In a Binding Private Ruling issued on 6 July 2021, SARS has made strict ruling on an Employment Tax Incentive Act (ETI) scheme that has been doing the rounds. It is not often that negative rulings get published and it is therefore a unique situation that should serve as a warning to those participating in ETI schemes. The ruling determines that students in the proposed training programme are not considered “employees” as contemplated in the ETI Act and that the applicant in this case will not be entitled to claim an employment tax incentive in respect of any of them. The basic tenets of the scheme are as follows:

• The applicant: A resident company
• Company B: A resident non-profit company
• The applicant and company B will enter into an agreement with the stated purpose that students will be employed by the applicant for the purpose of obtaining a qualification. The students will participate in a training programme offered by company B

• Company B will train the students for a year, supply a tablet, data and cash per month as incentive to stay in the programme. Students will have to perform certain online tasks every week and meet for group discussions every second week.
• The applicant will invoice company B for payroll related services that the applicant will render monthly in respect of each student it proposes to employ.
• The applicant will sign agreements with the students for a period of 12 months and pay the students a monthly salary. The applicant is not obliged to employ the students after the 12 month training programme has been completed.
• The students will consent to forfeit their monthly salaries in order to be trained by company B. The students will be on the applicant’s payroll and protected by its group life policy.
• The students are not required to do any work. The main duty of a student will be to attend training courses “virtually” at the skills centres hosted by company B.

• There is no expectation that a student will report to the applicant’s offices on a daily basis. There may be times that the students would be expected to make themselves available to perform specific forms of work such as marketing, printing and distribution of pamphlets. The applicant will only call on them to perform these ad hoc activities to the extent that doing so does not interfere with their studies.
• Company B will exercise supervision and control over the students by way of mentors assigned to each of them. The mentors will monitor and supervise the students to ensure they progress successfully through the training course.

Ultimately, SARS ruled that:

1. a) No student will meet the definition of an “employee” in section 1(1) of the ETI Act.
2. b) The applicant will not be entitled to claim an incentive, as contemplated in the ETI Act, in respect of any of the students.

This should serve as a warning to carefully interrogate schemes of this nature before entering into them as they could have adverse tax consequences. Always speak to your tax advisor before assuming the applicability of any tax benefit.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).