Alternative Rewards Programme for Sales Staff
10 September 2012
Posted by: Author: Madeleine Schubert
Alternative Rewards Programme for Sales Staff
On 19 March 2012, the South African Revenue Services (SARS) issued a private binding ruling in favour of a manufacturer (the applicant) who wished to implement a rewards programme as part of a marketing initiative, for its wholesalers’ sales staff to entice them to sell its products to its clients.
The main aspect
•The applicant manufactures products which it sells to various wholesalers and retailers.
•The programme will be directed at the independent salespersons who sell the applicant’s products to the customers of the wholesalers and retailers.
•Wholesalers and retailers, may, however, direct that their staff will not be entitled to participate in the programme.
•The applicant will not enjoy any form of employment relationship with the sales persons.
•The applicant will have no super vision or control over these salespersons and no service will be rendered by them on the premises of the applicant.Alternative rewards programme for sales staff
•The salespersons will be required to register for the programme with the applicant,after which a recognised prepaid card will be issued to each of them.
•The reward to be earned will be calculated with reference to the amount of the products sold and the equivalent Rand value will be credited to the prepaid card.
•The term prepaid means the card can be utilised only to the extent that it has a positive balance and cannot be overdrawn as is the case of normal credit cards.The salespersons will be entitled to spend their rewards at their discretion but only by utilising the prepaid card to purchase certain goods and services.
•The prepaid accounts will be under the control of the applicant and administered by an independent third party.
•The physical cash to be used to credit these accounts will be held in a separate bank account in the name of the applicant.
•The prepaid card account will be credited to a maximum value of R5 000, which will be supplemented as and when a portion or all of the maximum value has been utilised and further reward credits are available.
In terms of the ruling, SARS confirmed that the awards earned by independent salespersons from a supplier were not to be seen as remuneration as defined in the Fourth Schedule to the Income Tax Act 58 of 1962, which meant that the provider of the programme was not regarded as an employer for income tax purposes and such awards were not subject to employees’ tax.
Remuneration includes any amount of income which is paid or payable by way of salary or gratuity whether in cash or otherwise in respect of services rendered, including any amount referred in paragraph (c) of the definition of gross income.Paragraph (c) includes any voluntary award, received or accrued in respect of services rendered or to be rendered or any amount received or accrued in respect or by virtue of any employment or holding of office.
However, the definition of remuneration excludes any amount paid to an independent contractor.A natural person will be independent in the following cases:
•He carries on a trade independently from the person who pays the amount.
•He is not required to per form his duties mainly at the client’s premises.
•He is not subject to super vision and/or control as to the manner in which his duties are performed.
•He employs at least three unconnected persons in his business.
SARS confirmed that the programme did not create an employment relationship for tax purposes between the provider and the wholesalers’ staff, taking into consideration the above mentioned factors. However, in the individual sales staff personal tax returns, they are still obliged to declare these amounts, and if included in the ambit of paragraph (c) of the gross income definition on the basis of being a"voluntary amount received in respect of services rendered”, would be subject to income tax on assessment.
Paragraph (c) of the gross income definition specifically includes any amount or voluntary award received in respect of services rendered or by virtue of any employment.In essence, there needs to be a causal relationship between the amount received and the services rendered.
However, in Stander v CIR, the court confirmed that where a manufacturer made an award (in the form of an overseas trip) to one of its wholesaler’s employees on being the top accountant, such an award did not constitute ‘money’s worth’ to the accountant in that he could not exchange the trip for cash or transfer it to somebody else.On this basis, the award could not be included in paragraph (c)of the gross income definition and was as such not taxable in the accountant’s hands. [It is worth noting that in SARS v Brummeria Renaissance (Pty) Ltd 21, the Judge President referred to the Stander case where he rejected the argument that only benefits which a taxpayer can turn into money can have money’s worth].
It is also important to confirm that paragraph (c) of the definition of gross income also require that there has to be a sufficient causal relationship between the services rendered and the prize received.In Stander’s case it was confirmed that the rendering of services by the accountant to his employer was not the real cause of the prize received by him.He received the prize fortuitously and on the basis of the excellent manner in which the company deemed he had performed his duties.
In our view, the rewards paid to staff in terms of the programme would arguably fall foul of paragraph (c) of the gross in come definition on the basis that they received money’s worth; however,there may be an argument that the rewards are not in respect of services rendered to their employer (as it was from a third party)and it had the quality of an accolade (reward) rather than a quality of remuneration for services rendered.In fact, SARS confirmed that they are independent with regard to the applicant and the programme is not provided to them by their employer.However,paragraph (c) only requires a causal relationship and from the facts above it is apparent that there is a direct link between the staff’s services and the rewards received in the programme and, as such,is not merely a voluntary reward.
Source: By Madeleine Schubert (TaxTALK)