There has been uncertainty around the tax treatment of fees paid to non-executive directors. While it is clear that the amounts will be subject to income tax, the question was when and how this tax should be collected. In addition, differing views existed as to whether fees paid to non-executive directors should be subject to VAT. SARS clarified these two questions by issuing two binding general rulings. The rulings indicate that while the payments are not subject to employees tax, it may be subject to VAT.

Some uncertainty has existed regarding the tax treatment of payments made to non-executive directors. While it is clear that amounts received by a non-executive director will be subject to income tax, differing views existed on the VAT and employees' tax implications of these payments.

After initially proposing to to resolve the matter by amending the legislation, clarification has now been provided in the form of Binding General Rulings (BGR) 40 and 41 issued by SARS.

The PAYE position (BGR 40)

Employees tax should be deducted from any amount of remuneration paid by an employer to an employee. Amounts paid to any person in the course of a trade carried on independently by such a person are however specifically excluded from being remuneration and are not subject to employees' tax. In order to establish whether a person carries on a trade independently, the person must not fall foul of the statutory test. The statutory test entails that it should be considered whether the person is required to mainly perform services at the premises of the payor and whether the person is subject to the control and supervision of the payor as to the manner in which the duties are performed or the hours of work.

SARS indicates in BGR40 that it accepts that by the nature of the duties of a non-executive director from the King III report, which requires objectivity and independence from the company, the director is not a common law employee. It further indicates that the fact that a non-executive director is paid for time spent in preparing and attending board meetings is not sufficient to contend that the company exercises control or supervision over the hours during which a non-executive director should perform his or her duties. The fees paid to nonexecutive directors would therefore not constitute remuneration and companies are not required to withhold employees' tax. This means that SARS collects tax on these payments through the provisional tax mechanism.

An exception to this rule would be foreign nonexecutive directors who are specifically excluded from the rules relating to payments made to persons who carry on a trade independently.

The VAT position (BGR 41)

The debate from a VAT perspective centred around the interpretation of the exclusion from carrying on an enterprise, and therefore from having to register as a VAT vendor, that is available for employees. In particular, the exclusion made reference back to services rendered to the extent that the amounts received constituted 'remuneration' for employees' tax purposes. The exclusion also makes it clear that it does not apply to the holding of an office by a person in carrying on any trade independently from the employer.

SARS states in BGR41 that the exclusion is aimed at excluding services rendered under an employment contract. This means that common law employees will not be liable to charge VAT on their remuneration. Amounts received in terms of a contract for service, commonly referred to as an independent contractor fees, do not fall within this exclusion. In line with the view that a non-executive director is not a common law employee, SARS indicates that where the fees earned by such a person exceed R1 million during a period of 12 months, the non-executive director should register as a VAT vendor and charge VAT on the fees. (February 2017)

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