Sars issues rulings on non-executive directors' fees

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In its rulings, Sars considers a NED to be a director who is not involved in the daily management or operation of a company but simply attends, provides objective judgment, and votes at board meetings. When considering whether amounts paid to NEDs are remuneration, Sars accepts that the nature of the duties of an NED mean that they are not common- law employees.

When PAYE applies

A NED’s fees would only be subject to PAYE if the requirements in the “premises” and the “control or supervision” tests are both met. These tests require:

• the services to be performed mainly (more than 50%) at the premises of the client; and
• control or supervision must be exercised over, either the manner in which the duties must be performed, or the hours of work.

Payments made to a NED for time spent in preparation for board meetings (such as an agreement to bill for a specified number of hours before each meeting) does not create a form of control or supervision over the hours of the NED.

If a NED is not deemed to be an employee, and is not a common-law employee, the amounts payable will not be remuneration and not be subject to a PAYE deduction.

Section 23(m)

Section 23(m) of the Income Tax Act prohibits the deduction of certain expenses for employees and office holders. The two important triggers for section 23(m) to apply are:

• the expenditure, loss or allowance must relate to an office held; and
• the taxpayer must derive “remuneration” in respect of that office.

Directors are holders of an office and therefore if they receive remuneration, section 23(m) will operate to prohibit certain deductions. However, if they are NEDs, who do not receive remuneration, section 23(m) will not apply and the ordinary rules for the deductibility of expenditure, losses or allowances will apply.

Independent contractors

As a NED is an independent contractor and not an employee, it follows that VAT should be charged on directors’ fees. The NED needs to register for VAT, if the fees exceed the threshold of R1m in any consecutive 12-month period. A director could also choose to register for VAT voluntarily if such fees do not reach this threshold.