How should the directors' fees of Non-Executive Directors be treated for tax purposes?

Historically there has been some uncertainty on the tax treatment of fees paid to a Non-Executive Director (NED). SARS has recently issued two Binding General Rulings (rulings), the purpose of which is to set out SARS practice. Taxpayers are not bound by these rulings because they do not constitute law. SARS however is bound by the rulings, which creates certainty for taxpayers .

There are two possible tax consequences which NEDs could face in relation to their directors fees. The first relates to employees tax and the second to value-added tax (VAT).

The rulings note that if a director is not subject to the control or supervision by the company as to the manner in which the NED's duties are performed or to their hours of work, the directors' fees will not be regarded as remuneration and will not therefore be subject to employees' tax (PAYE).

The rulings go on to state that if the directors fees paid to a NED are not subject to employees tax. The NED will be considered to be an independent contractor . When this is the case, the NED will be regarded as carrying on an enterprise for VAT purposes and will be required to register for VAT if the amount of the fees exceeds the compulsory VAT registration threshold of R 1million in a twelve month period.

NEDs are not considered to be employees under the common law rules. As a result NEDs are considered to be independent contractors who must register for VAT if their fees exceed the R1 million threshold.

The rulings are effective from 1 June 2017 until they are amended or withdrawn. The rulings are silent on the tax treatment which is to apply prior to 1 June 2017. A NED who has received directors' fees that have exceeded the VAT registration threshold and has neither accounted for VAT or employees' tax for periods prior to 1 June 2017 should take further advice on their position.