Effective for years of assessment commencing on/after 1 March 2019, directors of private companies are no longer specifically included as employees for purposes of the Fourth Schedule to the Income Tax Act 58 (1962).
The Legislator is of the opinion that the determination of whether or not a director is an employee for employees’ tax purposes, should be based on general principles. Therefore, where a director renders executive-type services and is remunerated for these services, the director should be regarded as an employee. On the other hand, where a director merely renders non-executive-type services, the director should typically not be regarded as an employee.
Effectively, the determination of the employee status of a director of a private company has now been aligned with the methodology applicable to directors of public companies.
How to determine if a director should still be treated as an employee
A director will not be regarded as an employee for employees’ tax purposes, if the director carries on an independent trade. However, even where a director appears to carry on a trade independently, such director will be regarded as an employee for employees’ tax purposes where:
- More than 50% of the director’s services are performed at the premises of the relevant company (the “Premises Test”); and
- The director’s services are subject to the control or supervision of any person as to the manner in which his/her duties are to be performed or as to his/her hours of work (the “Control or Supervision Test”).
If both the Premises Test and the Control or Supervision Test are met, then the affected amount paid to the director will be regarded as remuneration for employees’ tax purposes.
According to SARS Binding General Ruling 40, director’s fees paid to non-executive directors will not be regarded as remuneration, as the nature of the trade carried on by a non-executive director is usually independent.
The value-added tax implications
In terms of the Value-Added Tax Act No. 89 (1991), a common law employee that received remuneration does not carry on an enterprise for value-added tax purposes. However, where the employee carries on an enterprise independent of the employer, the services supplied by the director will still be regarded as an enterprise for value-added tax purposes.
Where a director carries on a trade independently and the value of his/her fees exceed R1 million within a 12-month period, such director will be required to register for value-added tax.
According to SARS Binding General Ruling 41, a non-executive director will generally not be a common law employee as there is usually no contract of employment between the relevant company and the director. This means that non-executive directors should be mindful of the value of director’s fees received, as they could be required to register for value-added tax.