By Joon Chong, Nina Keyser, Carryn Alexander and Nabeelah Edwards
Where fixed monthly payments made up less than 75% of private company director remuneration, paragraph 11C of the Fourth Schedule to the Income Tax Act 58 of 1962 used to apply to require payment of employees’ tax for such directors on a monthly basis in respect of “deemed remuneration”. This “deemed remuneration” was a notional amount determined in terms of a formula in paragraph 11C. Paragraph 11C was repealed with effect from 1 March 2017.
The draft 2018 Tax Administration Laws Amendment Bill, which was released for comment on 16 July 2018, now proposes to remove directors of private companies from the definition of “employee” in the Fourth Schedule (thus appear to be exempting directors of private companies from employees’ tax) with effect from 1 March 2019, in order to be in line with the repeal of paragraph 11C.
We note that the existing section 7B on the timing of incurral and accrual of variable remuneration applies to the variable remuneration payable to the directors of private companies. The variable remuneration of a director is thus deemed to accrue to the director on the date on which it is actually paid to the director, which shall be the same date on which the amount of remuneration becomes claimable as expenditure by the private company. Section 7B effectively deals with the mischief at which paragraph 11C was aimed and is the same regime that has applied to ordinary employees all along. The object of the proposed amendment is therefore unclear.
Further, paragraph (a) of the definition of “employee” defines employee as “any person (other than a company)who receives any remuneration or to whom any remuneration accrues”. Paragraph (a) is broad enough to include any director of a private company who receives remuneration. Consequently, the employer would still be obligated to deduct or withhold employees’ tax in terms of the Fourth Schedule from remuneration paid to directors of private companies.
The Draft Response Document on Taxation Laws Amendment Bill, 2018 and Tax Administration Laws Amendment Bill, 2018 which was published by National Treasury and SARS on 12 September 2018, clarified that the removal of directors of private companies from the definition of “employee” was intended to apply only to directors who do not receive remuneration. The proposed amendment would have the effect that no PAYE is to be withheld when such directors receive amounts which do not fall within the ambit of “remuneration”, for example, amounts paid to non-executive directors. Remuneration paid to directors of private companies would still be subject to employees’ tax. Where such remuneration is in the nature of variable remuneration, section 7B would still apply to determine the date of incurral and accrual of the amounts.