Employees’ tax in respect of an independent contractor

On 05 March 2019, SARS published an updated Interpretation Note 17 to determine whether a person is an independent contractor for employees’ tax purposes.

Relevant Acts:

  • The Fourth Schedule to the Income Tax Act, Number 58 of 1962
  • Tax Administration Laws Amendment Act, Number 16 of 2016
  • Labour Relations Act, Number 66 of 1995—Section 200

This Note explains the statutory tests and the common law tests to assist SARS officials and employers to properly classify a worker. The Note has been updated to incorporate the latest amendments made under section 5(1)(d) of the Tax Administration Laws Amendment Act 16 of 2016, effective from 1 March 2017, to the exclusionary subparagraph (ii) of the definition of “remuneration”.

Binding General Ruling 40 “Remuneration Paid to Non-Executive Directors” and the Non-Executive Directors FAQs on BGRs 40 and 41 address the independent contractor status of non-executive directors. This Note therefore does not apply to non-executive directors. It is the responsibility of the employer to determine whether the provisions of exclusionary subparagraph (ii) of the definition of “remuneration” are applicable and whether payments are subject to employees’ tax. Not only is this responsibility set by the provisions of the Fourth Schedule, but it is also the employer that is in the best position to evaluate the facts and the actual situation.

Two tests exist: Statutory and Common Law. Both are complex in nature and the reader is required to read and interpret the contents of the Interpretation Note and seek professional tax advice.

The Statutory Test has two aspects:

• Evaluates whether the services being procured are rendered more than 50% of the time at the premises of either the person paying the worker or the person to whom the services are being rendered and also evaluate the level of control or supervision exerted over the worker in carrying out his/her duties. If both conditions are met, the worker is not considered to be independent.
• Considers whether or not a person employs three or more full-time employees, who are not connected persons related to him or her and are engaged in his or her business throughout the particular year of assessment. If so employed, the person is deemed to be carrying on a trade independently. This test overrides the first statutory test. The reader must then apply the Common Law test on the question of whether the monies paid to such a person are remuneration for employee’s tax purposes.

The Common Law Test

The Common Law test evaluates an overall or dominant impression of the employment relationship.

The test is an analytical tool that is designed for application in the employment environment to establish the dependence or independence of a person.

A number of indicators are used and the reader is advised to consult Annexures A to E in the Note for a property understanding of this complex test.

These indicators are grouped into three categories, namely:

• Near-conclusive indicators, such as the manner of control, the payment regime, the person who can render the service etc;
• Persuasive indicators, such as whether or not the worker is receiving instructions or supervision, the reporting regime and training methods; and
• Resonant indicators (those creating an immediate impression of independence) such as, who provides the tools of the trade, whether one operates from their own premises, integration into the employer’s workplace etc.

The flow diagram in Annexure B should be used in the Common Law test process.

Within Annexure C of the Note is a Grid. This Grid is a guide to determine a score.

Each indicator must be analysed with due regard to the particular context (type of industry, type of business, type of customer, type of worker), and how the business actually operates.

The user must analyse the employment relationship in the light of all the indicators and their relative weightings, and arrive at a dominant impression, in favour of either the acquisition by the employer of the worker’s productive capacity (effort), or of the result of the worker’s productive capacity. This dominant impression will be the basis for classification of the relationship as either an employee relationship or an independent contractor relationship.

As these tests are of a complex nature, it is advisable that the reader obtains professional advice to ensure compliance with the relevant Acts.

The Note from SARS may be found here: Note 17

This article is provided for information only and does not constitute the provision of professional advice of any kind.

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