Uncertainty has existed since 2007 on whether amounts payable to Non-Executive Directors (NED) should be subject to the deduction of employees’ tax (PAYE) or subject to VAT. SARS recently issued Binding General Rulings 40 and 41 to clarify the position, which rulings take effect on 1 June 2017.
In its rulings SARS considers a NED to be a director who is not involved in the daily management or operation of a company but simply attends, provides objective judgment, and votes at board meetings. When considering whether amounts paid to NEDs are remuneration, SARS accepts that the nature of the duties of an NED mean that they are not common law employees.
A NED’s fees would only be subject to PAYE if the requirements in the “premises” and the “control or supervision” tests are both met. These tests require:
- the services to be performed mainly (i.e. more than 50%) at the premises of the client; and
- control or supervision must be exercised over, either the manner in which the duties must be performed, or the hours of work.
Payments made to a NED for time spent in preparation for board meetings (e.g. an agreement to bill for a specified number of hours before each meeting) does not create a form of control or supervision over the hours of the NED.
If a NED is not deemed to be an employee, and is not a common-law employee, the amounts payable to a NED will not be remuneration and not be subject to a PAYE deduction.
Section 23(m) of the Income Tax Act prohibits the deduction of certain expenses for employees and office holders. The two important triggers for section 23(m) to apply are:
- the expenditure, loss or allowance must relate to an office held; and
- the taxpayer must derive “remuneration” in respect of that office.
Directors are holders of an office and therefore if they receive remuneration, section 23(m) will operate to prohibit certain deductions. However, if they are NEDs that do not receive remuneration, section 23(m) will not apply and the ordinary rules for the deductibility of expenditure, losses or allowances will apply.
As a NED is an independent contractor and not an employee, it follows that VAT should be charged on directors’ fees. If the value of the fees exceeds the compulsory VAT registration threshold of R1 million in any consecutive 12 month period, the NED would have to register for VAT. A NED may also choose to register for VAT voluntarily if such fees do not reach the compulsory VAT registration threshold.
This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc
NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.