SARS Interpretation Note 35 Issue 5: Employees' tax: Personal service providers and labour brokers (source: https://www.sars.gov.za/legal-in-35-employees-tax-personal-service-providers-and-labour-brokers/)
INTERPRETATION NOTE 35 (ISSUE 5)
DATE: 14 March 2023
ACT : INCOME TAX ACT 58 OF 1962
SECTION : PARAGRAPHS 1, 2(1A) AND 2(5) OF THE FOURTH SCHEDULE AND
SECTION 23(k)
SUBJECT : EMPLOYEES’ TAX: PERSONAL SERVICE PROVIDERS AND LABOUR
BROKERS
Preamble
In this Note, unless the context indicates otherwise –
• “LRA” means the Labour Relations Act 66 of 1995; and
• “paragraph” means a paragraph of the Fourth Schedule to the Act;
• “Schedule” means a schedule to the Act;
• “section” means a section of the Act;
• “the Act” means the Income Tax Act 58 of 1962; and
• any other word or expression bears the meaning ascribed to it in the Act.
All interpretation notes referred to in this Note are available on the SARS website at
should be consulted.
1. Purpose
This Note discusses the employees’ tax implications and the deductions that may be
claimed by a personal service provider or a labour broker.
2. Background
Previously, it was a popular tax-saving method for employees to offer their services to
their employers through the medium of private companies, close corporations or trusts,
or by utilising labour brokers, none of which could be classified as “employees” as
defined in paragraph 1. The use of labels such as “independent contractor” and
“service company”, and the perception that these were acceptable means of avoiding
the deduction of employees’ tax, necessitated the development of stronger anti-
avoidance measures for employees’ tax purposes. In order to discourage the use of
corporate entities, trusts or labour brokers as intermediaries to provide personal
services to a client that are, in essence, services provided under a contract of
employment, the concepts of “personal service provider” 1 and “labour broker” 2 were
included in the definitions in paragraph 1. Both were also included as employees in the
definition of “employee” in paragraph 1. This required that the remuneration paid or
Added by section 66(1)(f) of Act 60 of 2008.
Added by section 44(1)(c) of Act 101 of 1990.
payable to such personal service provider or labour broker 3 to be subject to the
deduction or withholding of employees’ tax. Deductions applicable to personal service
providers and labour brokers without a certificate of exemption were simultaneously
narrowed.
Over the years, various amendments have refined the scope of these provisions.
This Note includes the latest amendments and amendments to the relevant rates of
tax attributable to personal service providers and labour brokers.
3. The law
The relevant provisions of the law are quoted in Annexure A.
4. Application of the law
The deduction or withholding of employees’ tax 4 is dependent on three elements, all
of which are defined terms, 5 namely, an “employer”, an “employee” and
“remuneration”. Employees’ tax cannot be charged if one or more of these three
elements are not present. If, for example, an “employee” is removed from the equation,
then the person paying the remuneration has no obligation to deduct employees’ tax.
Similarly, if the term “remuneration” is removed from the equation, no employees’ tax
liability arises.
For the purpose of ensuring the correct deduction or withholding of employees’ tax by
an employer, it is crucial, therefore, to correctly classify a company, close corporation
or a natural person providing labour brokering services, as a “personal service
provider” or “labour broker”.
4.1 Classification of employees
4.1.1 Personal service provider
Any company, close corporation or trust that meets the definition of “personal service
provider” is an “employee”, as defined in paragraph 1; and if it is in receipt of
“remuneration” as defined in paragraph 1, is subject to the deduction or withholding of
employees’ tax.
In determining whether a company, close corporation or trust is a “personal service
provider” and whether employees’ tax must be deducted or withheld from amounts
paid or payable to them, the following tests should be performed:
Other than a labour broker that has been issued with a certificate of exemption – see the discussion
in 4.1.2.
Under paragraph 2(1).
In paragraph 1.
(a) Determine whether some or all of the receipts of the company, close
corporation or trust consist of “remuneration”
If the receipts do not include “remuneration” as defined, no employees’ tax is
deductible. The definition of “remuneration” excludes payments made to independent
contractors who are natural persons or trusts, but the exclusion does not apply to
personal service providers. 6 There is no need, as a result, to determine whether the
personal service provider is an “independent contractor” for purposes of the Fourth
Schedule. If remuneration is paid or payable, then proceed to the next test.
(b) Determine whether the service is rendered personally by any person who
is a connected person in relation to the company, close corporation or
trust
The term “connected person” is defined in section 1(1) and must be applied
accordingly. 7 The word “service” includes the provisions of a person to render a service
or work for a client (including, for example, companies, close corporations and trusts
operating as labour brokers). If the service is rendered personally by any person who
is a connected person in relation to the company, close corporation or trust, then
proceed to the next test below. If this is not the case, the company, close corporation
or trust is not a “personal service provider”, and it is not subject to the deduction or
withholding of employees’ tax.
(c) Determine whether the company, close corporation or trust employs (or
is likely to employ) three or more full-time employees throughout the
particular year of assessment who are, on a full-time basis, engaged in
the business of rendering the service, and who are not holders of shares
or members of the company or close corporation, nor settlors or
beneficiaries of a trust, nor connected persons in relation to such
persons
The phrase “engaged in the business…of rendering any such service” mean that
the employees must be directly involved in the service activities of the personal
service provider. Taking this into consideration, auxiliary staff such as cleaning staff
do not enable the service delivery business and, therefore, do not qualify under the
legislation for purposes of determining the “three or more full-time employees”
requirement.
It is not possible to define precisely who could be regarded as being engaged in
the business on a “full-time” basis. The facts and circumstances of each case must
be evaluated to determine whether an employee will qualify as being engaged on
a full-time basis for purposes of the exclusion.
Paragraph (ii) of the exclusions to the definition of “remuneration” in paragraph 1 do not apply to a
person who is not a resident, or to a person referred to in paragraphs (b), (c), (d) or (e) of the
definition of “employee” in paragraph 1.
See Interpretation Note 67 “Connected Persons” for a discussion on the meaning of this term.
Example 1 – Classification of a personal service provider
Facts:
X is the only member of ABC Close Corporation (the CC). X provides information
technology consulting services. The CC employs two other consultants, and an
administrative assistant who is responsible for account maintenance and customer
queries etc. All are employed on a full-time basis for the full year of assessment and
none are connected persons in relation to X.
Result:
Given that the CC employs three full-time employees for the full year of assessment,
who are not members of the CC or are not connected persons in relation to X, the CC
will not be classified as a personal service provider.
If this test is satisfied, the company, close corporation or trust is not a personal service
provider. If this test is not satisfied, then proceed to the next test below.
(d) Determine whether one (or more) of the following criteria applies:
Would the person who is personally rendering the service have been regarded as an
“employee” of the client if the service was rendered directly to the client and not through
the company, close corporation or trust?
It is necessary to determine whether the person would have been an “employee” as
defined in paragraph 1. For example, if the person would have been a person in receipt
of remuneration or to whom remuneration accrues as described in paragraph (a) of the
definition of an “employee”, the company, close corporation or trust is a “personal
service provider”. Following the example through, the test must also include a
reference to the definition of the term “remuneration” (because of the reference in
paragraph (a) to the definition of “employee”), that excludes payments made to
common law independent contractors. If the person rendering the service would have
been regarded as an independent contractor under common law, then the person
would not have been regarded as an “employee” in the absence of the company, close
corporation or trust. 8
Must the person who is personally rendering the service, or the company, close
corporation or trust, perform the duties mainly at the premises of the client, and if so,
is that person subject to the control or supervision of the client as to the manner in
which the duties are performed or are to be performed?
The test is the same as the one used in paragraph (ii) of the exclusions to the definition
of “remuneration” in paragraph 1. If the services are rendered mainly at the premises
of the client and the client supervises or controls the activities of the person rendering
the service or the activities of the company, close corporation or trust, then the test is
positive.
Unless the statutory test in the proviso to paragraph (ii) of the exclusions from the definition of
“remuneration” in paragraph 1 applies. See Interpretation Note 17 “Employees' Tax: Independent
Contractors” for further information.
Does more than 80% of the income of the company, close corporation or trust from
services rendered consist (or is likely to consist) of amounts received from any one
client, or from any associated institution in relation to the client?
If more than 80% of the income of the company, close corporation or trust consists (or
is likely to consist) of income from only one client, the test is positive. The reference to
“income” in the test is a reference to “income” as defined in section 1(1). It is necessary
to isolate the income received for the services rendered from the income received for
other activities of the company, close corporation or trust.
If any of the three criteria under (d) above apply, the test will be positive.
Example 2 – Determination of income (more than 80%) derived from services
rendered
Facts:
Company A is in receipt of R100 000 for the year of assessment, of which R90 000 is
“income” as defined in section 1(1). R50 000 of the R90 000 represents income for
services rendered. Of the R50 000, R42 000 was earned from services rendered to
one client.
Result:
More than 80% of Company A’s income (R42 000 of R50 000, that is, 84%) was
earned from services rendered to one client. The test is therefore positive for the
company.
4.1.2 Labour broker
As of 1 March 2009, a labour broker 9 is any natural person who conducts or carries
on any business whereby such person, for reward, provides a client with his or her own
employees to perform work for the client or procures workers for a client, but does not
personally provide the services required by the client. A company, close corporation
or trust that provides such services is not classified as a labour broker.
An employer is not required 10 to deduct or withhold employees’ tax from any
remuneration paid or payable by it to a labour broker who produces a valid certificate
of exemption 11 (known as an IRP 30) issued by the Commissioner. The certificate of
exemption must be issued by SARS if –
• the labour broker conducts an independent trade and is a provisional
taxpayer; 12
• the labour broker is registered as an employer for employees’ tax purposes; 13
and
• the labour broker has submitted 14 all returns required to be submitted under the
Act. 15
As defined in paragraph 1.
Paragraph 2(5)(c).
Under paragraph 2(5)(a).
Paragraph 2(5)(a)(i).
Paragraph 2(5)(a)(ii).
Unless an extension has been granted by the Commissioner.
Paragraph 2(5)(a)(iii).
A certificate of exemption may not be granted when – 16
(a) more than 80% of the gross income of the labour broker during the year of
assessment consists of, or is likely to consist of, amounts received from any one
client of the labour broker or from an associated institution 17 of the client, unless
the labour broker employs three or more full-time employees who are on a full-time
basis engaged in the business of that labour broker and who are not connected
persons in relation to the labour broker. The rule relating to the three or more
employees does not apply to persons engaged in other activities of the labour
broker – the employees must be directly involved in the labour broking activities of
the labour broker to provide or procure persons for clients of that labour broker; or
(b) the labour broker provides to any of its clients the services of another labour broker.
This requirement does, however, not preclude a labour broker from acquiring an
employee from another labour broker for purposes of providing the employee to a
client. For example, if Labour Broker A is requested by a client to provide a
particular type of employee that it does not possess, and Labour Broker A acquires
this employee from Labour Broker B to become an employee of Labour Broker A,
and forwards the employee to the client in the normal way, then Labour Broker A
would not be penalised by this requirement because the employee is provided to
the client as an employee of Labour Broker A. This requirement is applicable when,
for example, a client is permitted to hire an employee of Labour Broker B through
Labour Broker A; or
(c) the labour broker is contractually obliged to provide the services of a specified
employee to the client. This requirement is applicable when, for example, the client
prescribed or required Employee A to render the service. This requirement is not
applicable if an employee of the labour broker was chosen by name as a result of
a bona fide selection process based on the requirements of the client, and specified
as such in the eventual contractual agreement.
Example 3 – Determination of a labour broker
Facts:
A client requires an information technology auditor. Labour Broker A conducts a
selection process to determine the most suitable employee to render services to
the client. B is selected by Labour Broker A and, in the contract between the client
and Labour Broker A, it is specified that B will render services to the client.
Result:
In this case the selection process was not influenced by the client and the exclusion
is therefore not applicable.
The requirements for granting a certificate of exemption still include the requirement
that the labour broker be conducting an independent trade. From a practical point of
view, however, it is easier to test the labour broker against the requirements listed
above before attempting to classify the labour broker as either dependent or
independent.
Since 7 February 2007, in terms of the proviso to paragraph 2(5)(a).
As defined in paragraph 1 of the Seventh Schedule.
Labour brokers and their employees
Many labour brokers and companies performing labour broking activities contend that
they merely act as agents for their clients, and the ultimate responsibility for the
deduction or withholding, and paying over to SARS, of employees’ tax, skills
development levy (SDL) 18 and Unemployment Insurance Fund contributions (UIF) 19
vests in the labour broker’s client. Relying on the authority of NUMSA v Assign
Services, 20 it is argued that under the LRA the client is in certain circumstances
deemed to become the employer of the employees after the expiry of a period of three
months.
NUMSA v Assign Services dealt with the correct interpretation of section 198A(3)(b) of
the LRA. That section provides as follows:
“(3) For the purposes of this Act, an employee—
(b) not performing such temporary service for the client is—
(i) deemed to be the employee of that client and the client is deemed
to be the employer; and
(ii) subject to the provisions of section 198B, employed on an
indefinite basis by the client.”
(Emphasis added)
The deeming rule under the LRA thus applies only for the purposes of the LRA. This is
supported by the reasoning of Tlaletsi DJP in NUMSA v Assign Services: 21
“In order to ascertain who the employer of the placed worker in that position for the
purposes of the LRA is, one is enjoined to resort to the provisions of s198A (3)(b). Such
a worker is therefore deemed to be the employee of the client and the client deemed
to be the employer of the worker.” 22
(Emphasis added)
Once the requirements of the LRA are triggered in this regard, the employees are
deemed to become employees of the client for purpose of the LRA, and enjoy the
various protections granted by that statute, such as for example, the right to fair labour
practices, protection against unfair dismissals, the right to collective bargaining etc.
However, the position under the Act is determined by a different test to that under the
LRA. For purposes of employees’ tax, SDL and UIF, the test is whether the amounts
paid by the labour broker or company performing labour broking activities constitute
remuneration. As the amounts in question will undoubtedly constitute paragraph (c),
(d) or (i) of “gross income”, the only question is whether the amounts qualify to be
excluded from remuneration under sub-paragraph (ii) of the exclusions from the
definition of remuneration (the so-called independent trade exclusion).
Under the Skills Development Levies Act 9 of 1999.
Under the Unemployment Insurance Contributions Act 4 of 2002.
NUMSA v Assign Services and Others [2017] 10 BLLR 1008 (LAC).
Paragraph 37 of the judgment.
The Labour Appeal Court’s decision was confirmed by the Constitutional Court in Assign Services
(Pty) Limited v National Union of Metalworkers of South Africa and Others 2018 (5) SA 323 (CC);
2018 (11) BCLR 1309 (CC).
The requirements for exclusion are discussed in detail in Interpretation Note 17
“Employees’ tax: Independent Contractors”. For present purposes, it is sufficient to
state that the employees are required to be independent of both –
(i) the person by whom the amount is paid or payable; and
(ii) the person to whom the services are rendered or will be rendered.
This will not be the case in labour broking scenarios, and the labour broker or company
conducting labour broking activities will be obliged to deduct or withhold employees’
tax, SDL and UIF.
4.1.3 Decision chart
The legislation relating to the definition of “employee” in paragraph 1 is illustrated by
the chart in Annexure B. The process flow to determine whether an entity is a personal
service provider is illustrated by the chart in Annexure C.
4.2 The effect of the law
Certain consequences flow from being classified as a personal service provider or a
labour broker without a certificate of exemption. These are explained in more detail
below.
4.2.1 Applicable tax rates
Personal service providers, as with all other companies and close corporations, pay
tax on taxable income at the rate of 28% 23, 24 and trusts pay tax at the rate of 45%. 25
A labour broker will not be granted a certificate of exemption if any one of the
prohibitions mentioned in 4.1.2 applies. A labour broker without a certificate of
exemption is subject to income tax at the rates applicable to individuals. 26
4.2.2 Deduction of expenses
Section 23(k) limits the deductions available to personal service providers and labour
brokers without a certificate of exemption.
Both personal service providers and labour brokers without a certificate of exemption
may claim amounts paid to employees for services rendered, which amounts are taken
into account in the determination of the taxable income of the employee. The phrase
“taken into account” does not mean that such amount must be included in taxable
income, only considered. For example, a labour broker without a certificate of
exemption could pay a travel allowance to an employee. The full travel allowance might
not be included in the employee’s taxable income, as the employee may claim travel
Paragraph 3(a) of the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill,
in force under section 5(2) following the national annual budget announced by the Minister of
Finance on 23 February 2022.
For companies with a year of assessment ending on or after 1 March 2023, the tax rate is 27% –
see paragraph 4(a) of the draft Rates and Monetary Amounts and Amendment of Revenue Laws
Bill, in force under section 5(2) following the national annual budget announced by the Minister of
Finance on 23 February 2022.
Paragraph 2 of the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, in
force under section 5(2) following the national annual budget announced by the Minister of Finance
on 23 February 2022.
Paragraph 1 of the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, in
force under section 5(2) following the national annual budget announced by the Minister of Finance
on 23 February 2022.
expenses. 27 However, subject to all other requirements for deductibility being met, the
full travel allowances will be deductible by the labour broker.
The opening words of section 23(k) prohibit a personal service provider or a labour
broker without a certificate of exemption from deducting any expense incurred, other
than those specifically permitted by section 23(k). For the reasons that follow, a wear-
and-tear allowance claimable under section 11(e) is not an expense incurred, and so
is not prohibited from being deducted by section 23(k).
Expense
An “expense” may be defined as a financial cost or outlay 28 and is “the money that
something costs you or that you need to spend in order to do something”. 29
An “expense” as contemplated in the introductory words of section 23(k), therefore,
entails some form of spending of money by the personal service provider or labour
broker.
Section 11(e) entitles a taxpayer to an allowance which is based on the value of the
asset and does not arise from expenditure in the form of the spending of money.
Although a taxpayer would originally have expended money to purchase the capital
asset on which the wear-and-tear allowance is claimed, that is not what is being
claimed under section 11(e). The section 11(e) allowance is a notional amount
representing the value by which an asset has diminished during a year of assessment
due to depreciation or wear-and-tear. It has no relation to what was actually spent,
other than to determine the value of the asset for purposes of quantifying the
allowance.
Incurred
An expense is “incurred” when there is an “undertaking of an obligation to pay or (which
amounts to the same thing) the actual incurring of a liability”. 30 Thus, for an expense
to be prohibited from being deducted under section 23(k), the personal service provider
or labour broker must have had a legal obligation to part with a sum of money or
property.
A wear-and tear-allowance claimed under section 11(e) does not entail a taxpayer
undertaking an obligation to pay anything, or to incur any actual liability. An obligation
may have arisen when the original asset was acquired, but the cost that was attached
to that original obligation is not what is being claimed under section 11(e). A wear-and-
tear allowance is what is claimed, which is a notional amount based on the asset’s
value. Nothing is incurred when claiming a wear-and-tear allowance.
See Interpretation Note 14 “Allowances, Advances and Reimbursements” for more detail.
Definition of “expense” in the Merriam-Webster Dictionary. www.merriam-webster.com/
dictionary/expense [Accessed 13 March 2023].
Definition of “expense” in the Collins Dictionary Online. www.collinsdictionary.com/dictionary/
english/expense [Accessed 13 March 2023].
Ackermans Ltd and another v Commissioner for the South African Revenue Service and another
2011 (1) SA 1 (SCA) in paragraph 8.
Accordingly, a wear-and-tear allowance under section 11(e) is not an “expense
incurred” by a personal service provider or labour broker, as contemplated in
section 23(k), 31 and is not prohibited. 32
Other expenses not prohibited for personal service providers
The additional expenses that may be claimed as a deduction by a personal service
provider are limited to the following:
• Legal expenses 33
• Bad debts 34
• Contributions to a pension fund, provident fund or retirement annuity fund for
the benefit of employees 35
• Any amount received or accrued for services rendered or by virtue of
employment or the holding of any office that was included in the taxable income
of the personal service provider and was refunded 36
• Any amount contemplated in paragraph (cA) of the definition of “gross income”
in section 1(1) (that is, any restraint of trade payment) received by or accrued
to the labour broker that was refunded 37
• Expenses for premises, finance charges, insurance, repairs and fuel and
maintenance cost for assets if the premises or assets are used wholly and
exclusively for the purposes of trade 38
Under section 23(k), any expenses incurred by a personal service provider or a labour
broker without a certificate of exemption, other than the expenses mentioned above,
are not permitted as deductions for purposes of calculating taxable income. The Act
does not provide for the apportionment of deductions if a personal service provider or
labour broker is in receipt of more than one type of income. The provisions of
section 23(k) will apply if a company, close corporation or trust falls within the definition
of personal service provider, or a natural person falls within the definition of “labour
broker” and does not have a certificate of exemption.
See also SARS and National Treasury: Responses to Written Representations by Organisations to
the Portfolio Committee on Finance on the Draft the Revenue Laws Amendment Bill, 2006 dated
31 October 2006 at paragraph 3.67 on page 40, where this objective of section 23(k) is confirmed.
See Interpretation Note 47 (Issue 5) “Wear-and-Tear or Depreciation Allowance” for more
information on the remaining requirements that must be satisfied before a section 11(e) allowance
may be claimed.
Under section 11(c).
Under section 11(i).
Under section 11(l).
Under section 11(nA).
Under section 11(nB).
Under section 11(a).
4.2.3 Employees’ tax
A personal service provider and a labour are employees for purposes of employees’
tax, and payments to them are subject to the deduction or withholding of employees’
tax. Employees’ tax must be deducted at the following rates:
• Personal service providers that are companies: 28% 39
• Personal service providers that are trusts: 45%
• Labour brokers: the tax tables applicable to natural persons
It may only become apparent during the year of assessment that a personal service
provider or a labour broker will earn more than 80% of its income from one source. To
avoid the situation where an employer did not deduct employees’ tax when it should
have done, employers must ensure at the outset that this situation is anticipated and
that the applicable employees’ tax is deducted.
In instances when the first two tests in 4.1.1(d) do not apply and a company, close
corporation or trust provides a client with an affidavit or solemn declaration 40 stating
that it will not derive more than 80% of its income from one client, the client may rely
on the affidavit or solemn declaration, provided the client relies on it in good faith. If it
later emerges that the company, close corporation or trust is, in fact, a personal service
provider, then employees’ tax will not be recoverable from the client. However, the
prohibition of deductions under section 23(k) will apply as far as that personal service
provider is concerned.
The employees’ tax that must be deducted or withheld from payments to personal
service providers may result in a tax credit that exceeds the personal service provider’s
final actual net tax liability, due to the expenses, deductions or contributions listed
above that could be claimed as deductions. Paragraph 11(a) therefore provides that a
personal service provider may apply to SARS for a tax directive to allow for a rate of
employees’ tax that will more closely match the final tax liability.
4.2.4 Additional considerations
A personal service provider does not qualify as a “small business corporation” 41 and
will thus not qualify for the lower tax rates applicable to small business corporations.
Both a personal service provider and a labour broker without a certificate of exemption
do not qualify as a micro business 42 for the purposes of turnover tax payable by micro
businesses.
For companies with a year of assessment ending on or after 1 March 2023, the tax rate is 27% –
see paragraph 4(a) of the draft Rates and Monetary Amounts and Amendment of Revenue Laws
Bill, in force under section 5(2) following the national annual budget announced by the Minister of
Finance on 23 February 2022.
Under paragraph 2(1A).
As defined in section 12E.
As defined in paragraph 1 of the Sixth Schedule.
5. Conclusion
The term “personal service provider” is only applicable to a “company” and “trust” as
defined in section 1(1). This means that the term is not applicable to a natural person.
The effect of the legislation can therefore be eliminated by rendering the services
through a natural person directly to the client. By rendering the services directly as a
natural person, the normal rules relating to the status of an independent contractor or
common law employee, as explained in previous guidelines issued by SARS, become
relevant.
Not all companies are affected by the legislation relating to a personal service provider.
Only companies that fall within the definition of a “personal service provider” are
affected by the definition, and also only when those that fall within the definition are in
receipt of “remuneration” as defined.
It is recommended that all users of services (employer or client) from potential labour
brokers and personal service providers should have policies and systems in place to
correctly identify and withhold employees’ tax from these entities and individuals.
A possible solution would be a questionnaire or an affidavit (including an affidavit or
solemn declaration for a personal service provider indicating that not more than 80%
of its income is derived or is likely to be derived from one client) that could be used by
the service-user at the start of the engagement or contract and regularly thereafter.
This will enable the client to determine whether employees’ tax should be deducted or
not.
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 7 March 2006
Date of 2nd issue : 11 December 2007
Date of 3rd issue : 16 March 2010
Date of 4th issue : 26 March 2018
Annexure A – The law
Paragraph 1 – Definitions
“employee” means—
(a) any person (other than a company) who receives any remuneration or to whom any
remuneration accrues;
(b) any person who receives any remuneration or to whom any remuneration accrues by
reason of any services rendered by such person to or on behalf of a labour broker;
(c) any labour broker;
(d) any person or class or category of person whom the Minister of Finance by notice in the
Gazette declares to be an employee for the purposes of this definition;
(e) any personal service provider; or
(f) ……
(g) any director of a private company who is not otherwise included in terms of
paragraph (a);
“labour broker” means any natural person who conducts or carries on any business whereby
such person for reward provides a client of such business with other persons to render a service or
perform work for such client, or procures such other persons for the client, for which services or work
such other persons are remunerated by such person;
“personal service provider” means any company or trust, where any service rendered on
behalf of such company or trust to a client of such company or trust is rendered personally by any
person who is a connected person in relation to such company or trust, and—
(a) such person would be regarded as an employee of such client if such service was
rendered by such person directly to such client, other than on behalf of such company
or trust; or
(b) where those duties must be performed mainly at the premises of the client, such person
or such company or trust is subject to the control or supervision of such client as to the
manner in which the duties are performed or are to be performed in rendering such
service; or
(c) where more than 80 per cent of the income of such company or trust during the year of
assessment, from services rendered, consists of or is likely to consist of amounts
received directly or indirectly from any one client of such company or trust, or any
associated institution as defined in the Seventh Schedule to this Act, in relation to such
client,
except where such company or trust throughout the year of assessment employs three or more full-
time employees who are on a full-time basis engaged in the business of such company or trust of
rendering any such service, other than any employee who is a holder of a share in the company or
settlor or beneficiary of the trust or is a connected person in relation to such person;
Paragraph 2(1A) – Affidavit in respect of 80% rule
(1A) Notwithstanding the provisions of subparagraph (1), a person shall not be required to
deduct or withhold employees’ tax in respect of any year of assessment of a company or trust solely by
virtue of paragraph (c) of the definition of “personal service provider” where the company or trust has in
respect of such year of assessment provided that person with an affidavit or solemn declaration stating
that the relevant paragraph does not apply and that person relied on that affidavit or declaration in good
faith.
Paragraph 2(5) – Certificate of exemption for a labour broker
(5)(a) The Commissioner shall on application made to him by any person who is a labour
broker or who is an employee by reason of the provisions of paragraph (d) of the definition of "employee"
in paragraph 1, issue to such person a certificate of exemption if—
(i) such person carries on an independent trade and is registered as a provisional taxpayer
under the provisions of paragraph 17;
(ii) in the case of any such labour broker, he is registered as an employer under the
provisions of paragraph 15; and
(iii) such person has, subject to any extension granted by the Commissioner, submitted all
such returns as are required to be submitted by him under this Act:
Provided that the Commissioner shall not issue a certificate of exemption if—
(aa) more than 80 per cent of the gross income of such person during the year of assessment
consists of, or is likely to consist of, an amount or amounts received from any one client
of such person, or any associated institution as defined in the Seventh Schedule to this
Act in relation to such client, unless that person is a labour broker who throughout the
year of assessment employs three or more full-time employees—
(A) who are on a full-time basis engaged in the business of that labour broker
of providing persons to or procuring persons for clients of that labour broker;
and
(B) who are not connected persons in relation to that labour broker;
(bb) such labour broker provides to any of its clients the services of any other labour broker;
or
(cc) such labour broker is contractually obliged to provide a specified employee of such
labour broker to render any service to such client.
(b) The certificate of exemption referred to in item (a) shall be issued in such form as the
Commissioner may decide and shall be valid for such period as the Commissioner may indicate
thereon.
(c) An employer shall not be required to deduct or withhold employees’ tax from any
remuneration paid or payable by him to any person who produces to the employer a valid certificate of
exemption issued by the Commissioner under item (a).
Section 23(k) – Limitation of allowable deductions
23. Deductions not allowed in determination of taxable income.—No deductions shall in
any case be made in respect of the following matters, namely—
(k) any expense incurred by—
(i) a labour broker as defined in the Fourth Schedule, other than a labour broker in
respect of which a certificate of exemption has been issued in terms of
paragraph 2 (5) of the said Schedule; or
(ii) a personal service provider as defined in the said Schedule,
other than any expense which constitutes an amount paid or payable to any employee
of such labour broker, or personal service provider for services rendered by such
employee, which is or will be taken into account in the determination of the taxable
income of such employee and, in the case of such personal service provider, any
expense, deduction or contribution contemplated in paragraphs (c), (i) (l), (nA) or (nB)
of section 11, expenses in respect of premises, finance charges, insurance, repairs and
fuel and maintenance in respect of assets, if such premises or assets are used wholly
and exclusively for purposes of trade;
Annexure B – Flow diagram
Does the person fall under paragraph (a) or (b), (c), or (e) of the definition of “employee”?
The person is a natural The person receives The person is a labour The person is a personal
person receiving remuneration from a broker (type (c) service provider (type (e)
remuneration (type (a) labour broker (type (b) employee) employee)
employee) employee)
Is person a resident in RSA?
Is the labour broker
registered for employees’
and provisional tax
purposes (where required)
Yes No and are all returns up to
date?
Does the person employ
three or more unconnected No Yes
employees throughout the
year of assessment?
Any of the following present?:
Gross income more than 80% from any
one client unless three or more
Yes No unconnected persons are employed
throughout the year of assessment? or
Provides the services of any other labour
broker?; or
Are services required to be Is contractually obliged to provide
rendered mainly at the services of specified employee?
client’s premises and is
control or supervision
present as envisaged by
exclusionary paragraph (ii)
of “remuneration”? Yes No
No Yes Apply the grid*
Apply the grid* Dominant impression
that of an independent
labour broker?
Dominant impression that
of an independent
contractor?
Yes No
Yes No
Not subject to employees’
tax (issue certifcate of
exemption if compliance
requirements are met)
Not subject to
employees’ tax Subject to employees’ tax
*See Annexure C to Interpretation Note 17 – Common law dominant impression test grid
Annexure C – Personal service provider process flow
Is the person a company or
No
trust?
Yes
Is the service rendered
personally by a connected No
person?
Yes
Are 3 or more full-time
employees employed The person is not
throughout the year (other than Yes a personal service
connected person) engaged in provider
rendering the service?
No
Would the person rendering the
service be regarded as an
employee of the client if the Yes
service was rendered directly?
No
Are the duties performed mainly
at the client’s premises and is The person is a
the person subject to the control
or supervision of the client as to
Yes personal service
the manner in which the duties provider
are performed?
No
Does more than 80% of the
income of the person consist of
amounts received from any one
client or associated institution? Yes
(This can be determined by
means of affidavit or solemn
declaration)
No
Diamond Export Levy Act, 2007
