Page 417 - SAIT Compendium 2016 Volume2

IN 35 (3) Income Tax acT: InTeRPReTaTIon noTes IN 35 (3)
reduce the cash- ow constraints, a personal service provider may apply at a SARS branch of ce for a tax directive under paragraph 11 for a lower rate of tax that more closely matches the nal tax liability.
4.2 Labour broker
As of 1 March 2009, a labour broker is any natural person who conducts or carries on any business whereby such person, for reward, provides a client with his or her own employees to perform work for the client or procures workers for a client but does not him or herself provide the services required by the client. A company, close corporation or trust that provides such services may no longer be classi ed as a labour broker.
A labour broker without an exemption certi cate is subject to employees’ tax at the rate applicable to individuals. As of 7 February 2007, an exemption certi cate may not be granted where—
(a) more than 80% of the gross income of the labour broker during the year of assessment consists of, or is likely to
consist of, amounts received from any one client of the labour broker or from an associated institution of the client, unless the labour broker employs three or more full-time employees who are on a full-time basis engaged in the business of that labour broker and who are not connected persons in relation to the labour broker. It is important to note that the rule relating to the three or more employees does not apply to persons engaged in other activities of the labour broker - they must be directly involved in the labour broking activities of the labour broker; or
(b) the labour broker provides to any of its clients the services of another labour broker. This requirement does, however, not preclude a labour broker from acquiring an employee from another labour broker for purposes of providing the employee to a client. Where, for example, Labour Broker A is requested by a client to provide a particular type of employee that it does not possess, and Labour Broker A acquires this employee from Labour Broker B to become an employee of Labour Broker A and forwards the employee to the client in the normal way, Labour Broker A would not be penalised by this requirement because the employee is provided to the client as an employee of Labour Broker A. This requirement is applicable where, for example, a client is permitted to hire an employee of Labour Broker B through Labour Broker A; or
(c) the labour broker is contractually obliged to provide the services of a speci ed employee to the client. This requirement is applicable where, for example, the client prescribed or required Employee A to render the service. This requirement is not applicable in circumstances where an employee of the labour broker was chosen by name as a result of a bona de selection process based on the requirements of the client, and speci ed as such in the eventual contractual agreement.
It is important to note that the requirements for granting an exemption certi cate still include the requirements that were operative before the introduction of the new requirements. From a practical point of view, however, it is easier to test the labour broker against the new requirements before attempting to classify the labour broker as either dependent or independent.
With the exception of amounts paid to employees for services rendered, section 23(k) prohibits the deduction of all expenses incurred by a labour broker for which a certi cate of exemption has not been issued.
4.3 Decision chart
The legislation relating to the de nition of an ‘employee’ in the Fourth Schedule is illustrated by the chart in Annexure A. The process ow to determine whether an entity is a personal service provider is illustrated by the chart in Annexure B.
5. The effect of the law
A ‘personal service provider’ as de ned in the Fourth Schedule is an ‘employee’ for purposes of employees’ tax. Therefore, employees’ tax must be deducted from remuneration paid or payable to a personal service provider.
A labour broker would not be granted an exemption certi cate where any one of the prohibitions mentioned in 4.2 applies.
Section 23(k) affects a personal service provider and a labour broker without an exemption certi cate. Under this section, any expenses incurred by a personal service provider or labour broker without an exemption certi cate, other than expenses mentioned in 4.1 for the personal service provider or amounts paid or payable to employees as remuneration for a labour broker, are not permitted as a deduction for purposes of calculating taxable income. The Act does not provide for the apportionment of deductions where a personal service provider or labour broker is in receipt of more than one type of income. The provisions of section 23(k) will apply if a company, close corporation or trust falls within the above de nition.
A personal service provider will, furthermore, not qualify as a ‘small business corporation’ (as de ned in section 12E) for purposes of the lower tax rates applicable to small business corporations. Both a personal service provider and a labour broker without a certi cate of exemption (IRP 30) do not qualify as a micro business for the purposes of the turnover tax (Sixth Schedule to the Act).
A personal service provider will be subject to tax at the rate of 33%, as opposed to the normal corporate tax rate (currently 28%). A trust, if it is a ‘personal service provider’ as de ned in the Fourth Schedule, will remain taxable at normal trust rates (currently 40%) and not the rates applicable to special trusts.
Example 3 – Determination of a labour broker
Facts:
The client requires an information technology auditor. Labour Broker A conducts a selection process to determine the most suitable employee to render services to the client. Ms. B is selected by Labour Broker A and in the contract between the client and Labour Broker A, it is speci ed that Ms. B will render services to the client.
Result:
In this case the selection process was not in uenced by the client and the exclusion is therefore not applicable.
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