In ABC (Pty) Ltd v The Commissioner for the South African Revenue Service (Case 14426 (as yet unreported)), the Tax Court had to decide whether ABC (Pty) Ltd (the taxpayer) could claim the employment tax incentive under the Employment Tax Incentive Act (26/2013) for certain periods. In deciding the matter, the court not only considered the provisions of the act but also applied various principles of South African labour law.

Background

The taxpayer conducted its business in the wholesale and retail industry, an industry which has a sectoral determination. The sectoral determination prescribed the minimum wages for employees in the sector and was published in January of each year. The terms of the sectoral determination applied from 1 February until 31 January the following year.

On 24 August 2012 the taxpayer concluded a three-year collective agreement with a trade union, representing approximately 30% of the taxpayer's employees. Under the agreement, negotiated wage increases were paid effective from 1 May of each year. The agreement also provided that those amounts due to employees under the sectoral determination wage adjustments would be paid in a lump sum in arrears on 1 May of every year. The taxpayer treated unionised and non-unionised employees alike and paid all annual wage increases with effect from 1 May of each year, in addition to the backpay in terms of the sectoral determination (backdated to 1 February of the same year).

During 2014 and 2015 the taxpayer sought to claim the employment tax incentive for qualifying employees. However, the commissioner for the South African Revenue Service (SARS) disallowed the employment tax incentive claims for the months February, March and April in the relevant years on the basis that the qualifying employees had been paid less than the minimum amount stipulated in the sectoral determination during those months. After the taxpayer raised an objection, SARS allowed the employment tax incentive claims only in respect of those employees who were union members. In addition, SARS disallowed the employment tax incentive claims for employees who had taken unpaid leave, as these claims had been based on the pro rata wages paid to the employees for the days that had been worked.

Judgment

The Tax Court explained that the employment tax incentive is provided to employers in order to encourage job creation for employees who are younger than 30 years old. The employer receives the incentive by withholding a portion of an employee's tax which is payable by the employer or by being reimbursed an amount as set out in Section 10(2) of the act. Under Section 4(1) of the act, an employer may not claim the employment tax incentive in respect of an employee for a specific month if the wage paid to that employee in respect of that month is less than the amount that is payable by virtue of a wage regulating measure which applies to that employer.

The Tax Court held that both the sectoral determination and the collective agreement entered into between the taxpayer and the union are wage regulating measures. As the collective agreement was not concluded in a bargaining council, it could not be formally extended to non-parties to the bargaining council under Section 32 of the Labour Relations Act (66/1995). However, the Tax Court found that no provision prohibits the extension of such an agreement to non-unionised employees where such an extension is voluntary.

The taxpayer contended that it had elected to extend the agreement (without any objection by the employees) and treat all employees in a similar fashion in order to avoid labour relations chaos and to achieve commercial efficiency. The Tax Court accepted this contention and agreed that different treatment among unionised and non-unionised employees would create a risk of workplace conflict.

During the proceedings SARS accepted that the wage increase, which had been prescribed by the sectoral determination, could be paid retrospectively to union members by virtue of the collective agreement. The Tax Court also stated that although the act does not make a provision for a retrospective application of the payment of a minimum wage, it is apparent that retrospective payment of wages had been expressly contemplated by the act as an accrued right to remuneration is a right to remuneration which is not paid but is payable.

Further, the Tax Court held that, given the voluntary extension of the collective agreement by the taxpayer and SARS's acknowledgment that the employment tax incentive may be determined retrospectively, the taxpayer had been entitled to claim the employment tax incentive in respect of all employees for February, March and April 2014 and 2015.

Regarding the employment tax incentive claims for employees who had taken unpaid leave, the Tax Court also held that the employment tax incentive applies to employees who have not worked a full calendar month where their remuneration, had they worked for a full month, falls within the prescribed minimum wage threshold. The Tax Court held that from the definition of 'monthly remuneration' in Section 1(1) of the act and the provisions of Section 7(5) of the act, it is apparent that the act expressly contemplates that an employer may employ a qualifying employee for part of a month and that the calculation of an employee's notional monthly remuneration, had they worked a full month, is necessary to determine whether the employee is a "qualifying employee in respect of a month" under Section 2(2) of the act. In such a case, the employment tax incentive can be claimed on a pro rata basis for the days that were worked.

Therefore, the Tax Court upheld the appeal and set aside the additional assessments which were issued by SARS against the taxpayer for the period between January 2014 and February 2015, as well as the penalties and interest that had been imposed.

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