On 10 February 2017, SARS published Binding General Ruling 40 (BGR 40), in addition to Binding General Ruling (BGR 41) that was referred to in the article above (Rulings). We initially reported on these Rulings in our Tax and Exchange Control Alert of 17 February 2017. BGR 40 dealt with the manner in which non-executive directors (NEDs) should account for tax on their earnings as directors from an employees’ tax (PAYE) perspective, while BGR 41 dealt with the VAT consequences of NEDs’ earnings. While the Rulings provided much needed clarity on various interpretational issues, there were still one or two practical issues, which were not covered. In particular, the Rulings did not provide clear guidance on the manner in which companies and NEDs should have dealt with the taxation of their earnings prior to 1 June 2017. SARS therefore subsequently issued a separate media release on 17 February 2017 setting out further practical guidance.
The 17 February 2017 media release provided, among other things, as follows:
Previously NEDs 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, No 58 of 1962, there was uncertainty as to whether the amounts payable to a NED were subject to the deduction of PAYE.
After consultation, review and application of the law it has been confirmed that a NED is regarded as an “independent contractor” and any directors fees paid or payable to a NED for services rendered in that capacity are not regarded as remuneration.
NEDs receiving directors’ fees exceeding the compulsory registration threshold are required to register as VAT vendors from 1 June 2017. However, NEDs will not be required to account for VAT in respect of directors’ fees received prior to this date, provided such NED was subject to PAYE.
Notwithstanding the further guidance provided by SARS in its subsequent media release, published on 17 February 2017, there was still some uncertainty in respect of the position prior to 1 June 2017, particularly where a NED received directors’ fees exceeding the compulsory registration threshold and failed to account for VAT in addition to the fact that the company paying the NED also did not deduct PAYE.
SARS thus issued the updated BGR 41 referred to in the article above and issued a media release on 5 May 2017 in this regard. As per the SARS media release, the updated BGR 41 clarifies that:
- A NED who is liable to register for VAT but has not done so yet, must register and account for VAT with effect from 1 June 2017 unless an earlier date of liability is chosen.
- A NED who was actually registered for VAT before 1 June 2017 for other activities, but did not charge VAT on the director’s fees must charge VAT with effect from 1 June 2017 unless that person chooses to account for VAT on those fees from an earlier date.
The media release further importantly confirms that the above is applicable regardless of whether the fees earned by the NED were subject to PAYE or not. Therefore, whether the fees were subject to PAYE prior to 1 June 2017 does not affect the VAT liability as the obligation to charge VAT only arises from 1 June 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 NED that carries on an enterprise in the Republic of South Africa and has exceeded the R1 million compulsory VAT registration threshold that has not registered for VAT as at the date of BGR 41 must apply for registration by no later than 1 June 2017. The revised Ruling 41 therefore provides guidance in respect of the provisions set out in s23(4)(b) of the Value-Added Tax Act, No 89 of 1991 (VAT Act) 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 NED may be considered a vendor for purposes of the VAT Act with effect from the date on which that person first became liable to be registered (ie a date prior to 1 June 2017), the effective date of such registration (liability date) as determined by the Commissioner of SARS under s23(4)(b) of the VAT Act, must be no later than 1 June 2017.
The further publications, media releases and revised BGR 41 issued by SARS hopefully provide more clarity.