Page 416 - SAIT Compendium 2016 Volume2

IN 35 (3) Income Tax acT: InTeRPReTaTIon noTes IN 35 (3)
connected persons in relation to the person who is personally rendering the service or the trust. If this is not the case, proceed to the next test below. If this is the case the company, close corporation or trust is not a ‘personal service provider’ and therefore not subject to the deduction of employees’ tax.
AND
(d) Determine whether one (or more) of the following is true:
• Would the person who is personally rendering the service have been regarded as an ‘employee’ of the
client if the service was rendered directly to the client and not through the company, close corporation or trust? For purposes of employees’ tax, the word ‘employee’ is de ned in the Fourth Schedule and it is therefore necessary to determine whether the person would have been an ‘employee’ as de ned. For example, if the person would have been a person in receipt of remuneration or to whom remuneration accrues as described in paragraph (a) of the de nition of an ‘employee’, the company, close corporation or trust is a ‘personal service provider’. Following the example through, the test must also include a reference to the de nition of the term ‘remuneration’ (because of its reference in paragraph (a) of the de nition of an ‘employee’), which excludes payments made to common law independent contractors. If the person rendering the service would have been regarded as an independent contractor under common law (refer to Interpretation Note No. 17), the person would not have been regarded as an ‘employee’ in the absence of the company, close corporation or trust.
• Must the person who is personally rendering the service, or the company, close corporation or trust, perform the duties mainly at the premises of the client, and if so, is that person subject to the control or supervision of the client as to the manner in which the duties are performed or are to be performed? The test is the same as the one used in exclusionary paragraph (ii) of the de nition of the term ‘remuneration’. If the services are rendered mainly at the premises of the client and the client supervises or controls the activities of the person rendering the service or the activities of the company, close corporation or trust, the test is positive.
• Does more than 80% of the income of the company, close corporation or trust from services rendered consist of or is likely to consist of amounts received from any one client, or from any associated institution in relation to the client? If more than 80% of the income of the company, close corporation or trust consists (or is likely to consist) of income from only one client, the test is positive. The reference to ‘income’ in the test is a reference to ‘income’ as de ned in section 1. It is necessary to isolate the income received for the services rendered from the income received for other activities of the company, close corporation or trust.
In instances where the rst two tests in 4.1(d) (above) do not apply and a company, close corporation or trust provides a client with an af davit or solemn declaration stating that it will not derive more than 80% of its income from one client, the client may rely on the af davit or solemn declaration, provided the client relies on it in good faith. If it later emerges that the company, close corporation or trust is, in fact, a personal service provider, employees’ tax will not be recoverable from the client. However, the other provisions relating to a personal service provider [such as paying tax on taxable income at the rate of 33%, and the prohibition of deductions under section 23(k)] will apply as far as that personal service provider is concerned. Section 23(k) limits the deduction of expenses which can be claimed by a personal service provider to the following:
• Remuneration paid to the employees of that personal service provider.
• Legal expenses.
• Bad debts.
• Contributions to pension fund, provident fund or bene t fund for the bene t of employees.
• So much of any amount, including any voluntary award received or accrued for services rendered or to be rendered
or any amount received or accrued for or by virtue of any employment or the holding of any of ce as was included
in the taxable income of that person and is refunded by that person.
• So much of any amount contemplated in paragraph (cA) of the de nition of the term ‘gross income’ (that is,
restraint of trade payments) received by or accrued to any person as refunded by that person.
• Expenses for premises, nance charges, insurance, repairs and fuel and maintenance cost for assets where the
premises or assets are used wholly or exclusively for the purposes of trade.
As the personal service provider may claim any expense, deduction or contribution listed above, it is apparent that a at rate of tax applicable to personal service provider may far exceed the actual net liability eventually owed. Therefore, to
Example 1 – Classi cation of a personal service provider
Facts:
X is the only member of ABC Close Corporation (the CC). She provides information technology consulting services. The CC employs two other consultants and an administrative assistant, all of whom are employed on a full- time basis for the full year of assessment and none of whom are connected persons in relation to X.
Result:
Because the CC employs three full-time employees for the full year of assessment, who are not members of the CC or are not connected persons in relation to X, the CC will not be classi ed as a personal service provider.
Example 2 – Determination of income (more than 80%) derived from services rendered
Company A is in receipt of R100 000 for the year of assessment, of which R90 000 is ‘income’ as de ned in section 1. R50 000 of the R90 000 represents income for services rendered. Of the R50 000, R42 000 (that is, more than 80% of R50 000) was earned from services rendered to one client and the test is therefore positive in respect of the company.
408 saIT comPendIum oF Tax LegIsLaTIon VoLume 2