never been more important to play by the rules.
