In binding private ruling 115 (BPR 115) the South African Revenue Service (SARS) considered the following set of facts:
- A manufacturer sells its goods to various retailers and wholesalers.
- The manufacturer wants to run a ‘reward’ or ‘incentive’ scheme to encourage sales persons to sell the manufacturer’s goods.
- The sales persons are employed by the various retailers and wholesalers and not by the manufacturer and as such are independent from the manufacturer.
- The manufacturer does not have any control or supervision over the sales persons and the retailers and wholesalers may prohibit the sales persons (being their employees) from taking part in the scheme.
- The sales persons will not operate from the premises of the manufacturer but from the premises of their employers.
- Each sales person taking part in the scheme will receive a card, onto which cash credits will be loaded.
- The amount of cash credits to be allocated to a sales person’s card will depend on the sales performance of that individual.
- The sales persons may use the cards at their discretion to pay for various goods and services.
- The cards will be credited from time to time from a separate bank account held by the manufacturer.
The concern, from a tax perspective, was whether the cash credits received by the sales persons would constitute ‘remuneration’ as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, No 58 of 1962. If it were to constitute ‘remuneration’, employees’ tax would have to be accounted for. This is so because where an employer pays remuneration to an employee, the employer becomes liable to withhold employees' tax in terms of paragraph 2(1) of the Fourth Schedule to the Act.
In simple terms, an employee is defined as anyone who receives remuneration and an employer is defined as anyone who pays remuneration. Accordingly, for purposes of employees' tax one must have regard to whether "remuneration" is payable or receivable and not to whether there is an employer-employee relationship in common law terms.
‘Remuneration’ is broadly defined as "any amount of income which is paid or is payable to any persons by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commissioner, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered…(a) including any amount referred to in paragraph (a), (c), (cA), (d), (e), (eA), or (f) of the definition of "gross income" in Section 1 of this Act” but does not include “any amount paid or payable in respect of services rendered or to be rendered by any person…in the course of any trade carried on by him independently of the person by whom such amount is paid or payable and of the person to whom such services have been or are to be rendered…"
Without giving any reasons, SARS ruled that the amount would not constitute ‘remuneration’ and that employees’ tax will not have to be accounted for by the manufacturer. It is, however, not entirely clear how the ‘rewards’ escape the definition of ‘remuneration’, for example, whether it is due to the independence of the sales persons or due to some other reason.
Nevertheless, SARS specifically points out in their ruling that the amounts will constitute ‘gross income’ in the hands of the sales persons and it will be subject to normal tax.