In the past, the issue as to whether non-executive directors (NEDs) should be considered common law employees or deemed employees for employees’ tax purposes has been the subject of some debate between SARS and National Treasury. Another issue of concern related to this topic was whether the fees received by a NED should be subject to VAT.
In the 2016 Budget, the Minister of Finance confirmed that these matters would be properly investigated and clarity would be provided in due course.
In an effort to clarify the tax treatment of fees paid to NEDs, SARS issued Binding General Ruling 40 (Employees’ tax) and Binding General Ruling 41 (VAT) on 14 February 2017. The rulings apply from 1 June 2017.
It is important to note that the rulings issued only apply to NEDs that are South African tax residents.
Rulings Main Points:
Employees’ Tax (Binding General Ruling 40)
- SARS has confirmed that directors’ fees received by a NED for services rendered as an NED on a company’s board is not ‘remuneration’ as defined for employees’ tax purposes. As a result, no employees’ tax should be withheld from the director’s fee paid to a NED.
- As the fee paid to a NED does not fall within the prescribed definition of ‘remuneration’ for employees’ tax purposes, the ordinary rules concerning the deductibility of expenses, allowances and losses will apply.
- SARS reached the above decisions having accepted that the nature of the duties of a NED is such that a NED is not a common law employee for tax purposes. It further accepted that no control or supervision is exercised over the manner in which a NED performs his/her duties or as to the NED’s hours of work.
- The ruling only applies to South African tax resident NEDs. In the case of a non-South African resident NED of a South Africa resident entity, employees’ tax should be deducted from the director’s fee(s) paid to such NED.
VAT (Binding General Ruling 41)
- The VAT ruling in essence confirms what is concluded in the Binding General Rules (BGR) (Income Tax) 40 that an NED is not considered to be a common law employee and that the services of the NED is supplied independently and personally to the company.
- The NED is treated as an independent contractor for VAT purposes.
- The NED is consequently carrying on an enterprise in the Republic and is required to register and charge VAT relating to these services to the extent that the total value of all the NED’s supplies exceeds R1 million in any consecutive 12-month period.
- The above applies whether the NED is an ordinary resident of the Republic or not.
- The NED may also consider to register voluntarily for VAT purposes if the total value of the NED’s services exceeds R50 000 in any consecutive 12-month period.
Challenges facing NEDs and the companies they serve
Whilst the respective rulings provide some welcome clarity around the employees’ tax and VAT consequences arising in respect of the payment of director fees to NEDs, Grant Thornton’s Tax Advisory team is of the view that the changes will present a number of challenging concerns for NEDs and the companies they serve.
It is expected that the rulings will not only result in additional compliance obligations for both the NEDs and relevant companies it could also influence the fees that NEDs will charge for their services in future. Highlighted below are some practical questions that will need to be considered by NEDs and/or the companies they serve.
Income Tax Considerations
- How do I account for the tax on my NED’s fees?
- Will I have to register for provisional tax if not already a provisional taxpayer?
- As a company, how does one deal with SDL and UIF already paid in respect of the NED’s fees? Can one claim a refund of such costs?
- Should any refund of UIF be paid to the NED?
- Can SARS seek to claw back the tax deduction claimed by the company in respect of SDL and UIF costs?
- What rate of employees’ tax should be applied to fees paid to a NED who is non-South African tax resident?
- Is the rate different if the NED contracts with the company via his own company or as an individual?
- Should the company apply SDL and deduct UIF in respect of fees paid to a NED who is non-South African tax resident?
- May the company still deduct employee’s tax from the NED’s fees?
- Will the NED be required to register for VAT purposes in the instances where employees’ tax was not deducted from the consideration for the NEC’s services?
- Will VAT be paid on top of the previously agreed consideration or is the amount deemed to include VAT?
- Is the full amount payable to non-resident NEDs subject to VAT even if a portion of the services are supplied outside South Africa?
- Is the amount paid to non-resident NEDs subject to VAT and employees’ tax?
- What input tax, if any, will NEDs be allowed to claim?
- Will companies, especially holding companies, be entitled to claim the VAT charged by the NEDs for their services rendered?
- Will NEDs be allowed to render certain of their services to operating companies within the group?
- What do NEDs and companies need to do to become compliant before the deadline of 1 June 2017?
- What documentation and information is required to register for VAT purposes?
- What will the compliance cost be for registering for VAT purposes and submitting VAT returns?
- What if a NED’s scenario does not fall within the vanilla case that SARS indicated in the Binding General Rulings?
It is vital for both NEDs and the companies that they serve to work with skilled advisors in terms of the announced changes from an employees’ tax and VAT perspective.
For further information or for assistance with implementation of the changes and dealing with any historical position or any other employee tax queries, please contact James Hourigan or Cliff Watson from our Tax Team.