FAQ - 4 September 2014
03 September 2014
Posted by: Author: SAIT Technical
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
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.
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
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
"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;
(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
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.