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FAQ - 4 May 2016

04 May 2016   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is PAYE deductible from independent contractors?

Q: A contractor earns income from the services they provide and has no other clients, and this is their only source of income.There are no set hours and the contractor is available for weekly meetings and ad hoc telephone and email advising. I wanted to find out if PAYE can be deducted from the income they earn.

A: A person making payment to an individual (in respect of services rendered) would have an obligation to deduct employees’ tax from that payment unless the individual rendered the services in the course of a trade carried on independently (as required by proviso (ii) to the definition of remuneration in paragraph 1 of the Fourth Schedule to the Income Tax Act).  In this regard a person will be deemed not to carry on a trade independently if the services are required to be performed mainly at the premises of the person by whom payment is made or the person to whom the services are rendered AND the person rendering the services is subject to the control or supervision of any other person as to the manner in which his duties are performed or as to his hours of work.  

It is the employer's duty to determine whether a person is an independent contractor or an employee and whether employee's tax should therefore be deducted or not.  The employer is in the best position to interpret the facts of each case.  If the employer incorrectly classifies a person as an independent contractor, the employer will be liable for the relevant employee's tax together with the relevant penalties and interest.  

The current practice generally prevailing in this regard is set out in Interpretation Note 17 (issue 3).  The note deals with the statutory tests (including how to apply the statutory tests) and common law dominant impression test.  The table on page 17 is very useful.  

The general principle was explained as follows by Judge Streicher in the Niselow case.  The Judge said that "…an employee is a person who makes over his or her capacity to produce to another; an independent contractor, by contrast, is a person whose commitment is to the production of a given result by his or her labour…"  The judge then concluded by saying that the relationship between the parties must remain one in terms of which the person doing the work undertook to produce a certain result and not to render personal services to person paying for it to be a contract in terms of which independent services are rendered.  

You state that "there are no set hours” the individual "is available for weekly meetings, and ad hoc telephone and email advising” and that the individual "receives NO other income”.  The other income earned by the individual would only be relevant if the individual is a labour broker (unlikely from the facts provided).  The hours of work and the place where the work is done are relevant to the statutory test.  

2. Are the proceeds from the sale of an aircraft capital in nature?

Q: I want to know whether the proceeds on sale of an aircraft held in a normal trust (which has never generated any income) will have to be treated as a capital gain or not.  

A: In applying the law to your scenario it is submitted that the intention of the trust and the trustees will have to be determined.  And this must be done both at acquisition and at disposal of the aircraft.  

The essential question here is whether or the receipt (accrual) from the disposal of the aircraft is of a capital nature.  If the taxpayer were to argue that the receipt on disposal of the aircraft is capital in nature the taxpayer bears the burden to prove on a balance of probabilities that the proceeds were of a capital nature.  The fact that it is an asset, in itself, is not sufficient.  We accept that there is no special inclusion in gross income in terms of paragraph (n) of that definition in section 1(1) of the Income Tax Act.  

Our courts have dealt with this issue on many occasions – the most recent being 9 February 2016.  Judge van Der Merwe confirmed in this SCA case (CSARS v Capstone 556 (Pty) Ltd) that "…our courts have … consistently applied the test that a gain made by an operation of a business in carrying out a scheme of profit-making, is income and vice versa.”  With ‘income’ the judge of course refers to ‘gross income’.  

The Judge continued as follows:

"Where a profit is the result of the sale of an asset, the intention with which the taxpayer had acquired and held the asset is of great importance and may be decisive.  In essence, the question is whether the asset was acquired for the purpose of reselling it at a profit and assumed the character of trading stock…”  

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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