South Africa: Interpretation Of Employment Tax Incentive Act

ON 13 December 2018 the Western Cape tax court upheld the appeal of the taxpayer in ABC (Pty) Ltd v CSARS Case No 14426.  The origin of the dispute lay in the fact that the taxpayer employed both union and non-union employees. At issue was the interpretation of the provisions of the Employment Tax Incentive Act, 2013 (Act).

The taxpayer operated in the fast-moving consumer goods industry to which wholesale and retail Sectoral Determination 9 (SD9) prescribed wage increases to union members.  SD9 establishes conditions of employment and minimum wages for employees in the wholesale and retail sector.  The staff consisted of management and non-management employees.  Within the non-management category were permanent full-time monthly paid employees and permanent part-time weekly paid employees.  About 30% of the non-management employees belonged to a union.

SD9 is published in January each year, applicable from 1 February for 12 months.  The negotiated wage increases were paid from 1 May, on which date the taxpayer paid lump sums to all non-management employees, union and non-union, backdated to 1 February.  The evidence was that the taxpayer treated all employees equally to avoid labour relations chaos and had done so for many years.  The taxpayer had concluded a three-year collective agreement with the union and applied this wage agreement across the board.

CSARS disallowed the taxpayer's ETI claims for February, March and April 2014 and 2015 on the grounds that the amount paid was less than the SD9 minimum.   Section 4 of the Act provides that an employer is not eligible for the incentive if the wage paid to the employee is less than "the amount payable by virtue of a wage regulating measure applicable to that employee".  SARS went further and disallowed claims in respect of employees who had taken unpaid leave, despite the fact that the taxpayer had claimed the ETI only for the period during which the employee had been at work and paid.  SARS based this decision on an interpretation of section 2(2), which provides that the ETI is available to "a qualifying employee in respect of a month".  According to SARS, this meant that the employee had to have worked and been paid for the whole month.

The taxpayer contended that the collective agreement was a "wage regulating measure" as contemplated in section 4.  It followed that the taxpayer was permitted to apply the agreement across the whole bargaining unit regardless of union membership in terms of its past practice for reasons of commercial necessity.  Furthermore, the calculation of pro-rated monthly earnings where there had been unpaid leave was an appropriate manner of calculating ETI where employees had taken unpaid leave for part of a month.

CSARS opposed the appeal on the grounds that: the ETI entitlement is granted on a month-to-month basis, not retrospectively months later; the amounts paid to non-union members, being the wages determined under the collective bargaining agreement, were less than SD9, the  minimum wage under the wage regulating measure; the collective bargaining agreement made no reference to non-union members; and therefore the tax was in breach of section 4.  Furthermore, the ETI Act did not provide for retrospective application of the minimum wage; and employees who took unpaid leave were not entitled to a full month's pay and therefore did not qualify for the ETI.

The court noted that the ETI Act is an incentive to encourage job creation for employees under 30 years of age, to encourage employment creation.  The government recognised the need to share the costs of expanding the labour market with the private sector and wished to support employment growth, especially in relation to young work seekers.  In addressing the submissions of the taxpayer and SARS, the court adopted the well known principles of interpretation summarised in Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13, where the Supreme Court of Appeal found that in interpreting any legislation one should seek to give a sensible and business-like interpretation to the statute or have appropriate regard for its purpose".

To accept the contentions of CSARS would amount to not applying this tenet of interpretation.  The taxpayer's remuneration policy did not result in unacceptable retrospective application of ETI; its policy was well established and based on an understandable recognition of the need to avoid chaos in the workplace; and to apply an interpretation that meant that the remuneration of an employee who took just one day's unpaid leave in a month would lose the benefit of ETI was without merit.

One is tempted to speculate whether CSARS was genuinely intent on applying these, as the court with respect correctly described them, meritless interpretations of the Act; or whether it was seeking judicial interpretation of uncertain aspects of the Act.  It is hoped, perhaps somewhat optimistically, that the latter was the case.

07 March 2019

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