Source: SARS INTERPRETATION NOTE 35 (ISSUE 5)
This Note discusses the employees’ tax implications and the deductions that may be claimed by a personal service provider or a labour broker.
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, or by utilising labour brokers, none of which could be classified as “employees” as defined in paragraph 1. The use of labels such as “independent contractor” and “service company”, and the perception that these were acceptable means of avoiding the deduction of employees’ tax, necessitated the development of stronger anti-avoidance measures for employees’ tax purposes.
In order to discourage the use of corporate entities, trusts or labour brokers as intermediaries to provide personal services to a client that are, in essence, services provided under a contract of employment, the concepts of “personal service provider” and “labour broker” were included in the definitions in paragraph 1. Both were also included as employees in the definition of “employee” in paragraph 1. This required that the remuneration paid or payable to such personal service provider or labour broker be subject to the deduction or withholding of employees’ tax. Deductions applicable to personal service providers and labour brokers without a certificate of exemption were simultaneously narrowed.
The deduction or withholding of employees’ tax is dependent on three elements, all of which are defined terms, namely, an “employer”, an “employee” and “remuneration”.
Employees’ tax cannot be charged if one or more of these three elements are not present. If, for example, an “employee” is removed from the equation, then the person paying the remuneration has no obligation to deduct employees’ tax. Similarly, if the term “remuneration” is removed from the equation, no employees’ tax liability arises.
Classification of employees
- Personal service provider
- Labour broker
Personal service provider
Any company, close corporation or trust that meets the definition of “personal service provider” is an “employee”, as defined in paragraph 1; and if it is in receipt of “remuneration” as defined in paragraph 1, is subject to the deduction or withholding of employees’ tax.
In determining whether a company, close corporation or trust is a “personal service provider” and whether employees’ tax must be deducted or withheld from amounts paid or payable to them, the following tests should be performed:
a. Determine whether some or all of the receipts of the company, close corporation or trust consist of “remuneration”
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.
c. Determine whether the company, close corporation or trust employs (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 the business of rendering the service, and who are not holders of shares or members of the company or close corporation, nor settlors or beneficiaries of a trust, nor connected persons in relation to such persons.
d. Determine whether one (or more) of the following criteria applies:
i. 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?
ii. 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?
iii. Does more than 80% of the income of the company, close corporation or trust from services rendered consist (or is likely to consist) of amounts received from any one client, or from any associated institution in relation to the client?
If any of the three criteria above apply, the test will be positive.
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 personally provide the services required by the client. A company, close corporation or trust that provides such services is not classified as a labour broker.
An employer is not required to deduct or withhold employees’ tax from any remuneration paid or payable by it to a labour broker who produces a valid certificate of exemption (known as an IRP 30) issued by the Commissioner.
The certificate of exemption must be issued by SARS if:
• the labour broker conducts an independent trade and is a provisional taxpayer;
• the labour broker is registered as an employer for employees’ tax purposes; and
• the labour broker has submitted all returns required to be submitted under the Act.
A certificate of exemption may not be granted when:
(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. The rule relating to three or more
employees does not apply to persons engaged in other activities of the labour broker – the employees must be directly involved in the labour broking activities of the labour broker to provide or procure persons for clients of that 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 purpose of providing the employee to a client; or
(c) the labour broker is contractually obliged to provide the services of a specified employee to the client. This requirement is applicable when, for example, the client prescribed or required Employee A to render the service. This requirement is not applicable if an employee of the labour broker was chosen by name as a result of a bona fide selection process based on the requirements of the client, and specified as such in the eventual contractual agreement.
The requirements for granting a certificate of exemption still include the requirement that the labour broker be conducting an independent trade.
Applicable tax rates
Personal service providers, as with all other companies and close corporations, pay tax on taxable income at the rate of 27% (from 01 March 2023) and trusts pay tax at the rate of 45%. A labour broker will not be granted a certificate of exemption if any one of the prohibitions applies. A labour broker without a certificate of exemption is subject to income tax at the rates applicable to individuals.
Deduction of expenses
Section 23(k) limits the deductions available to personal service providers and labour brokers without a certificate of exemption. Both personal service providers and labour brokers without a certificate of exemption may claim amounts paid to employees for services rendered, which amounts are taken into account in the determination of the taxable income of the employee.
The opening words of section 23(k) prohibit a personal service provider or a labour broker without a certificate of exemption from deducting any expense incurred, other than those specifically permitted by section 23(k).
A wear-and-tear allowance under section 11(e) is not an “expense incurred” by a personal service provider or labour broker, as contemplated in section 23(k),31 and is not prohibited.
A personal service provider and a labour broker are employees for purposes of employees’ tax, and payments to them are subject to the deduction or withholding of employees’ tax. Employees’ tax must be deducted at the following rates:
• Personal service providers that are companies: 27% (from 01 March 2023)
• Personal service providers that are trusts: 45%
• Labour brokers: the tax tables applicable to natural persons