A succinct discussion of selected topical, legal matters
THE TAXATION OF NON-EXECUTIVE DIRECTORS
The lack of clarity (and logic) regarding whether (or not) the fees of a non-executive director are subject to PAYE and/or VAT arises from the absence of:
– a coherent legislative definition of what is (and is not) a non-executive director; and
– synchronisation between the Income Tax Act and the Value-Added Tax Act.
Ideally, Parliament, in which the Constitution vests national legislative authority, should resolve the problem by duly amending the tax legislation. But Parliament seems to have other priorities.
On 10 February 2017, SARS issued two “binding general rulings” regarding the PAYE and VAT treatment of non-executive directors’ fees, to ‘apply’ from 1 June 2017.
SARS defines a non-executive director as: “a director who is not involved in the daily management or operations of a company, but simply attends, provides objective judgment, and votes at board meetings“. As far as “corporate speak” goes, such definition may be sufficient, but for something as technical as tax legislation, it is inadequate.
According to the PAYE ruling, a non-executive director will, by and large, not be subject to PAYE. But of course there could be facts specific exceptions.
According to the VAT ruling, a non-executive director will, by and large, be liable to register as a VAT vendor, if in any consecutive period of 12 months his or her turnover exceeds R1 million.
The rulings envisage that some unfortunate few non-executive directors may be subject to PAYE and will also be liable to register as VAT vendors.
In law, a SARS ‘binding’ general ruling is essentially a published SARS’ non-binding view on the application or interpretation of tax law relating to stated facts. In practice, SARS seems to apply its publications as ‘super legislation’ that ‘trumps’ the Constitution, Parliament, and the Courts. And, regrettably, SARS’ record as a ‘legislator’ is not that good.
Non-executive directors (and their companies) who may be affected by the rulings ought to obtain independent legal advice.