When it comes to the requirements of a Small Business Corporation, it can sometimes be a grey, uncertain area regarding personal service providers. One of my clients has a transport business. He does short distance transport of goods for his clients. He h
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
For purposes of the guidance that follows we accept that the only concern, in determining whether or not the entity qualifies as a small business corporation (see section 12E(4)) relates to the requirement in section 12E(4)(a)(iii) - "... not more than 20% of the total receipts and accruals ... consists ... of ... income from the rendering of a personal service..."
The relevant part in this regard is “...any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science ...” in the current definition are relevant to this issue. The Act does not provide clarity in this regard. SARS states the following in Interpretation Note: No. 9 (Issue 5):
“In general terms, a personal service refers to a service rendered and for which the income derived is mainly a reward for the personal efforts or skills of an individual. However, the term is capable of expansion or limitation depending on the scope of the specific law in which it used. Section 12E(4)(d) (as quoted below) defines “personal service” which merely lists a class of activities that would be regarded as a personal service. For the sake of clarity, the ordinary, grammatical meaning is to be ascribed to each word. Accordingly, each of these entries is to be construed in their widest possible sense.”
While it is clear from the Act (section 12E) that “personal service” is a defined term (copied above), the services used in the definition are not defined themselves. The basic rule of interpretation is that the meaning must, unless a statute provides otherwise, or unless it would result in an absurdity, be taken to be the ordinary meaning of the word which can be found in a dictionary of established authority. This principle was specifically confirmed in a Tax Court case where the interpretation of the term “personal service” as used in section 12E was considered.
Judge Mbha (in case 12680) said that in his “view, the meaning of "consulting" as referred to in section 12E(4)(d), falls into the second category, as the activities referred to in the first and third groups do not normally involve any commercial transactions, and would therefore not be relevant for taxation purposes.”
Your view is that the transport service is not included in the personal services listed above.
The company will only be a personal services provider, which would exclude it from being a small business corporation, where any service rendered on behalf of the company to a client of the company is rendered personally by any person who is a connected person in relation to the company, “and-
(a) such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company or trust; or
(b) where those duties must be performed mainly at the premises of the client, such person or such company or trust is subject to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service; or
(c) where more than 80 per cent of the income of such company or trust during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of such company or trust, or any associated institution as defined in the Seventh Schedule to this Act, in relation to such client, …”
We don’t have enough information about this, but it is possibly one paragraph (c) that may present a problem. We noticed that the more than 3 full-time employees safe harbour rule will not assist here.