If an employee received two IRP5's from two different employers. The one got a salary of R500 000 against code 3601 and the other a salary of R100 000 against code 3616. Can he claim deductions as an independent contractor, and what may he claim? Does the
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
The code 3616 is normally used where the mount relates to “remuneration paid to an independent contractor” – see the SARS guide for the codes used on IRP5’s. The only time the amount would appear on an IRP5 would be where the person making payment considered the amount to be remuneration as defined in the Fourth Schedule to the Income Tax Act – probably because of the place the duties were rendered and supervision with regard to hours worked. The deductions would the only be allowed if permitted by the Act.
The relevant law is found in section 23(m) of the Income Tax Act. It applies to “any expenditure, loss or allowance, contemplated in section 11, which relates to any employment of, or office held by, any person (other than an agent or representative whose remuneration is normally derived mainly in the form of commissions based on his or her sales or the turnover attributable to him or her) in respect of which he or she derives any remuneration, as defined in paragraph 1 of the Fourth Schedule”.
The current practice generally prevailing, which we agree with, is that a person “in receipt of two or more streams of income may thus be in a situation where the deduction of expenditure, losses or allowances relating to a “remuneration” stream of income is prohibited, while expenditure, losses or allowances relating to another trade remain deductible.” In one of the example SARS states that “for purposes of section 23(m), each contractual arrangement arising from unconnected sources has to be considered on its own. This means that section 23(m) prohibits the deduction of the expenses incurred in relation to remuneration received from employer A, but that section 23(m) does not prohibit the deduction of expenses incurred in relation to remuneration received from employer B.”