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FAQ - 4 September 2014

03 September 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. The meaning of "education” in the definition of "personal service” and section 23(k) 

Q: I am not able to locate anything that expands on what SARS intended to catch within the ambit of "education” in the designated trades according to the definition of "personal service”. For instance, would education include someone giving driving lessons? Or teaching people to drive forklifts? Or is it education as in a school and university classroom situation.

We have been approached by a newly registered private company with two shareholders and two directors. They have certification and accreditation from South African Maritime Safety Authority to present various short training courses. 

All courses presented have a theoretical and practical content at various levels, and include various disciplines of which examples are: skippers tickets, first aid and safety courses, diving courses, commercial diving, etc.

The company has only two employees (who are also the shareholders and directors) and they personally attend to all training of classes. Additional staff are recruited as and when needed and only for the duration of a specific course. Courses are normally one or two days a week over a month or two, seldom concentrated to every day of the week. The company does not have regular turnover, and periods of inactivity mean that the shareholders have limited incomes at this stage.

From what we can see this entity will be a personal services company only if their trade is caught by the word "education” within the definition, and therefore S23(k) would apply. Hence our enquiry.

Any advice and guidance would be appreciated.

A: Meaning of "education”

We agree with you that the following are the relevant parts of the definition of "personal service’, "in relation to a company…, means any service in the field of …, education …, if…” and is the issue in this instance.  Note that it is the words "... any service in the field of ... education...” in the current definition that are relevant to this issue.  The Act does not provide clarity in this regard.  The Tax court considered the meaning of the words "consulting, broking and management", (as used in this definition) and Judge Mbha made the following comments in this regard:

It is accepted generally that the meaning of words in a statute is derived from the common law.  The basic rule of interpretation is that the meaning must, unless a statute provides otherwise, or unless it would result in an absurdity, be taken to be the ordinary meaning of the word which can be found in a dictionary of established authority. 

Note: SARS changed its Interpretation Note after this case.  SARS states the following in Interpretation Note: No. 9 (Issue 5):

"In general terms, a personal service refers to a service rendered and for which the income derived is mainly a reward for the personal efforts or skills of an individual. However, the term is capable of expansion or limitation depending on the scope of the specific law in which it used. Section 12E(4)(d) … defines "personal service” which merely lists a class of activities that would be regarded as a personal service. For the sake of clarity, the ordinary, grammatical meaning is to be ascribed to each word. Accordingly, each of these entries is to be construed in their widest possible sense.” 

The Oxford Dictionary (under British and world English) defines the word "education” (noun) as "the process of receiving or giving systematic instruction, especially at a school or university” and "the theory and practice of teaching”.  

It may well be that the services offered by the client is not a personal service, but it is outside the scope of the service offered by SAIT to give an opinion on the matter.  As the taxpayer would bear the onus of proof in this regard, should SARS dispute the view taken, we suggest that you advise your client to obtain a legal opinion or an advance tax ruling or opinion from SARS in this regard. 

Relevance for "personal service provider” definition

Furthermore, there is a difference between a ‘personal service’ and a ‘personal service provider’ (which includes a company). The former is defined in section 12E of the Income Tax Act ("ITA”) and the latter in the 4th Schedule to the ITA. Section 23(k) limits the deductions available to a personal service provider (PSP), not the deductions available to companies that provide a ‘personal service’ as defined in section 12E. The ‘personal service’ definition in section 12E, which refers to a company providing a service in the field of "education”,  is relevant only for the purpose of determining whether a company is a ‘small business corporation’ [see section 12E(4)(a)(iii)]. 

Furthermore, the definition of a PSP makes no reference to the term "personal service”. According to the 4th Schedule, a PSP is defined as:

"any company or trust, where any service rendered on behalf of such company or trust to a client of such company or trust is rendered personally by any person who is a connected person in relation to such company or trust, and— 

(a) such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company or trust; or

(b) where those duties must be performed mainly at the premises of the client, such person or such company or trust is subject to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service; 

(c) where more than 80 per cent of the income of such company or trust during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of such company or trust, or any associated institution as defined in the Seventh Schedule to this Act, in relation to such client,

except where such company or trust throughout the year of assessment employs three or more full-time employees who are on a full-time basis engaged in the business of such company or trust of rendering any such service, other than any employee who is a holder of a share in the company or member of the trust or is a connected person in relation to such person”

The services rendered on behalf of the company you’ve mentioned are rendered personally by connected persons in relation to the company (the shareholder/directors). These individuals are connected persons to the company by virtue of owning more than 20% of the equity shares or voting rights in the company [see (d)(iv) of the ‘connected persons’ definition in section 1 of the ITA]. I have assumed this is the case.

In addition to this, either (a), (b) or (c) of the PSP definition must be met, except where more than 3 full-time employees are employed by the company for the whole year of assessment. 

Unfortunately you have not given us sufficient information to determine whether the rest of the PSP definition will be met. For instance, we do not know if more than 80% of the company’s income will come from one client, as provided for in (c) above.

Please refer to Interpretation Note 35 for very detailed guidance on PSPs, which is available on this link:

In conclusion, the fact that a company provides a service in the field of education will have no impact in determining whether that company is a personal service provider or not.

2. The potential application of the withholdings tax on royalties to services rendered by a foreign employee

Q: I would like to know if S49B of the Income Tax Act (the withholding tax on royalties) could apply to the payment of remuneration to a foreign employee. I would also like to know the Exchange control implications of the payment.

My SA tax resident client operates a consulting business in South Africa which involves, inter alia, the compilation of monthly reports on the mining industry (dealing with current mining trends, commodity prices and outlooks and trade dynamics. These reports are sold mainly on a subscription basis electronically to various mining companies, some being SA tax resident, others being foreign. My client intends to employ a Ukrainian individual to, amongst other things, compile the mining reports, which compilation would take place wholly outside of SA. The Ukrainian would therefore be my client’s employee. Upon completion of the relevant report, he will then e-mail his employer (my client) the report, which will be reviewed and sold to the various mining companies. Given that the source of the services rendered is outside SA, I am confident that no employees’ tax need be withheld. 

However what of section 49B? Unlike with the service fee withholding tax, there is no exemption in s49B if the fee paid constitutes remuneration. I would like to know if the remuneration paid to the Ukrainian, could be regarded as being from an SA source per sections 9 (e) and (f). This would potentially be the case regarding the reports that my client obtains from her employee which are then sold to SA tax resident mining companies and used / applied by them in South Africa. I would also like to know the exchange control implications if 1) the remuneration is subject to s49B and 2) if it is simply regarded as remuneration.

I would submit that S49B would not apply given that the crux of the section is a royalty withholding tax. As my client is the employer, any copyright in the report would automatically vest in her; the payment is simply for a service performed for her by her employee and is not a royalty.

A: We wish to remind you that the service offered by SAIT is limited to providing guidance only.  You may want to consult an expert in this regard.  

The Government of the Republic of South Africa and the Cabinet of Ministers of Ukraine concluded a Convention for the avoidance of double taxation – see Government gazette 27150.  It specifically applies to the withholding tax on royalties.  It deals with royalties in Article 12 of the treaty and states that:

"The term "royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films and films, tapes or discs for radio or television broadcasting) any patent, trade mark, design or model, plan, secret formula or process, or for information (know-how) concerning industrial, commercial or scientific experience.” 

Section 49A states that a 'royalty' means any amount that is received or accrues in respect of

a) the use or right of use of or permission to use any intellectual property as defined in section 23I; or

b) the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or the rendering of or the undertaking to render any assistance or service in connection with the application or utilisation of such knowledge or information 

From both of these definitions it is clear that the royalty relates to the payment for the right of use of essentially intellectual property.  Based on the agreement provided by you we agree that it appears that the payment is in respect of services rendered as an employee.  The tax consequences will follow in terms of Article 14 of the treaty.  This will also apply to the source.  

We submit that from a tax (and treaty) point of view the payment can only be in respect of remuneration or a royalty (not both).  But, as pointed out earlier, you may want to consult a specialist in this regard.  

The exchange control issues are not tax related and ARE best obtained from an authorised dealer (a bank).  There should generally be no limitation to make payment in this instance – see section I (Payments of a business nature) of the SA Reserve bank Manual.  Paragraph 2.3.2 deals with royalties and 2.3.7 with services rendered.  


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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