Income Tax Deduction in Respect of Learnership Agreements

Income Tax Deduction in respect of Learnership Agreements

The REVENUE LAWS AMENDMENT ACT No 60, 2008

With effect from 8 Jan 2009, Section 12H provides an additional deduction for employers over and above the normal remuneration deduction. This additional deduction is intended as an incentive for training employees in a regulated environment in order to encourage skills development and job creation. Training contracts that qualify for the deduction are Learnerships registered with a sector education and training authority (SETA) or contracts of apprenticeship registered with the Department of Labour. Please note that INSETA does not have the latter.

The additional deduction comprises both a commencement and completion allowance.

This is in addition to claiming Learnerships and Internships Discretionary grants from INSETA (Please refer to the Inseta Learnership and Internships Funding Policy).

Reasons for change

While the aim of the legislation is to encourage skills development and job creation; a) the complexity of the old legislation was acting as a barrier to employer usage;

b) the legislation was difficult to understand and contained too many variables;

c) Employers, especially smaller employers, were hesitant to claim the Learnership

allowance because the compliance cost of administering the programme seemed

to overshadow the benefits.

The legislation accordingly needed to be simplified so that the allowance is accessible to all employers.

Employed and Unemployed learners

Employed learners are those who are current employees and for whom contracts of employment were in existence before they entered into a Learnership.

Unemployed learners are those who are not current employees and for whom contracts of employment did not exist before they entered into a Learnership.

The revised legislation will contains two basic thresholds – a commencement allowance of R30 000 and a completion allowance of R30 000 with respect to learners that are not disabled. The calculations with reference to the learner’s annual remuneration are eliminated.

Recent evidence indicates that the Department of Labour prescribe minimum salaries for learners and these minimums will prevent employers from utilising extremely low-paid employees mainly to secure tax benefits.

Disabled Learners

Employers who take learners (employed and unemployed) with disabilities onto Learnerships are eligible for a commencement allowance of R50 000 and a completion allowance of R50 000.

Employee terminations and assumption of Learnerships

Many learners change employment for better pay or better opportunities. Some of these employment changes even entail the assumption of Learnerships by the new employer in terms of section 17(5) of the Skills Development Act, 1998 (Act No. 97 of 1998).

In order to ensure that employers are not punished for learners who leave their employ during the Learnerships, Learnerships of less than 12 full months are eligible only for a pro rata amount of the commencement allowance (regardless of the reason that the Learnership falls short of the 12-month period).

If a Learnership falls over two years of tax assessment, the commencement allowance is allocated pro rata between both years based on the calendar months applicable to each year. The commencement allowance is determined by multiplying the commencement amount by the total calendar months of Learnership over 12.

As a result of the pro rata rule, the first employer will be eligible for a pro rata proportion of the commencement allowance upon a learner’s shift to a new employer (but none of the completion allowance since the initial employer no longer has control over the learner’s successful completion). The new employer seeking to assume the responsibility of a Learnership pursuant to section 17(5) of the Skills Development Act will also be eligible for the remaining pro rata portion of the Learnership (and all of the completion allowance).

Example:

Employer X concludes a Learnership contract with a learner. At the end of month six of the contract, the learner leaves employment with Employer X and takes up employment with Employer Y. The learner subsequently completes the Learnership with Employer Y (in accordance with section 17(5) of the Skills Development Act).

Assume the learner does not have any disabilities and that the Learnership spans a single year of assessment for both Employer X and Employer Y.

The commencement amount is divided pro rata between Employer X and Employer Y (each based on a 6/12 ratio). Therefore, Employer X is entitled to a commencement allowance of R15 000 (half of R30 000), and Employer Y is entitled to a commencement allowance of R15 000 (the other half of R30 000). Employer Y is also entitled to claim the completion allowance of R30 000 (i.e. the full amount).

Multi-year Learnerships/Duration of more than one year

The deduction for multi-year Learnerships is simplified so as to provide for enhanced upfront benefits. The commencement allowance is now allowed in respect of each successive year of the Learnership.

As before, in the final year of the contract, the completion amount is multiplied by the number of years of the Learnership.

The new rules have the added benefit of assisting initial employers of multi-year Learnerships if learners change employment. The initial employer obtains a commencement allowance attributable to the learner’s initial multi-year period of employment with the subsequent employer obtaining the remaining share of the commencement allowance. The subsequent employer obtains the sole benefit of the completion allowance.

Example:

Employer X (a calendar year taxpayer) concludes a three-year Learnership with a learner at the beginning of January 2010. The learner shifts employment to Employer Y (a calendar year taxpayer) at the end of June 2011. The learner subsequently completes the Learnership with

Employer Y. Assume the learner does not have any disabilities.

In 2010, Employer X may claim the full R30 000 commencement allowance. In 2011, Employer X may claim R15 000 of the commencement allowance and Employer Y claiming the R15 000 remainder. At the close of 2012, Employer Y may claim the final R30 000 commencement allowance as well as a R90 000 completion allowance (the basic R30 000 multiplied by three).