Editor’s Note: Based on this commentary, employers should be closely looking at their non-executive director (NED) payments both from a PAYE and VAT perspective. In addition, this is likely to lead to more admin for NEDs, and employers should consider how they communicate and support NEDs through this.
February has been an interesting month in terms of tax commentary regarding non-executive directors. Firstly, on 10 February SARS published Binding General Ruling (BGR) 40 and then on 14 February SARS confirmed an interpretation regarding the VAT treatment of NED fees [BGR (VAT) 41].
Binding General Ruling 40 provides clarity on the employees’ tax consequences of income earned by a NED, as well as the effect those employees’ tax consequences could have on the prohibition against deductions by office holders under section 23(m).
Since the ‘statutory tests’ contained in paragraph (ii) of the exclusions to the definition of ‘remuneration’ were amended in 2007 there has been uncertainty over whether payments to a NED would be subject to the deduction of employees’ tax.
It is important to firstly understand what a NED is though. The King lll report states that crucial elements of an NED’s role are that an NED:
- must provide objective judgement independent of management of a company;
- must not be involved in the management of the company, and
- is independent of management on issues such as, amongst others, strategy, performance, resources, diversity etc.
It is very important to understand that ‘independence’ in this case simply means ‘the absence of undue influence and bias…’
SARS considers an NED to be a director who is not involved in the daily management or operations of a company, but simply attends, provides objective judgement, and votes at board meetings.
SARS accepts that due to the nature of the duties that NEDs perform that they are not ‘common law employees’. The only way that they would be subject to employee’s tax is if the so-called ‘statutory tests’ apply. In terms of these tests the recipient is deemed to be an employee if the ‘premises’ and ‘control or supervision’ tests apply. In terms of the ‘premises’ test the services must be performed mainly (more than 50%) at the client’s premises. In terms of the ‘control or supervision’ test control or supervision must have been exercised over the manner in which duties must be performed or the hours of work. It is only if both these tests are satisfied that the recipient is not regarded as carrying on an independent trade and would therefore be receiving ‘remuneration’ for employees’ tax purposes.
To summarise. If an NED is not deemed to be an employee, and is not a common-law employee, the amounts payable to the NED would not be ‘remuneration’. These payments would not be subject to the deduction of employees’ tax. NEDs would therefore be allowed to claim expenditure incurred in the production of such income subject to the ordinary deduction rules, as Section 23(m) will not apply.
It is important to note that this ruling does not apply in respect of non-resident NEDs.
BGR (VAT) 41 was issued to clarify the VAT position pertaining to the payments made to NEDs. With BGR 40 (Employees’ Tax) classifying NEDs to effectively be ‘independent’, payments made to them will no longer be regarded as ‘remuneration’. NEDs receiving director’s fees that exceed the compulsory VAT registration threshold of R 1 million in any 12 consecutive month period are required to register for VAT. NEDs will however not be required to account for VAT in respect of director fees earned prior to the amendment date, provided that such NEDs fees was subject to PAYE for that period. NEDs will be able to voluntarily register for VAT even if their income is below the R 1 million threshold.
Both of these rulings are applicable as of 1 June 2017.