Provided By Cliffe Dekker Hofmeyr By Jerome Brink and Aadil Patel
The South African Revenue Service (SARS) has published an updated Interpretation Note 17 (Interpretation Note) on how to determine whether a person is an independent contractor for employees’ tax purposes. The Fourth Schedule to the Income Tax Act, No 58 of 1962 (Act), requires there to be three elements before employees’ tax can be levied, namely an employer paying remuneration to an employee. As such, determining whether a person is receiving remuneration, as defined in the Act, and whether they are an employee, are important considerations.
In terms of the definition of remuneration in the Fourth Schedule, if amounts are paid to a person who carries on a trade independently of the person from whom the amounts are received and for whom the services are rendered, then the amounts are not considered remuneration for the purposes of employees’ tax and the employer will not be liable to deduct and pay over employees’ tax to SARS.
The Interpretation Note provides that an independent business can, in general terms, be described as one that is an entrepreneurial enterprise, enjoying such a degree of independence that “it can survive the termination of the relationship with the client”.
In evaluating whether a person is an independent contractor for employee’s tax purposes, SARS make use of two “tools” consisting of two statutory tests and the common law test. There are two statutory tests, where the first is met, the person is deemed not to be carrying on an independent trade, and if the second is met, the person will be deemed to be carrying on an independent trade.
The statutory tests
The first statutory test involves two parts, the first being an evaluation of whether the services being procured are rendered mainly (i.e. more than 50% of the time) at the premises of either the person paying the worker or the person to whom the services are being rendered. The second part of the first test evaluates the level of control or supervision exerted over the worker in carrying out his/her duties. Where both the first and second parts of the first statutory test are met, the worker will not be considered to be independent.
The second statutory test considers whether or not a person employs three or more full-time employees, who are not connected persons related to him or her and are engaged in his or her business throughout the particular year of assessment. Where the person employs such other people as aforementioned, the person is deemed to be carrying on a trade independently. This test overrides the first statutory test and the common law test and is therefore decisive on the question of whether the monies paid to such a person are remuneration for employee’s tax purposes.
The common law test
The common law test, as applied by SARS, involves making use of an overall or dominant impression of the employment relationship. In making this evaluation a number of indicators are used. These indicators are grouped into three categories, namely:
- Near-conclusive indicators, such as the manner of control, the payment regime, the person who can render the service etc;
- Persuasive indicators, such as whether or not the worker is receiving instructions or supervision, the reporting regime and training methods; and
- Resonant indicators (those creating an immediate impression of independence) such as, who provides the tools of the trade, whether one operates from their own premises, integration into the employer’s workplace etc.
The list of indicators in the Interpretation Note is not exhaustive and can be supplemented over time and due to changing circumstances.
The common law test applied by SARS is similar to the tests applied to determine whether an independent contractor is an employee in terms to read of our Labour Law. Section 200A of the Labour Relations Act creates a presumption that a person is an employee where one or more of the factors listed therein are present. These factors include the manner of control the employer exerts on a person, the economic dependence of that person on the employer and whether the person is provided with the tools to do the work. The difference however is that for the purposes of the Labour Relations Act, this presumption only applies to those earning below R205,433.30 per annum. SARS however, does not make any distinction based on the amount of remuneration being received by the contractor.
It is the responsibility of the employer to determine whether the monies paid by it for services rendered are remuneration for purposes of employees’ tax, or whether the exclusions in the Fourth Schedule apply. An employer who has incorrectly classified a worker as an independent contractor is liable for employees’ tax that should have been deducted, as well as the accompanying interest and penalties. The employer, however, has the right to recover the tax from the worker.
It is therefore important for employers, especially those who make use of independent contractors, to evaluate those relationships and ascertain whether or not a particular worker or contractor, could be regarded as an employee for the purposes of employees’ tax, and if so, the employer must deduct employees’ tax from the remuneration paid to them.