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Taxation
Friday, December 1, 2006
Small business change

The concept of personal service companies (and trusts) has been part of our tax legislation since 2000. It was introduced to prevent the use of companies to disguise what was really an employer/employee relationship.

The categorisation of businesses as personal service companies has serious implications. Personal service companies are taxed at 34% rather than the usual corporate rate of 29% and are denied certain deductions. Those making use of their services are obliged to deduct employees’ tax from all payments.
It has been recognised that personal service companies are currently so widely defined as to include many legitimate small businesses. The Revenue Laws Amendment Bill, 2006 now proposes certain amendments in an attempt to reduce the number of legitimate small businesses that will be categorised as personal service companies.
It is currently provided that, where a client of a company controls or supervises how and when its work is performed or makes regular payments to that company then it will automatically be a personal service company. The proposed amendments will mean that not only must there be supervision, but the work must take place at the client’s premises in order for the company to qualify as a personal service company. The issue of regular payments will be removed entirely.
If a company has more than four unconnected employees engaged in rendering services, then that company will not be a personal service company, irrespective of whether it would otherwise qualify as such. It has been proposed that this requirement be reduced to three employees.
The obligation to deduct employees’ tax from payments made to a personal service company has created a tendency to err on the side of caution and deduct employees’ tax from payments to any company that might qualify as a personal service company. In order to try and reverse this tendency, it has been proposed that clients be permitted to rely on an affidavit from a company that it does not constitute a personal service company. The client must, however, be relying on such affidavit in good faith.
There are also proposed amendments to increase the extent of deductions to which a personal service company is entitled and to allow SARS to issue directives for the withholding of employees’ tax at a rate lower than 34%. By Tim Desmond, Director - Tax and Commercial Departments, Garlicke & Bousfield Inc, Durban

For more information please contact Mr Desmond on (031) 570 5300

Copyright © Insurance Times and Investments® Vol:19.6 1st December, 2006
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