I have a client who has been invoicing a company for services rendered. He could claim all business related expenses therefor reducing his gross income. He has now been appointed as an employee with shares being given to him. The amount of with holding ta
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
Section 23(m) of the Income Tax Act is relevant to your request. It prohibits the deduction of “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, other than—
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any contributions to a pension fund, provident fund or retirement annuity fund as may be deducted from the income of that person in terms of section 11F;
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any allowance or expense which may be deducted from the income of that person in terms of section 11 (c), (e), (i) or (j);
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any deduction which is allowable under section 11 (nA) or (nB); and
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any deduction which is allowable under section 11 (a) or (d) in respect of any rent of, cost of repairs of or expenses in connection with any dwelling house or domestic premises, to the extent that the deduction is not prohibited under paragraph (b); …”
We don’t understand the following statement:
“The amount of with holding tax that needs to be paid over to SARS they are borrowing him and he "repays it" with the amount of dividends he gets.”
It is possible that it relates to the possible gain on vesting of the equity instruments.
The company, as employer, will have to withhold employees tax form the amount of remuneration and pay same over to SARS. It can’t be treated as a loan to the individual as employee. The same applies to the gain on the vesting of the instruments. The fact that any acquisition cost, of the equity instruments, is financed by way of a loan, is relevant to determine if a taxable benefit arises – due to a low rate of interest.