The Employment Tax Incentive is a boon for entrepreneurs who want to hire and develop talented junior employees. However, a recent SARS private ruling highlights that there are limits to how far business owners can take advantage of the ETI.

The ruling concerns a company that enrolled student employees in an external training program managed by a non-profit organisation. The students received a tablet, data and monthly cash stipend as incentives for persevering with their training.

However, while the students were employed for a year, they had to forfeit their salary for the duration of the training program with no guarantee that their employment would be extended thereafter. Furthermore, instead of performing any actual work, their only duty was to attend the virtual training courses.

SARS had to determine whether these students qualified as employees for the purpose of the ETI. According to the ETI Act, an "employee" is any natural person (excluding independent contractors) who:

1. Works directly for someone; and

2. Either receives, or is entitled to receive, remuneration from their employer.

SARS concluded that the students did not satisfy these requirements and, therefore, that the company was not entitled to claim from the ETI.

While this is a private binding ruling and limited to the company in question, it does set a precedent for other entrepreneurs. The ETI is a great opportunity for SMEs to grow their teams cost-efficiently, but creative schemes that border on exploitation won't cut the mustard.