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FAQ - 3 February 2016

03 February 2016   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Should an independent contractor earning over R1million register for VAT?

Q: An individual tax client provides consulting services to a number of different companies. Some of these are based in South Africa and deduct the 28% independent contract PAYE amounts from payments made to her. She also does work for foreign clients (work is performed mostly out of the country) and then declares this income on her tax returns. Her gross income is over R1million.

As she is not actually employed by the various companies, is this still considered "remuneration for services rendered” as it would be stated on an employment contract or should she be registered for VAT?  

If I was employed by a company and my salary was R2million a year I would not have to be VAT registered and charge my employer VAT but I am not certain of how independent contractors and their income is viewed. 

A: As the request relates to the Value-Added Tax treatment we don’t comment on the employees’ tax remark.  

The relevant principle is found in the definition of ‘enterprise’ in section 1(1) of the Value-Added Tax Act in proviso (iii).   For ease of reference we copied the full proviso below:

"(iii) (aa) the rendering of services by an employee to his employer in the course of his employment or the rendering of services by the holder of any office in performing the duties of his office, shall not be deemed to be the carrying on of an enterprise to the extent that any amount constituting remuneration as contemplated in the definition of "remuneration” in paragraph 1 of the Fourth Schedule to the Income Tax Act is paid or is payable to such employee or office holder, as the case may be;

bb) subparagraph (aa) of this paragraph shall not apply in relation to any employment or office accepted by any person in carrying on any enterprise carried on by him independently of the employer or concern by whom the amount of remuneration is paid or payable…”

Important here is the phrase "…any enterprise carried on by him (or her) independently…”  The supply would be a taxable supply (an enterprise activity) if it is in respect of an independent activity.  The fact that employees’ tax may, or may not have been withheld, because it is remuneration as defined (in the Fourth Schedule) is then irrelevant.  In other words the phrase takes its ordinary, and not its Fourth Schedule, meaning.  

An output tax must be levied and the rate of zero percent may apply where section 11(2)(k) or (l) of the Value-Added Tax Act apply.  

2. Will a person who receives a loan be taxed on the amount received?

Q: A mother loaned an amount of R2million to her son, interest free. He repays the loan as the mother still needs money. The average is about R4,000.00 per month.  If the interest income was shown in the mothers' books and the expense was deducted in the son’s books, then the effect will be zero for SARS. Will the son be taxed by SARS because the loan is interest free?

A: We assume that all the persons are residents of the RSA - section 31 of the Income Tax Act is thus not applicable.  We also accept that the parties will be able to meet the onus of proof with regard to the presumption of purpose – see section 80G.  

Note that the granting of a loan interest free, does not per se give rise to a donation, as no right to earn interest is waived (definition of donation in section 55(1)).  If a loan agreement grants the lender a right to charge interest, then the waiving of that right is a "donation” as defined in section 55 of the Income Tax Act and subject to donations tax.

You referred to Interpretation Note 58 (issue 2) dated 4 October 2012: The Brummeria case and the right to use loan capital interest free. This interpretation note discusses in which instance an interest free loan can result in an inclusion in gross income, being the interest "saved” by the borrower.  The point raised in paragraph 6.1 is relevant.  It reads as follows:

"As a result the principles from the judgment may be applied in all cases in which benefits in a form other than money (such as the right to use an interest-free loan) are granted in exchange for goods supplied, services rendered or any other benefit given.” 

Essentially then when there is a quid quo pro.  We agree with your view on the receipt of the loan.  We don’t agree with your comment ", if the interest income where shown in the mothers' books, and the expense where deducted in the sons books, then the effect will be zero for SARS”.  If interest accrues it would be gross income (section 24J(3)) for one taxpayer and the other taxpayer will have to meet the requirements of section 24J(2) before a deduction can be made.  As they are two different taxpayers (and two different principles at law) there is no zero effect.  

We don’t know, but assume the son is not a minor and section 7(3) will not apply.  We don’t have enough information to comment on the other subsections of section 7.  

Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.  


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