FAQ - 3 February 2016
03 February 2016
Posted by: Author: SAIT Technical
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
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
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.