Pretoria - After years of uncertainty about
the status of non-executive directors and how their income should be taxed,
this has been resolved, but with far-reaching consequences.
The South African Revenue Service (SARS)
has confirmed that non-executive directors (NEDs) of companies must register
for and charge Value Added Tax (VAT) for any directors’ fees they earn.
Previously non-executive directors were
subject to pay-as-you-earn (PAYE) because the fees were considered
remuneration.
In 2007 some changes were made to the definition
of remuneration in the Income Tax Act, causing the uncertainty about whether
non-executive directors are employees (receiving remuneration) or independent contractors
(providing services as an enterprise).
Following consultation, it has now been
decided that these directors are “independent contractors” and any fees paid to
them are not regarded as remuneration.
Victor Terblanche says the effect of this
interpretation is that non-executive directors will have to register for VAT
from June 1 if their total taxable income exceeds R1 million in any 12
consecutive months.
“All their economic activities will then be
brought into the VAT net. They will have to consider whether anything they sell
– such as property and certain vehicles – will be subject to VAT,” he says.
Terblanche, who is also chair of the South
African Institute of Tax Professionals' VAT committee, says these directors are
now considered to be an “enterprise”.
It will make it almost impossible for them
to “prove” which are personal assets and which are enterprise assets.
Read also: SARS makes VAT easier
If the individual only receives an annual fee
income of R500 000, but sells a property for R600 000 and “continuously or
regularly” sells property then the individual exceeds the R1 million mandatory
VAT registration threshold.
the director’s personal assets if there are any outstanding VAT amounts. In
addition, his personal bank account may be frozen if there are any disputes
pertaining to VAT payments or assessments.”
Gets
worse
It gets worse. When a director deregisters
for VAT, he is obliged to submit a balance sheet of all his personal assets.
VAT may be levied on some of the assets which is considered part of his
enterprise.
“There is also the possibility that he will
have to account for VAT on an apportionment basis since his personal expenses
are now part of his taxable expenses.”
Another consequence is that he will have to
submit a VAT return bi-monthly with additional compliance costs and time.
Terblanche says there will be no real
revenue benefit to the fiscus. The non-executive director will now charge VAT
on his services rendered to a company, the company will, in most instances,
claim it back which will result in “VAT in and VAT out”.
The Institute of Directors says it welcomes
the fact that clarity has been provided by SARS.
“There has been much confusion and debate
around the issue in the past, with the IoDSA and other bodies having written to
both SARS and National Treasury requesting clarity on the varying
interpretations of both the Income Tax Act and the VAT Act,” says Parmi Natesan
from the Centre for Corporate Governance at the Institute.
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