Page 256 - SAIT Compendium 2016 Volume2

IN 17 (3) Income Tax acT: InTeRPReTaTIon noTes IN 17 (3) 3.2 Labour Brokers (Paragraph 2(5) of the Fourth Schedule)
Remuneration paid to any labour broker who is not in possession of an exemption certi cate (IRP 30), is subject to employees’ tax. This is an anti-avoidance measure and must be applied strictly. The exemption certi cate will be issued only if the labour broker carries on an independent business and if certain other requirements have been met. The common law tests (see 7) are used to determine whether or not a labour broker is carrying on an independent business. An independent business can, in general terms, be described as one that is an entrepreneurial enterprise, enjoying such a degree of independence that it can survive the termination of the relationship with its client.
The provisions of paragraph 2(5) of the Fourth Schedule are further discussed in Interpretation Note No. 35 (Issue 3) ‘Employees’ Tax: Personal Service Providers and Labour Brokers’, available on the SARS website www.sars.gov.za.
4. When is it required of SARS to determine the status of a person?
As stated in 3, there are two instances in the Fourth Schedule where it has to be determined whether a person is an employee as opposed to an independent contractor or vice versa.
Where the provisions of exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’ are applicable, it is the responsibility of the employer to determine whether or not the payments are subject to employees’ tax. Not only is this responsibility set by the provisions of the Fourth Schedule, but it is also the employer that is in the best position to evaluate the facts and the actual situation.
A SARS branch of ce is not permitted to consider applications from persons, apparently falling into paragraph (a) of the de nition of an ‘employee’, for con rmation as an independent contractor under exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’. In the past certain branch of ces were issuing a ‘Letter of Independence’ based on the face-value of a written application (often inappropriately made on Form IRP 30A, which is only intended for use in labour broker determinations). This is no longer done. Annexure E of this Note contains a letter that must be issued to these applicants.
An employer who has incorrectly determined that a worker is an independent contractor is liable for the employees’ tax that should have been deducted, as well as the concomitant penalties and interest. The employer has the right to recover the tax paid from the employee.
5. The statutory tests
The exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’ provides two statutory tests to conclusively deem a person not to be an independent contractor for employees’ tax purposes.
The tests provide for a deeming provision that a person shall not carry on a trade independently if the services or duties are required to be performed mainly at the premises of the client and—
‘labour broker’ means any natural person who conducts or carries on any business whereby such person for reward provides a client of such business with other persons to render a service or perform work for such client, or procures such other persons for the client, for which services or work such other persons are remunerated by such person;
• •
the worker is subject to the control of any other person as to the manner in which the worker’s duties are or will be performed, or as to the hours of work (for purposes of this test the comments relating to ‘control’ under 9.1.1 would be relevant); or
the worker is subject to the supervision of any other person as to the manner in which the worker’s duties are or will be performed, or as to the hours of work (for purposes of this test the comments relating to ‘supervision’ under 9.2.1 would be relevant).
Where any of these tests apply positively, the independent contractor is deemed not to be an independent contractor and the amount so received by him or her is, therefore, not excluded from remuneration.
It is not necessary for both tests to be applicable in a particular situation. The application of only one of them would trigger the deeming provision.
Where any of these tests apply positively it is not necessary to consult the common law dominant impression test for purposes of determining whether an amount is excluded from or included in ‘remuneration’.
Notwithstanding the above, an independent contractor who employs three or more full-time employees, who are not connected persons in relation to him or her and are engaged in his or her business throughout the particular year of assessment, will be deemed to be carrying on a trade independently. ‘A connected person’ in relation to a natural person means any relative and any trust of which the natural person or the relative is a bene ciary. ‘Relative’ in relation to any natural person means the spouse of the person or anybody related to him or her or his or her spouse within the third degree of consanguinity, or any spouse of anybody so related, and for the purpose of determining the relationship between any child referred to in the de nition of a ‘child’ in section 1 of the Act and any other person, the child shall be deemed to be related to its adoptive parent within the rst degree of consanguinity.
6. How to apply the statutory tests
In determining whether the statutory test applies, the following steps should be taken:
(a) Determine whether the independent contractor, in terms of the common law tests, employs throughout
(b) (c)
the tax year of assessment three or more employees who are on a full-time basis engaged in the business of the independent contractor of rendering services and who are not connected persons in relation to the independent contractor. If this is not the case, proceed to the next test. If this is the case, the statutory test does not apply.
Determine whether or not the services are required to be performed mainly at the premises of the client. If the services are required to be performed mainly at the premises of the client, proceed to the next test. If this is not the case, the statutory test does not apply.
Determine whether one of the following is true:
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