Draft IN: Meaning of “employee” for purposes of the Employment Tax Incentive Act

This draft interpretation note provides clarity on the interpretation and application of the definition of “employee” in section 1(1) of the Employment Tax Incentive (“ETI”) Act.

Purpose of the draft interpretation note

The draft interpretation note (“IN”) issued by SARS is restricted to arrangements entered into by parties, typically as part of a composite arrangement, in an attempt to claim the Employment Tax Incentive (“ETI”) for persons not meeting the definition of “employee”, specifically arrangements involving learning institutions. The IN therefore does not consider other scenarios in which the definition of “employee” is critical for purposes of claiming the ETI.

No income tax or employees’ tax implications such as fringe benefits are considered in the IN.


The incentive provided for under the ETI Act is fundamentally based on an employer-employee relationship. The ETI Act does not define “employer”. Section 3 is, however, unambiguous as to who are eligible employers. An employer is eligible to receive the ETI only if the employer is registered for purposes of withholding and paying over to SARS employees’ tax under paragraph 15 of the Fourth Schedule to the Income Tax Act. The ETI Act, however, defines “employee”. Beside the requirements contained in the definition, a number of criteria must be met before a person will be considered to be an employee for purposes of the ETI Act.

In some instances, taxpayers become party to composite arrangements which are arguably aimed at abusing the incentive. These composite arrangements typically involve a learning institution, an organisation, and a person for a limited period of either 12 or 24 months. Under the arrangement, the organisation is responsible for paying an agreed-upon training fee to the learning institution, on behalf of that person. Contractually the parties refer to this training fee as the person’s basic remuneration. The learning institution is responsible for providing the person with training, mostly in the form of an accredited training course, as well as all the lectures, and training facilities for the duration of the arrangement. In some cases, practical field training is included. Notwithstanding that an employment contract may have been entered into under this composite arrangement, no work is carried out by the person for the organisation.

Under these arrangements, the person generally does not render any services to the organisation and does not obtain practical work experience. The person receives accredited education in the form of training courses through an accredited learning institution. Under some arrangements, the person may be exposed to work-based exercises and activities by another organisation (not the primary organisation) which pays only a fixed monthly fee. These fees are paid to the learning institution and not to the person. The number of persons contracted are often more than what is reasonably necessary to conduct the organisation’s business.

In an attempt to curb the abuse of the ETI, National Treasury announced in the 2021 Budget Review that the definition of “employee” will be amended to specify that work must be performed under an employment contract adhering to record‐keeping provisions in accordance with the Basic Conditions of Employment Act. The proposed effective date for this amendment is 1 March 2021.

The detailed draft IN, which can be accessed here, considers only the interpretation and application of the definition of “employee” under section 1(1) of the ETI Act. The proposed amendment by National Treasury to the definition of “employee” is not addressed. The due date for public comment on the draft IN is 3 December 2021.