Independent contractors — part 2

2008-05-14 00:00

In last week’s article, I looked at the implications of being classified as an independent contractor for the purposes of employee’s tax.

The process of ascertaining whether a person is independent is controversial, and the South African Revenue Service (SARS) has attempted to streamline the procedure in issue two of Interpretation Note 17.

Essentially, SARS has identified a two-tier test involving statutory law and common law.

The following steps apply for the statutory law test:

o Ascertain whether the person employs three or more unconnected, full-time employees throughout the year. If not, proceed to the next step. If so, consider the common law test below.

o Ascertain whether the services need to be supplied mainly at the client’s premises. If so, proceed to the next step. If not, consider the common law test.

o Ascertain whether the person rendering the service is subject to the supervision or control of the client in respect of the duties performed or hours worked.

This test comprises two components — supervision and control. If either applies, the person will not be deemed to be independent and therefore any payments made to that person will be subject to employee’s tax.

An important point is that the independent status of the person under the common law test is unaffected. This means that the person will be considered independent, remuneration paid will not be subject to employee’s tax and the limitation of deductions (Section 23[m]) will not apply.

The interpretation note states that the common law test is designed to establish the independence of the contractor, who may be an individual or a business.

There is no single indicator when determining the contractor’s status. SARS has provided a common law dominant impression grid, which contains categories that will help in the independency determination. SARS emphasises that the grid is a guide and should not be used as a mere checklist. The test seeks to provide information through flexibility, practicality and collating of information to determine the independence of the contractor.

The common law dominant impression test also has three indicators, each of which have subindicators. They are:

1. Near-conclusive indicators of the acquisition of productive capacity of the contractor. Some of the sub-indicators are:

o Control of manner

o Payment regime

o Risk, profit or loss

o Person who must render the service

o Nature of obligation to work.

2. Persuasive indications of the acquisition of productive capacity. Some of the subindicators are:

o Instructions and supervision

o Training

o Productive time

3. Indicators resonant of an employee relationship or an independent contractor relationship. Some of the subindicators are:

o Tools, materials and stationery

o Office or workshop

o Duration of relationship

o Termination and breach of contract

o Viability on termination

It is vitally important that employers correctly determine the status of the contractor as failure to do so will render the employer liable for the employee’s tax and the resulting interest and penalties.

Usha Maharaj

Associate Director

083 284 8760

usha.maharaj@kpmg.co.za

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