Page 257 - SAIT Compendium 2016 Volume2

IN 17 (3)
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Income Tax acT: InTeRPReTaTIon noTes IN 17 (3)
The person who rendered or will render the services is subject to the control of the client as to the manner in which his or her duties are performed or to be performed or as to his or her hours of work. The person who rendered or will render the services is subject to the supervision of the client as to the manner in which his or her duties are performed or to be performed or as to his or her hours of work.
If any of the above two tests apply (that is, control or supervision), the independent contractor is deemed not to be independent for purposes of the Fourth Schedule and is therefore, subject to employees’ tax. An independent contractor who is deemed not to be an independent contractor for purposes of the Fourth Schedule is not, however, also deemed to be an employee. The independent status under common law of an independent contractor that is deemed not to be independent remains unaffected. This means that the independent contractor will not be affected by section 23(m). The remuneration of this independent contractor will be coded 3616 on the IRP 5 certi cate and the limitation of deductions under section 23(m) will not apply.
Example 1 – Applying the statutory tests
Facts:
A is an independent contractor, in terms of the common law test, who provides his or her services mainly at the clients’ premises and is subject to control or supervision. A does not employ three or more qualifying employees. Result:
A will be deemed not to be an independent contractor for the purposes of the Fourth Schedule (the statutory test applies). Accordingly employees’ tax will be deducted from the amounts paid or payable to him or her by his or her clients. However, because A is independent in terms of the common law test, the remuneration will be coded 3616 on the IRP 5 certi cate and the limitation of deductions under section 23(m) will not apply. Please note that if A was not regarded to be independent in terms of the common law test, the remuneration would be coded 3601 on the IRP 5 certi cate and the provisions of section 23(m) would apply.
7. The common law dominant impression test
The current South African common law position is that the so-called ‘dominant impression test’ (the Test) must be applied to determine whether a worker is an independent contractor or an employee. The Test makes use of several indicators, of differing signi cance or weight, which have to be applied in the relevant context. At common law, no single indicator is conclusive or a determinant of a person’s status. The Test is essentially an analytical tool that is designed for application in the employment environment to establish the dependence or independence of a person. The person that is tested can be an individual worker or a business.
The Test can be applied in the two situations mentioned under 3.
8. How to apply the common law dominant impression test
The ‘common law dominant impression grid’ (the Grid), in Annexure B, sets out 20 of the more common indicators in tabular form and is not meant to be exhaustive. The indicators are interrelated as it will be found that some are subcategories of others or only differ marginally from others. Depending on the circumstances, some indicators may become irrelevant, while others may become more relevant, in time. The indicators point to whether or not there has been the ‘acquisition of productive capacity’ (that is, of labour power, capacity to work, or simply effort). They have been classi ed into three categories, namely,—
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near-conclusive (those relating ‘most directly to the acquisition of productive capacity’);
persuasive (those establishing ‘the degree of control of the work environment’); and
resonant of either an employee/employer relationship or an independent contractor/client relationship, whichever is relevant.
This classi cation and weighting is intended to assist assessors and auditors in making the determination. The weightings are based on SARS’ assessment as to what is appropriate and fair to an employee vs independent contractor determination for the purposes of withholding employees’ tax.
The Grid breaks the employee vs independent contractor spectrum into 20 sub-spectra. The typical employee and the typical independent contractor represent the polar opposites of a spectrum. The Grid is a guide and should not be used as a checklist to determine a certain ‘score’ to come to a conclusion. Each indicator must in itself be analysed with due regard for the particular context (kind of industry, kind of business, kind of customer, kind of worker), and how the business actually operates. The assessor must analyse the employment relationship in the light of all the indicators and their relative weightings, and arrive at a dominant impression, in favour of either the acquisition by the employer of the worker’s productive capacity (effort), or of the result of the worker’s productive capacity. This dominant impression will be the basis for classi cation of the relationship as either an employee relationship or an independent contractor relationship.
The keys to the exercise are exibility, practicality, and gathering as much information as possible through thorough investigation. The client and the worker (or business) must be required to provide a detailed motivation (preferably an af davit) as to why any particular indicator does not indicate what it apparently does. The assessor/auditor should interview (and take af davits from) not only the parties to the contract, but also closely connected third parties (any labour brokerage, employment agency, immediate supervisors, co-workers, trade union organisers and shop stewards active in the workplace, any works committee, bargaining council, and so on). The assessor’s/auditor’s conclusion must be supported by the information gathered. It is not suf cient to record a mere ‘gut feeling’.
9. The common law dominant impression indicators (the indicators)
9.1 Near-conclusive indicators of the acquisition of productive capacity (i.e. of employee status or non- independent business status)
The indicators in this category provide insight into the quality of control, the nature of nancial relations and the degree of exclusivity of the relationship. This category of indicator is nearly conclusive because the indicators are considered
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