Page 418 - SAIT Compendium 2016 Volume2

IN 35 (3) Income Tax acT: InTeRPReTaTIon noTes IN 35 (3)
It may become apparent, during the year of assessment, that a personal service provider or a labour broker will earn more than 80% of its income from one source. To avoid this unforeseen circumstance, employers must ensure at the outset that this situation is anticipated and that the applicable employees’ tax is deducted.
The client is not required to deduct employees’ tax if the company, close corporation or trust provided the client with an af davit or solemn declaration stating that not more than 80% of the income of that company, close corporation or trust will be derived from one client. However, this exemption only applies if the client relied on the af davit or solemn declaration in good faith and the other two requirements in 4.1(d) do not apply.
6. The effective dates of implementation of the law
The de nition of a ‘personal service provider’ in the Fourth Schedule came into operation on 1 March 2009 and applies to the year of assessment commencing on or after that date.
The amendment to the de nition of an ‘employee’ replacing the de nitions of a ‘personal service company’ and a ‘personal service trust’ by a de nition of a ‘personal service provider’ came into operation on 1 March 2009 and applies to a year of assessment commencing on or after that date.
The amendments to section 23(k) adding the new deductions that can be claimed by a ‘personal service provider’ came into operation on 1 March 2009 and apply to a year of assessment commencing on or after that date.
The 80% requirement set out in paragraph (c) of the de nition of a ‘personal service provider’ may, with effect from 1 March 2009, be satis ed by means of an af davit. This has the effect that, where an employer bona de relies on such an af davit, that employer is no longer required to satisfy itself as to whether that test has been met.
With regards to the de nition of a ‘labour broker’, the effective date of the amendment is any year of assessment commencing on or after 1 March 2009. Therefore, a company or trust that previously satis ed the requirements to be a labour broker, and which has a nancial year-end before 1 March 2009, for example 31 December 2008, will still be classi ed as a labour broker for the year of assessment ending 31 December 2009. Employees’ tax is deductible from payments made to a labour broker that is not in possession of a certi cate of exemption.
7. Common misconceptions about the law
One of the areas that is typically misinterpreted is the relationship between the de nition of an ‘employment company’ in section 12E(4)(b) and the de nition of a ‘personal service’ in the section 12E(4)(d) on the one hand, and the de nition of a ‘personal service provider’ in the Fourth Schedule on the other. In this regard, it is important to note that the de nitions of ‘employment company’ and ‘personal service’ were not created for purposes of determining whether or not a company or trust is a ‘personal service provider’. For example, a company is not a ‘personal service provider’ because it provides a ‘personal service’, but because it complies with the de nition of a ‘personal service provider’ in the Fourth Schedule.
The term ‘personal service provider’ is only applicable to a ‘company’ and ‘trust’ as de ned in section 1. This means that the term is not applicable to a natural person. The effect of the new legislation can therefore be eliminated by rendering the service through a natural person directly to the client. By rendering the services directly as a natural person, the normal rules relating to the status of an independent contractor or common law employee as explained in previous guidelines issued by SARS become relevant.
Not all companies are affected by the legislation relating to personal service providers. Only companies that fall within the de nition of a ‘personal service provider’ are affected by the de nition, and also only when those that fall within the de nition are in receipt of ‘remuneration’, as de ned.
It is recommended that all users of services (employer/client) from potential labour brokers and personal service providers should have policies and systems in place to correctly identify and withhold tax from these entities and individuals. A possible solution would be a questionnaire or an af davit (including an af davit or solemn declaration for a personal service provider indicating that not more than 80% of its income is derived or is likely to be derived from one client) that could be used by the service-user at the start of the engagement or contract and regularly thereafter. This will enable the client to determine whether employees’ tax should be deducted or not.
8. Applicable tax rates
A labour broker without an exemption certi cate is subject to employees’ tax at the rates applicable to an individual. In the case where the ‘personal service provider’ is—
(i) a company or close corporation, employees’ tax at the rate of 33% must be withheld by the client (employer) of the
company or close corporation; or
(ii) a trust, employees’ tax must be withheld by the client (employer) at the rate applicable to trusts (other than special
trusts) which is currently 40%.
9. Conclusion
The information contained in this Interpretation Note covers the main aspects associated with personal service providers, personal service trusts and labour brokers.
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