Non-executive directors and tax : SARS takes a stand

• Jurisdiction: South Africa
• Author: Des Kruger
• DOI: 10.10520/EJC-629c6affc
• Published date: 01 March 2017
• Date: 01 March 2017
• Record Number: btclq_v8_n1_a2
• Pages: 1-12
• Published By: Siber Ink

1

© SIBER INK

Non-executive Directors

andTax:

SARS TAKES A STAND

DES KRUGER*

ABSTRACT

The issue of non-executive directors (NEDs) has previously been discussed in

an article in this journal. The author concluded that the fees paid to NEDs do

not constitute remuneration as defined in paragraph 1 of the Fourth Schedule

to the Income Tax Act of 1962, and that accordingly no employees’ tax liability

arose in relation to such fees. This conclusion was predicated on the provi-

sions of paragraph (ii) of the definition of ‘remuneration’, which in essence

excludes from the ambit of that definition any income derived by so-called

independent contractors. While an independent contractor who is subject to

the control or supervision of the company (in this instance) as to the manner

in which the director’s duties are to be performed and the director’s hours

of work is brought back into the ambit of the definition of ‘remuneration’,

the author argued that this is not the case in respect of NEDs, as they are

not subject to the control or supervision of the company in this manner. This

being the case, the author further argued that the NEDs would be regarded

as carrying on an enterprise in relation to their directorship activities and may

be required to register and account for VAT on the fees paid to them.

SARS has now issued Binding General Rulings (BGRs) 40 (income tax) and

41 (VAT) to clarify the position. The BGRs are welcome and provide certainty

on the interpretation of the relevant provisions that will be adopted by SARS.

The BGRs are effective from 1 June 2017. No indication is given of the stance

SARS will adopt in relation to contrary positions adopted by taxpayers prior

to that date.

In short, the BGRs confirm that the fees paid to NEDs (other than non-

resident NEDs) are not subject to employees’ tax, but could be subject to VAT

if the aggregate consideration derived by an NED from carrying on ‘enter-

prise’ activities (which, in SARS’s view, is the case in relation to NEDs) exceed

R1 million in any continuous 12-month period. SARS’s conclusion in regard

to employees’ tax is predicated on the view that an NED is not subject to the

requisite control or supervision of the company so as to fall outside the ambit

of the independent contractor inclusion provided for in paragraph (ii) of the

definition of ‘remuneration’. As regards VAT, SARS confirms that, as NEDs are

not in receipt of remuneration in relation to their directorship activities, they

carry on enterprises in relation to those activities and would need to register

for VAT if their income from all their taxable activities exceeds the registra-

tion threshold. While the author is in agreement with the approach generally

adopted by SARS in the two BGRs, he questions the approach adopted by

SARS in relation to VAT and non-resident NEDs.

*Consultant, Webber Wentzel Attorneys.