At Last, Clarity on Tax Implications for Non-Executive Directors

For many years, there has been uncertainty on how to treat fees paid to Non-Executive Directors (“NED”) in relation to value –added tax (“VAT”) and pay as you earn (“PAYE”). Following the issuing of two binding general rulings by SARS, certainty is now created for taxpayers.
 
On 10 February, SARS issued binding general ruling 40 (remuneration paid to non-executive directors) and 41 (VAT treatment on non-executive directors). 
 
These rulings confirm that:

  • Fees paid to a NED will not be regarded as remuneration as defined and will therefore not be subject to PAYE;
  • NED are not considered employees under common law. As a result, NEDs are considered to be independent contractors and subject to VAT if they meet the VAT registration requirements;
  • As NEDs are considered to be independent contractors, they will be allowed to deduct expenses incurred in the production of income.


What is important to note is that the binding general ruling 40 does not apply to non-resident NEDs. There could therefore be cases that a non-resident NED could be subject to PAYE on their fees received and also be required to be registered for VAT if they exceed the R1million compulsory threshold.
 
The rulings are effective from 1 June 2017 onwards, but are silent on the treatment prior to that date. It is important for any NED who has received directors’ fees that have exceeded the R1million threshold that has neither accounted for VAT or PAYE for periods prior to 1 June 2017, to request advice on their tax position.