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FAQ - 12 May 2015

Tuesday, 12 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is the commission received by an estate agent ‘remuneration’ for ETI purposes? 

Q: I have an estate agent client who wants to make use of the Employees Tax Incentive (ETI).

Is the remuneration spoken of in the ETI Act the same as per section 1 of the Fourth Schedule to the Income Tax Act? I want to know if the commission received by an agent forms part of the remuneration for the ETI. Say he receives R2000 basic salary and R8000 commission will he still qualify for the ETI?

A: You are correct that for the purposes of the definition of ‘‘monthly remuneration’’ in subsection (1) of the Employment Tax Incentive Act, 2013, ‘‘remuneration’’ has the meaning ascribed to it in paragraph (1) of the Fourth Schedule to the Income Tax Act. 

The definition of ‘remuneration’ specifically includes "any amount of income which is paid or is payable to any person by way of any … commission…” 

But note that, in terms of exclusion (ii) of the definition, it would not be remuneration if the amount is paid or payable in respect of services rendered or to be rendered by any person in the course of any trade carried on by him independently of the person by whom such amount is paid or payable and of the person to whom such services have been or are to be rendered. 

We submit that this is confirmed when the Employment Tax Incentive Act states that an ‘‘employee’’ means a natural person—

(a)    who works directly for another person; and

(b)   who receives, or is entitled to receive remuneration, from that other person,

but does not include an independent contractor. 

So the recipient of the commission should qualify if he or she meets the other requirements and then works directly for the estate agent and receives commission not as an independent contractor. 

2. Is VAT payable on the full rental amount received by an estate agent?

Q1: My client is an estate agent and rents out a commercial building on behalf of the owner. Should VAT be charged on the entire rental amount when invoicing the tenant?

A1: It is not clear what you mean with ‘on the entire rental amount’ and there are a number of possibilities.  We assume that you want to invoice the rental amount on behalf of the client.  We submit that the supply is really being made by the owner of the building and we accept that the owner is registered as a vendor.  If our assumptions are wrong the guidance may not be appropriate.  You are welcome to provide the additional detail – which will be evident from the guidance that follows. 

The Act allows for an agent to issue the tax invoice on behalf of the principal – section 54.  We copy the relevant part here for convenience sake:

"…where an agent makes a supply of goods or services for and on behalf of any other person who is the principal of that agent, that supply shall be deemed to be made by that principal and not by that agent: Provided that, where that supply is a taxable supply and that agent is a vendor, the agent may, notwithstanding anything to the contrary in this Act, issue a tax invoice or a credit note or a debit note in relation to such supply as if the agent had made a taxable supply, and to the extent that that tax invoice or credit note or debit note relates to that supply, the principal shall not also issue a tax invoice or a credit note or a debit note, as the case may be.” 

As we don’t know the nature of the agreement between the estate agent and the owner we can’t comment on whether or not the agent will be making a supply for and on behalf of the principal of that agent. 

The commission that the agent will be entitled to will be invoiced by the estate agent to the owner as that is the supply the agent makes (possibly the only supply). 

Q2: The rental agreement is between the owner and the lessee. The estate agent merely manages the rental on the owner’s behalf.

The estate agent and the property owner are registered for VAT. Is it correct to interpret the Act as saying that the commercial rental will attract output VAT, payable by the estate agent?

And then from a practical point of view, the property owner will need to invoice the estate agent for their portion of the rent to be paid out?

A2: You are correct that ‘commercial rental’ (being a supply of property which is not an exempt supply or a supply of commercial accommodation) will be a taxable supply.  This assumes that the supplier is registered (or required to be registered) as a vendor.  We don’t agree that there is a supply between the land owner and the agent – you confirm that when you say that the agreement is between "the owner and the lessee” and that the "agent merely manages the rental on the owner’s behalf”.  We submit that the supply (in respect of which the rental is received) is made by the owner of the property and not by the agent. 

We assume that when you refer to "portion of the rent to be paid out” you mean that the agent collects the full rental (inclusive) from the tenant and then deducts their commission (inclusive) before the balance is paid over to the landlord.  The only invoice necessary here is the invoice from the agent to the owner for the agent’s fee. 

As Judge Nugent (in the British Airways case) said:

"The services that passengers enjoy are supplied by the company and the tax accrues in terms of s 7 (and is payable by the vendor of the service) when that supply occurs. A further tax does not accrue when the vendor of another service (British Airways) does no more than bring to account and recover the charge that it was required to pay for the supply of that service by the company (whether it is supplied to the passengers themselves, or to the airline for the benefit of its passengers). The moneys that are recovered by British Airways are not a consideration for the supply by it of airport services simply because it does not supply them at all.” 

3. Given the change in the ‘Companies Act’ definition, is a firm of attorneys a small business corp?  

Q: According to Notes on South African Income Tax 2015 by Phillip Haupt the definition of "Companies Act” was introduced into the Income Tax Act with effect from 1 January 2015 and the definition makes it clear the when the term is used, the 2008 Companies Act is being referred to. Further according to Haupt this has a knock on effect on the definition of "small business corporation” in section 12E(4) of the Income Tax Act, because the definition of "private company” in the 2008 Companies Act is different from the definition of "private companies” in the 1973 Companies Act.

Are these changes applicable to a firm of attorneys incorporated as a company, which will result in the incorporated not qualifying as a "small business corporation” in terms of the Income Tax Act and if so, with effect from which tax year (firm tax year end is 28 February)?

A: The definition of Companies Act as referred to in s12E ITA was inserted from 1 January 2014 and refers to Companies Act 2008. It is however arguable that the Companies Act 2008 applied since it replaced the 1973 Act, per s12(1) of the Interpretation Act, from 1 May 2011. The definition of Private Company in the Companies Act 2008 excludes personal liability companies which seemingly excludes such companies from s12E. However we are addressing the matter and have not seen SARS exclude companies on this technical basis. 

4. When will transfer duty be levied on the sale of a member’s interest in a close corporation?  

Q: I have a client who’s about to sell his member’s interest in his Close Corporation. The only asset in the CC is a property being used for commercial purposes although there isn't any business rights on the property.

Besides CGT, what other taxes would apply to this transaction?

I am unsure if there will be transfer duty payable on the transfer of the members interest in the CC.

A: Transfer duty is payable on the sale of shares of a residential property company as defined in the Transfer Duty Act, the former being a company holding residential property as defined in s1. Residential property includes any dwelling or unimproved land zoned for residential use.

Therefore if it is a residential property which is bought for commercial purposes but have not been rezoned for commercial use the shares will in our view fall within the definition and be subject to transfer duty.

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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