The South African Revenue Service (SARS) recently issued two Binding General Rulings, numbers 40 and 41 dated 10 February 2017 (Rulings) on the way that non-executive directors (Non-Execs) should account for tax on their earnings as directors.
In the 2016 Budget, the Minister of Finance indicated that the matter of Non-Execs earnings would be properly investigated.
SARS considers Non-Execs to be directors who are not involved in the daily management or operations of a company, but simply attend, provide objective judgment and vote at board meetings.
SARS accepts that the nature of the duties of Non-Execs mean that they are not common law employees; instead they are independent contractors because the company exercises no control or supervision over the Non-Execs in respect of the manner in which they perform their duties or their hours of work.
The Rulings determine the following:
- Companies must not withhold employees’ tax (PAYE) on amounts paid to Non-Execs.
- Non-Execs may claim deductions against their income for certain expenses which they incur and which are not allowed for ordinary employees, for example, travelling costs and home study expenses, provided they meet the requirements of the Income Tax Act, No 58 of 1962 (Act) in this regard.
A Non-Exec is deemed to carry on an enterprise for value-added tax (VAT) purposes. So, a Non-Exec who receives director’s fees in excess of R1 million in any 12-month period must register for VAT, and must charge VAT on the fees. And Non-Execs may voluntarily register for VAT and charge VAT if their fees have exceeded R50,000 in the preceding 12-month period. Non-Execs who account for VAT would then be able to claim an input tax deduction on certain taxable supplies made to them, provided they comply with the provisions of the Value-Added Tax Act, No 89 of 1991. The following should be noted:
- The Ruling relating to income tax does not apply to Non-Execs who are not tax residents in South Africa. However, the Ruling relating to VAT applies whether the Non-Exec is an ordinary resident of South Africa or not.
- Non-Execs must still account for income tax on their fees themselves and must register for provisional tax.
- Section 8C of the Act imposes tax in certain cases in relation to shares and other instruments acquired by a director by virtue of his or her office as such. For example, Non-Execs could participate in a share incentive scheme operated by the company. Under the Fourth Schedule to the Act, the companies have an obligation to withhold PAYE on the schemes when the tax is triggered. It appears that, by virtue of the Rulings, companies would not need to withhold PAYE in those cases.
- The Rulings only apply from 1 June 2017. However, it is possible that SARS will take a pragmatic approach when considering the manner in which companies have dealt with Non-Execs in the period before that date.
The clarity provided by SARS on this matter should be welcomed. However, the Rulings will likely impose an additional compliance and administration burden on companies, Non-Execs and SARS.