Page 261 - SAIT Compendium 2016 Volume2

IN 17 (3) 9.3.4
9.3.5
9.3.6
9.3.7
9.3.8
9.3.9
Income Tax acT: InTeRPReTaTIon noTes IN 17 (3)
premises) there is a degree of dependence and symbiosis that is inconsistent with an independent contractor relationship.
Integration/usual business operations
An independent contractor is in essence another employer running a separate business. Therefore, where the person (worker or business) is engaged in activities which are integral, accessory or ancillary to the employer’s business operations, this may indicate an employer-employee relationship, particularly if economic survival of the person as an ‘entrepreneurial entity’ is not possible outside of the employer’s normal business operations, or if the person’s function is ordinarily and continually critical to the employer’s survival. Integration/hierarchy & organogram
An independent contractor is characteristically independent, and therefore not integrated into any one client’s organisation, nor re ected on any one client’s organogram. Where the person (worker or ‘business’) has a job description (as opposed to a general professional capacity), and a position in the employer’s hierarchy or organogram, this may be an indication of employee status and an indication of how the parties perceive the relationship.
Duration of relationship
Generally, where the parties contemplate an open ended or inde nite relationship (rather than one limited with regard to a result) an employee relationship may be indicated. An employee contract is usually inde nite and can be terminated on notice, while an independent contractor contract is terminated on achievement of a result or production of the item.
Termination and breach of contract
The threat of termination is a form of control normally associated with an employee relationship. Where the employer has the right to dismiss (Labour Relations Act aside) and/or the person (worker or ‘business’) has the right to resign (Basic Conditions of Employment Act aside), before completion of any task or before any result is achieved, without being in breach, this may be an indication of an employer- employee relationship. Signi cant investment
Where the conducting of an enterprise requires investment, it is normally the employer who makes this investment (an employer of an employee normally provides the employee with the premises, tools, raw materials, training, support services and other inputs), while the employee normally has no signi cant investment in any of these inputs. On the other hand, the typical independent contractor normally has made a signi cant investment in his, her or its business.
Bona de business expenses, bona de statutory compliance
Typically, an employee incurs no ‘business expenses’ and is reimbursed or granted allowances for expenses on behalf of the employer, while an independent contractor incurs business expenses (advertising, entertaining, bookkeeping, wages, travel etc) and builds these into the fee or contract price. Similarly, an employee might (or might have to) register with a trade or professional association, but would not have to register with the Department of Labour (as a labour broker or employer) or with SARS for Value-added tax (VAT) (as an enterprise) or for PAYE (as an employer). Where an amount paid to an independent contractor is deemed to be remuneration as envisaged by paragraph (ii) of the de nition of the term ‘remuneration’ in the Fourth Schedule, the amount is subject to both VAT (if registered as a vendor) and PAYE. Note, however, that the amount of VAT must be excluded when determining the employees’ tax to be deducted. The following should be noted:
(a) Stereo-typical labels
Headings, labels or terminology may be intended to deceive. Not only should a sound legal and factual (business purpose) basis exist for their presence, but their presence should be consistent with the manner in which the parties actually conduct their relationship. The mere presence of headings, labels, or terminology resonant of an independent contractor contract does not necessarily mean that there is an independent contractor relationship.
(b) Stereo-typical clauses and statutory compliance
Like labels, the insertion of typical clauses or the fact of statutory compliance or membership of a professional or trade regulatory authority may be intended to deceive. Not only should a sound legal and factual basis (business purpose) exist for the expenses claimed, but these indicators should also be consistent with the manner in which the parties actually conduct their relationship. For example:
• An independent contractor characteristically makes provision for his or her own insurance and
retirement. Therefore, the provision of typical employee bene ts would tend to indicate an employer-
employee relationship.
• Either the independent contractor or employer may insist on certain clauses (invoicing, labour
law recourse, risk insurance, cancellation and damages etc), or on compliance with certain scal (VAT, PAYE etc) or labour statutes. The mere presence of clauses, or the fact of compliance, though resonant of an independent contractor contract, does not necessarily mean that there is an independent contractor relationship.
(c) Stereo-typical expenses
Like labels, the claiming as deductions of typical expenses may be intended to deceive. Not only should a sound legal and factual basis (business purpose) exist for the expenses claimed, but these expenses should have actually been incurred, and should be consistent with the manner in which the parties conduct their relationship. Just as employee status does not automatically disqualify all expenses, so too does independent contractor status not mean that all expenses should not be scrutinised. The provisions of the Fourth Schedule should be applied in determining whether employees’ tax should be deducted but do not apply in determining whether deductions claimed are allowable or not when an assessment is raised following the receipt of an income tax return.
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