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IN 17 (3) Income Tax acT: InTeRPReTaTIon noTes IN 17 (3) Annexure D – The current common law position in South Africa
Annexure E – Letter to paragraph (a) applicants
Preamble
Legislative references in this Note to sections are to sections of the Act and references to paragraphs are to paragraphs of the Fourth Schedule to the Act, unless the context indicates otherwise.
1. Purpose
This Interpretation Note explains the statutory tests and the common law tests to assist of cials of the South African Revenue Service (SARS) and employers to classify a worker ef ciently and effectively. This Note has been updated to incorporate the latest amendments made, under section 54(1)(e)(g) of the Taxation Laws Amendment Act, No. 8 of 2007, effective from 1 March 2007, to the exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’ as de ned in paragraph 1 of the Fourth Schedule to the Act.
2. Background
The concept of an ‘independent trader’ or ‘independent contractor’ (synonymous for practical purposes) still remains one of the more contentious features of the Fourth Schedule. A decision in favour of either independent contractor or employee status impacts on an employer’s liability to deduct employees’ tax.
The liability of an employer to deduct employees’ tax is largely dependent on whether or not ‘remuneration’ as de ned in paragraph 1 the Fourth Schedule is paid. Subject to certain conditions, amounts paid to an independent contractor for services rendered are excluded from ‘remuneration’ as de ned, in which case an employer has no liability to deduct employees’ tax from the amounts paid.
Two sets of tools are available to determine whether a person is an independent contractor for employees’ tax purposes. The rst tool is referred to as statutory tests. The statutory tests are conclusive in nature which, if they apply, means that a person is deemed not to be an independent contractor for purposes of determining employees’ tax. The second tool is the common law tests, used to determine whether a person is an independent contractor or an employee. Unfortunately, the common law tests as they apply in South Africa do not permit a simple ‘checklist’ approach. There are no hard and fast rules in determining whether or not a person is an independent contractor. An ‘overall’ or ‘dominant impression’ of the employment relationship must be formed.
Legally, the common law tests should be performed rst in determining whether a person is an employee or an independent contractor. In practice, the statutory tests are considered rst. If the statutory tests are not applicable in a particular situation, the common law tests are applied to nally determine whether the person is an independent contractor or an employee.
This Note includes the interpretation of the relevant legislation, an explanation of the statutory tests, an explanation of the common law tests as captured in the dominant impression test, a ow diagram explaining the structure of the legislation, the dominant impression test grid for quick reference and a historical overview of the common law principles. It is not intended to be a de nitive and binding statement of SARS’ views and should not be relied upon to sustain a technical legal position. It must be accepted that this Note will be revised constantly in the light of public debate, court judgements and legislative reform.
The common law history (Annexure C) will provide a more in-depth analysis of the concept by making reference to Latin and legal terms often used by lawyers and tax consultants. The ow diagram (Annexure A) and the dominant impression grid (Annexure B) will provide a useful summary and quick reference guide of the detailed content.
3. Interpretation of the Fourth Schedule
The Fourth Schedule requires the presence of three elements before employees’ tax can be levied, namely, an employer paying remuneration to an employee.
There are two instances in the Fourth Schedule where it has to be determined whether an independent trade is being carried on, namely—
• in exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’; and
• in paragraph 2(5)(a)(i), where it is necessary to decide whether a labour broker quali es for an employees’ tax
exemption certi cate.
3.1 Exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’
Amounts (that would otherwise be remuneration) paid to a person as contemplated in paragraph (a) of the de nition of an ‘employee’ in the Fourth Schedule are excluded from the de nition of the term ‘remuneration’ in the Fourth Schedule if that person is an independent contractor. The exclusion does not apply to payments made to the following categories of ‘employees’ as de ned:
1. Any person who receives remuneration by reason of services rendered to a labour broker [paragraph (b) of the de nition of employee];
2. Any labour broker [paragraph (c) of the de nition];
3. Any persons declared by the Minister of Finance in the Gazette that they are employees [paragraph (d)]; and
4. Any personal service provider [paragraph (e).
Also excluded are persons who are not resident in South Africa. The exclusion would therefore in general only be applicable to natural persons or trusts (who are not personal service providers) that are resident in South Africa.
Common law tests, as further developed by the South African Courts, are used to determine whether a person is an employee or an independent contractor. The common law prescribes the use of certain tests to form a dominant impression of a relationship. There is no conclusive test under the common law. The Legislator has, however, under its powers elevated two of these tests to form conclusive tests. These conclusive tests are referred to as statutory tests. If any one of these conclusive tests applies, the exclusion from ‘remuneration’ does not apply.
Where the statutory tests (see 5) for deeming a person to be an independent contractor are not applicable, the common law tests (see 7) are still used to determine whether or not a person is an independent contractor.
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