On February 10 2017 the South African Revenue Service (SARS) published two binding general rulings (BGRs):
- BGR 40, which deals with the manner in which non-executive directors should account for tax on their earnings as directors from an employees' pay-as-you-earn (PAYE) tax perspective; and
- BGR 41, which deals with the value added tax (VAT) consequences of non-executive directors' earnings.
While the rulings provided much-needed clarity on various interpretational issues, certain practical issues were still not covered. In particular, the rulings did not provide clear guidance on the manner in which companies and non-executive directors should have dealt with the taxation of their earnings before June 1 2017. Therefore, SARS subsequently issued a media release on February 17 2017 setting out further practical guidance.
Among other things, the February 17 2017 media release provided as follows:
- Previously, non-executive directors were subject to employees' tax because the directors' fees received for services rendered were considered remuneration. However, due to amendments made in 2007 to the exclusions to the definition of 'remuneration' in the Fourth Schedule to the Income Tax Act (58/1962), there was uncertainty as to whether the amounts payable to non-executive directors were subject to the deduction of PAYE.
- After consultation, review and application of the law, it was confirmed that a non-executive director is regarded as an 'independent contractor' and any directors' fees paid or payable to a non-executive director for services rendered in that capacity are not regarded as remuneration.
- Non-executive directors receiving directors' fees exceeding the compulsory registration threshold are required to register as VAT vendors from June 1 2017. However, non-executive directors will not be required to account for VAT in respect of directors' fees received before this date, provided such non-executive directors were subject to PAYE.
Notwithstanding this further guidance, some uncertainty remained in respect of the position before June 1 2017, particularly where a non-executive director received directors' fees exceeding the compulsory registration threshold and failed to account for VAT, in addition to the fact that the company paying the non-executive director also did not deduct PAYE.
SARS thus issued the updated BGR 41 and issued an additional media release on May 5 2017 in this regard. As per the SARS media release, the updated BGR 41 clarifies that:
- a non-executive director who is liable to register for VAT but has yet to do so, must register and account for VAT with effect from June 1 2017 unless an earlier date of liability is chosen; and
- a non-executive director who was actually registered for VAT before June 1 2017 for other activities, but did not charge VAT on the director's fees must charge VAT with effect from June 1 2017 unless he or she chooses to account for VAT on those fees from an earlier date.
Further, the media release confirmed that the above is applicable regardless of whether the fees earned by the non-executive director were subject to PAYE. Therefore, whether the fees were subject to PAYE before June 1 2017 does not affect the VAT liability as the obligation to charge VAT arises only from June 1 2017 henceforth, notwithstanding that persons may choose to charge VAT of their own volition should they wish to do so.
In addition, the revised BGR 41 provides that any non-executive director who carries on an enterprise in South Africa, has exceeded the R1 million compulsory VAT registration threshold and has not registered for VAT as at the date of BGR 41 must apply for registration by no later than June 1 2017. The revised BGR 41 therefore provides guidance in respect of the provisions set out in Section 23(4)(b) of the Value-Added Tax Act (89, (1991)), which states as follows:
"Where any person has not applied for registration in terms of Chapter 3 of the Tax Administration Act and the Commissioner is satisfied that that person is liable to be registered in terms of this Act, that person shall be a vendor for the purposes of this Act with effect from the date on which that person first became liable to be registered in terms of this Act: Provided that the Commissioner may, having regard to the circumstances of the case, determine that person to be a vendor from such later date as the Commissioner may consider equitable."
Therefore, notwithstanding the fact that a non-executive director may be considered a vendor for purposes of the Value Added Tax Act with effect from the date on which he or she first became liable to be registered (ie, a date before June 1 2017), the effective date of such registration ('liability date') as determined by the SARS commissioner under Section 23(4)(b) of the Value Added Tax Act, must be no later than June 1 2017.
The further publications, media releases and revised BGR 41 issued by SARS hopefully provide greater clarity.
For further information on this topic please contact Jerome Brink at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.