SARS recently published two Binding General Rulings (number 40 and 41) that have put the tax treatment of non-executive director’s fees to bed, which will come in effect on 1 June 2017.
As it stands, a Non-Executive Director (NED) earning more than R1 million in director’s fees in any 12-month period should register for VAT.
What will happen when the Rulings become effective?
BRG40: Director fees paid to a Non-Executive Director (NED) do not qualify as remuneration and there is no employees’ tax withholding obligation for the employer.
- The NED may still voluntarily request the employer to withhold employees’ tax.
- The disallowance of deductions in terms of section 23(m) will not apply to director fees paid to NEDs.
- BRG40 does not apply to Non-South African tax resident NEDs because they cannot qualify as independent contractors by virtue of their tax residence status.
BRG41: Non-Executive Directors (NEDs) must register for VAT and account for VAT on the fees charged to the company. A non-resident Non-Executive Director (NED) may also be liable to register for Vat, if the services are physically performed in South Africa on a continuous or regular basis, or if the services are conducted on a continuous or regular basis through a fixed or permanent place in South Africa, this will place an additional admin burden on the non-resident Non-Executive Director (NED).
- Non-Executive Directors that earns less than the VAT threshold of R1 Million in any 12-month period may voluntarily register for VAT;
- VAT registered Non-Executive Directors (NEDs) can claim input tax on any taxable expense incurred in respect of goods or services utilised or consumed in the course of rendering the service.
What is the role of Non-Executive Directors (NEDs)
Independence is central to the NED’s role and is interpreted to mean “the absence of undue influence and bias”. Since the Income Tax Act, No 58 of 1962, does not define a Non-Executive Director (NED), SARS shares the view of the King III report in Binding General Ruling 40 (BGR40).
The King III Report on Governance for South Africa states that the crucial elements of an NED’s role are that an NED –
- must provide objective judgement independent of management of a company;
- must not be involved in the management of the company; and
- is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.
Feel free to contact us should you require any assistance in this regard.