Page 259 - SAIT Compendium 2016 Volume2

IN 17 (3) Income Tax acT: InTeRPReTaTIon noTes IN 17 (3)
9.1.5 Employer (client) base
The contractual right to deny a worker the opportunity to service other clients, amounts to acquisition of exclusive use of the worker’s productive capacity (a form of the ‘economic reality’ test as referred to in Annexure D). In the absence of a contractual right to exclusivity, the absence of a multiple and concurrent client base may be a persuasive indicator or merely another relevant indicator, depending on the context and the reasons for there not being a multiple concurrent client base. It should be noted that:
• The typical independent contractor is free to seek out business opportunities, is entrepreneurial (seeks out new business opportunities or sources of income), has a multiple and concurrent client base, and is not economically dependent on one employer.
• The typical employee (or non-independent ‘business’) is bound contractually (at least in his or her job function and during business hours) to an exclusive relationship with the employer, and may not work for a competitor or any other employer. The employee is restricted in developing a client base, and typically has no client base. The fact that the employer turns a blind eye to night or weekend work (for example, within the employee’s eld of expertise but not in competition with the employer) may mean that the worker is both an employee (in relation to that employer), and an independent contractor in relation to other employers (clients). This may affect the availability of deductible expenses, but not the obligation to withhold Pay As You Earn (PAYE) by the main employer.
9.1.6 Risk, pro t and loss
An exposure to risk (opportunity to enjoy pro t or suffer loss) may indicate a degree of economic independence or non-exclusive acquisition of productive capacity, which is consistent with an independent contractor (independent business) and inconsistent with an employer-employee relationship (a form of the ‘economic reality’ test as described in Annexure C). In this regard:
• An employee’s remuneration, like the income of most independent contractors, is not directly dependent on the employer’s sales (except for a commission agent), cash ow or pro tability (although employees rank before independent contractors on insolvency of the employer). Risk related to the employer’s pro tability or solvency is, therefore, not relevant.
• Where a person (worker or business) is not directly exposed to performance or market risks, this may indicate an employee relationship. An employee is generally paid regardless of defective workmanship, while an independent contractor may only be entitled to a reduced fee or no fee in similar circumstances. An employee receives a xed salary irrespective of incompetence, inef ciency, wastefulness or ‘cost or time over-runs’ occasioned by him or her, while an independent contractor might typically agree on a fee or price and bear the risk of loss if performance costs exceed that fee or price. Employees do not bear the risk of increases in raw material prices, while the owner of the stock or inventory would ordinarily be an independent contractor.
• An independent contractor is free to make business decisions which directly affect pro tability [levels of inventory, pricing, staf ng, nancing (purchase or lease)] while an employee does not make these decisions, unless mandated to do so by the employer on behalf of the employer.
9.2 Persuasive indicators of the acquisition of productive capacity (of employee status or non-independent business status)
This category of indicators examines the degree or extent of behavioural control, as well as the purpose of acquiring control. The existence of this category of indicator, depending on the extent to which and purpose for which control is acquired, is persuasive in coming to a decision. These indicators are persuasive because of their relationship to the extent of control, and the relationship of the extent of control to the acquisition of labour power. Control enables management to convert productive capacity into productive activity. Some examples are:
9.2.1 Instructions/supervision
The employer controls the work done and the environment in which the work is done by giving instructions as to the location, when to begin or stop, pace, order or sequence of work etc. ‘Supervision’ is typical of most workplaces or employment relationships, and may indicate employer measures to control what it has contractually acquired (productive capacity), or measures to co-ordinate the work of independent contractors, or measures to co-ordinate the work of both types of workers. It should be noted that:
• The greater the degree of supervision (that is, the scope or extent of instructions, or the sanctions for non-compliance), the greater the indication in favour of employee status. The degree of supervision required by the employer may differ depending on the nature of the business or of the worker, and supervision is not an essential feature of an employee contract (for example, it may be largely absent in the case of certain tradesmen or professionals). The degree of control must be measured against that level of supervision which the nature of the work requires.
• Independent contractors usually enjoy autonomy as regards the order or sequence of work. Supervision in the sense of mere monitoring of performance (without the right to intervene) is unlikely to be relevant. Unless imperatives inherent in the nature of the employer’s premises (for example, the need for safety or co-ordination with employees), or the task, profession, trade or industry, dictates that the employer control the order or sequence of work (for example, relevant legislation or the nature of technology), then the control would be persuasive in favour of an employee relationship.
• Any form of supervision must ow from the legal relationship (the contract) itself and not from some extraneous source like the nature of the trade, profession, workplace or market conditions. It is suf cient for the right of control to be contractually present, even if it is not exercised in practice.
• A restraint of trade involves control of the future use of productive capacity, and is intended to prevent unfair competition by protecting sensitive business information, as well as to promote stability of employment. A restraint can only exclude a worker from working for or as a speci c class of employer for a speci c period and in a speci c area. However, since future employment is restricted while the maintenance of the current employment relationship is promoted, some degree of control (for example, of the entrepreneurial development of the worker’s potential client base) is present. Although a restraint of trade can be imposed on an employee or an independent contractor, independent contractors would ordinarily be subject to a ‘secrecy clause’. A restraint of trade would tend to indicate
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