Page 415 - SAIT Compendium 2016 Volume2

IN 35 (3) Income Tax acT: InTeRPReTaTIon noTes IN 35 (3)
Provided that the Commissioner shall not issue a certi cate of exemption if—
(aa) more than 80 per cent of the gross income of such person during the year of assessment consists of, or is
likely to consist of, an amount or amounts received from any one client of such person, or any associated institution as de ned in the Seventh Schedule to this Act in relation to such client unless that person is a labour broker who throughout the year of assessment employs three or more full-time employees—
(A) who are on a full-time basis engaged in the business of that labour broker of providing persons to or
procuring persons for clients of that labour broker; and
(B) who are not connected persons in relation to that labour broker;
(bb) such labour broker provides to any of its clients the services of any other labour broker; or
(cc) such labour broker is contractually obliged to provide a speci ed employee of such labour broker to render any service to such client.
(b) The certi cate of exemption referred to in item (a) shall be issued in such form as the Commissioner may decide and shall be valid for such period as the Commissioner may indicate thereon.
(c) An employer shall not be required to deduct or withhold employees’ tax from any remuneration paid or payable by him to any person who produces to the employer a valid certi cate of exemption issued by the Commissioner under item (a).
Section 23(k) – Limitation of allowable deductions
23. Deductions not allowed in determination of taxable income - No deductions shall in any case be made in respect of the following matters, namely—
(k) any expense incurred by—
(i) a labour broker as de ned in the Fourth Schedule, other than a labour broker in respect of which a certi cate of exemption has been issued in terms of paragraph 2(5) of the said Schedule; or
(ii) a personal service provider as de ned in the said Schedule,
other than any expense which constitutes an amount paid or payable to any employee of such labour broker, or personal service provider for services rendered by such employee, which is or will be taken into account in the determination of the taxable income of such employee and, in the case of such personal service provider any expense, deduction or contribution contemplated in paragraph (c), (i) (l),(nA) or (nB) of section 11, expenses in respect of premises, nance charges, insurance, repairs and fuel and maintenance in respect of assets, if such premises or assets are used wholly and exclusively for purposes of trade;
4. Interpretation of the law
By way of background, and as explained in Interpretation Note 17, the deduction of employees’ tax is dependent on three elements, namely, an employer, an employee and the payment of remuneration. All three elements are de ned in the Fourth Schedule. Employees’ tax cannot be charged where one or more of these three elements are not present. If, for example, an ‘employee’ is removed from the equation, the person paying the remuneration has no responsibility to deduct employees’ tax. Similarly, if the term ‘remuneration’ is removed from the equation, no employees’ tax liability arises. If remuneration is therefore paid to somebody who is not an ‘employee’ as de ned in the Fourth Schedule, or if something other than ‘remuneration’ is paid to somebody, no employees’ tax needs to be deducted.
Previously it was a popular tax-saving method for employees to offer their services to their employers through the medium of private companies, close corporations or trusts. In order to discourage the use of corporate entities or trusts as intermediaries to provide personal services to a client which are, in essence, services provided in terms of a contract of employment, legislation was introduced that required remuneration payable to such a company, close corporation or trust by the client be subject to employees’ tax and which limited the available deductions from income in the determination of taxable income for these entities.
4.1 Personal service provider
Any company, close corporation or trust that ts the de nition of a ‘personal service provider’ and which is in receipt of ‘remuneration’ as de ned in the Fourth Schedule is subject to the deduction of employees’ tax.
In determining whether a company, close corporation or trust is a ‘personal service provider’ and whether or not employees’ tax is recoverable from payments made to them the following tests should be performed:
(a) Determine whether or not some or all of the receipts of the company, close corporation or trust consist of ‘remuneration’ as de ned in the Fourth Schedule. If the receipts do not include ‘remuneration’ as de ned, no employee’s tax is deductible. The de nition of the term ‘remuneration’ excludes payments made to independent contractors that are natural persons or trusts. The exclusion does not apply to personal service providers. There is no need, as a result, to determine whether the personal service provider is an ‘independent contractor’ for purposes of the Fourth Schedule. If remuneration is paid or payable, proceed to the next test.
(b) Determine whether the service is rendered personally by any person who is a connected person in relation to the company, close corporation or trust. The term ‘connected person’ is de ned in section 1 and must be applied accordingly. ‘Service’ includes the provisions of a person to render a service or work for a client (including, for example, companies, close corporations and trusts operating as labour brokers). If the service is rendered personally by any person who is a connected person in relation to the company, close corporation or trust, proceed to the next test below. If it is not the case, the company, close corporation or trust is not a ‘personal service provider’ and it is not subject to the deduction of employees’ tax.
(c) Determine whether the company, close corporation or trust employed (or is likely to employ) three or more full-time employees throughout the particular year of assessment who are on a full-time basis engaged in rendering the service, and who are not shareholders or members of the company or close corporation, or
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