VAT rule to hurt non-executive directors

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Published Feb 15, 2017

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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

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