However, in recent years, SARS has intensified its audits and disallowances of ETI claims, citing widespread abuse of the incentive. Now, in a significant escalation, SARS is increasing the financial consequences for employers who seek to abuse the incentive—not only rejecting ETI claims but also by attacking the corporate income tax deductions linked to “salaries” subject to ETI claims.
From Reversed ETI Claims to Corporate Tax Nightmares
SARS’ heightened scrutiny of ETI claims has primarily focused on whether the individuals for whom employers claim the incentive are truly “employees” under the Employment Tax Incentive Act, No. 26 of 2013(ETI Act). Where employers fail to substantiate this, SARS has reversed the Pay-As-You-Earn (PAYE) benefits derived from ETI schemes, often with crippling penalties and interest.
SARS are now taking an even more aggressive approach of late. If an employer’s ETI claim is denied on the basis that the individuals in question are not employees as defined in the ETI Act, SARS is concluding that the salaries paid to them are not salaries at all—and therefore do not qualify as deductible expenses for corporate income tax purposes.
The consequences are substantial: employers not only forfeit their PAYE benefits, but they also face an additional corporate tax liability, interest, and penalties on the basis of their disallowed salary deductions.
ETI Abuse Crackdown: No Longer Just About the Incentive
Over the years, SARS and National Treasury have continuously tightened the ETI legislation to curb abuse. A key concern has been the aggressive use of ETI by certain training institutions, where students are classified as employees but never actually receive cash wages. Instead, their “salaries” are offset against training fees—shifting the cost of education onto the very individuals the ETI was meant to uplift.
While SARS has primarily targeted these high-risk cases, the ripple effect has been felt across countless employers. Routine ETI audits have become a widespread reality, even for businesses that believed they were compliant. And now, SARS’ new tactic—disallowing corporate tax deductions for so-called “salaries”—could prove far more damaging than the loss of the PAYE benefit itself.
What This Means for Employers
SARS’ aggressive stance aligns with its strategic objective of making non-compliance “hard and costly”—but it also raises serious concerns for businesses that have claimed ETI in good faith. With the stakes now even higher, employers must ensure that:
- ETI claims are fully substantiated, with clear evidence that individuals are legitimate employees under both tax and labour law;
- Employment records and payroll structures are watertight and capable of withstanding a SARS audit; and
- Business structures are not designed primarily for tax benefits, as SARS is increasingly challenging these transactions.
The Bottom Line
SARS has sent a clear message—the ETI is no longer just about reducing PAYE liabilities. Employers who have claimed the incentive, particularly those under ongoing audits or disputes, now face a very real risk that their corporate tax deductions for salaries will also come under scrutiny.
The financial consequences of this shift cannot be ignored. Employers who have relied on ETI as a legitimate tax-saving mechanism must urgently reassess their exposure before SARS does it for them.
It is always prudent for employers to seek advice from a qualified tax attorney when considering entering into any employment-related tax arrangement or where there is uncertainty regarding compliance with the legal requirements. Proactive engagement with a tax specialist can help employers navigate the complex ETI and corporate tax landscape, ensure that all necessary documentation is in place, and avoid the risk of unexpected assessments, penalties, and interest down the line.
