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Where a personal service provider receives a share of a client’s profit as a fee for services render

03 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Please confirm my understanding of the tax and VAT treatment in respect of a lump sum payout to a personal service provider (PSP) (which is a company). The PSP receives a share of farming profits in exchange for farm management services. 

It receives income from other sources, but will receive a large lump sum profit share for the 2015 tax year, pushing the ratio over 80 %. The PSP is not VAT registered.

My understanding is that 28 % PAYE should be withheld by the farming company and declared on the IRP5 issued to the PSP. The PSP will need to register for VAT and charge VAT on the transaction (turnover in excess of R1m). PSP will declare the income, less any expenses allowable. Tax will be calculated at 28 % on the Taxable Income. The PSP will then claim the 28 % employees’ tax against the normal tax liability for the year of assessment

A: Assuming the PSP company meets all the other requirements as well and no exclusion applies, then we agree that 28% PAYE withholding will apply on the excluding VAT amount. The PSP would have to register for VAT from the end of the month that the registration threshold in section 23 of the VAT Act is met and the supplies after registration will be taxable supplies subject to VAT.

You are correct that on assessment the PAYE withheld will be claimed as a tax payment credit and in calculation of the taxable income the prohibition in section 23(k) Income Tax Act should be applied to the expenses of the PSP.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.



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