On February 10, 2017 the South African Revenue Service (SARS) issued two Binding General Rulings (BGR) on the position of Non-Executive Directors (NEDs) BGRs No. 40 and 41. Both BGRs will apply from June 1, 2017.
BGR No. 41 deals with the VAT consequences of amounts earned by NEDs. BGR 41 must be read in conjunction with BGR 40. The purpose of BGR No. 40 is to provide clarity on the employees’ tax consequences of income earned by an NED, as well as the effect those employees’ tax consequences could have on the prohibition against deductions by office holders under section 23(m).
BGR 41
BGR 41 contains the following ruling:
“VAT treatment of NEDs
It is concluded in paragraph 3.2 of BGR (Income Tax) 40 that an NED is not considered to be a common law employee. This is based on the view that the services must be supplied independently and personally by the NED. Any director’s fees paid or payable to an NED for services rendered in that capacity is therefore not regarded as “remuneration”. It follows that for VAT purposes an NED is treated as an independent contractor as contemplated in proviso (iii)(bb) to the definition of “enterprise” in section 1(1) in respect of those NED activities.
Liability of NEDs to register for VAT
An NED that carries on an enterprise in the Republic is required to register and charge VAT in respect of any director’s fees earned for services rendered as an NED if the value of such fees exceed the compulsory VAT registration threshold of R1 million in any consecutive 12-month period as provided in section 23(1). This rule applies whether the NED is an ordinary resident of the Republic or not. An NED may also choose to register for VAT voluntarily under section 23(3) if the value of such fees does not exceed the compulsory VAT registration threshold prescribed in section 23(1).”
BGR 40
BGR 40 contains the following ruling:
“For purposes of determining whether an NED receives “remuneration”, it is accepted that such NED is not a common law employee. It is further accepted that no control or supervision is exercised over the manner in which such NED performs his or her duties, or the NED’s hours of work.
The director’s fees received by an NED for services rendered as an NED on a company’s board, are thus not “remuneration”, and are not subject to the deduction of employees’ tax.
It is further accepted that because the amounts received by an NED are not “remuneration”, the prohibition under section 23(m) will not apply in respect of such fees.
This ruling does not apply in respect of non-resident NEDs.”
Press release
With respect to these 2 BGRs SARS issued the following press release on February 14, 2017:
“NON-EXECUTIVE DIRECTORS OF COMPANIES MUST REGISTER FOR VAT
Pretoria, Tuesday 14 February 2016 - The South African Revenue Service (SARS) has confirmed the interpretation of the VAT law that requires non-executive directors (NEDs) of companies to register for and charge VAT in respect of any directors fees earned for services rendered as a non-executive director.
Two binding general rulings – BGR Nos 40 and 41 were issued on 10 February 2017 confirming the interpretation as of 1 June 2017.
The value of the fees must, however, exceed the compulsory VAT registration threshold of R1 million in any 12-month consecutive period but NEDs can voluntarily register for VAT as well.
Previously NEDs were subject to employees’ tax (PAYE) because the director’s fees received for services rendered were considered remuneration. However, due to amendments made in 2007 to the exclusions to the definition of “remuneration” in the Fourth Schedule to the Income Tax Act No. 58 of 1962 (the Act), there was uncertainty as to whether the amounts payable to an NED were subject to the deduction of PAYE.
After consultation, review and application of the law it has been confirmed that an NED is regarded as an “independent contractor” and any directors fees paid or payable to an NED for services rendered in that capacity are not regarded as remuneration.
NEDs receiving directors fees exceeding the compulsory registration threshold are required to register as VAT vendors from 1 June 2017. However, NEDs will not be required to account for VAT in respect of directors fees received prior to this date, provided such NED was subject to PAYE.
SARS would like to encourage those NEDs already registered for another tax type to register for VAT via SARS eFiling at www.sarsefiling.co.za or to visit their nearest SARS branch.
For more information NEDs and other parties concerned may contact This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it..”
Click here to be forwarded to the full text of BGR No. 41 from February 10, 2017 as available on the website of SARS, which will open in a new window.
Click here to be forwarded to the full text of BGR No. 40 from February 10, 2017 as available on the website of SARS, which will open in a new window.
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