My client has a close corporation and have 1 member who offers metallurgical consultancy service to difference mines. This close corporation have 2 other employees the gardener and cleaner.
Important:
This answer is based on tax law year ending 28 February 2019.
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 ...”
That specifically includes that the “company is not a personal service provider as defined in the Fourth Schedule”. We accept that is not an issue here.
We noted that the company “does not throughout the year of assessment employ three or more full-time employees”.
The relevant part in this regard is “... “personal service”, in relation to a company … means any service in the field of … consulting, … engineering, … if—
(i) that service is performed personally by any person who holds an interest in that company, co-operative or close corporation or by any person that is a connected person in relation to any person holding such an interest ...”
While it is clear from the Act (section 12E of the Income Tax Act – not the SARS Act) that “personal service” is a defined term (copied above), but that the services used in the definition are not defined themselves.
SARS states the following in Interpretation Note: No. 9 (Issue 7):
“In general, a personal service refers to a service rendered for which the income derived is mainly a reward for the personal efforts or skills of an individual. In determining whether a service falls within the ambit of a “personal service” as defined, the ordinary grammatical meaning is given to each word in that definition. The words “any service in the field of” preceding the categories of services listed in the definition suggest that a wide interpretation must be applied to these categories. Therefore, the list must be interpreted to include every service in the specified field irrespective of whether it is of a professional nature.”
Judge Mbha (in case 12680) said the following in tax case 12860:
“It is accepted generally that the meaning of words in a statute is derived from the common law. 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.”
“If there is any doubt about the ordinary meaning of a word used in a particular context, certain rules must be applied. There are two rules relevant to this matter: A word included in the group of words must be regarded as being of the same type as the other words in that group (eiusdem generis); on the other hand, if a word is not included in the group, it must not be regarded as subject to the same prescriptions as that group (exclusio alteris).”
“The term 'consulting' as used in section 12E(4)(d) is not defined in the Act or in any other applicable law in South Africa. Since there are no definitions of "consulting" in the Act, or in any other statute or judicial ruling, the rules that I have referred to above that are applicable to the definition of terms used in a statute, must be applied. These rules are well-established in our law... As I have pointed out, the basic rule is that in the absence of any legislated manner or binding judicial ruling, the meaning attributable to any word must be the meaning of the word as generally used which can be ascertained by referring to a dictionary...”
“The definitions of "consulting" in the standard dictionaries I have consulted, reveal that there are several meanings to the nouns derived from the verb "consult", namely consulting, consultant and consultation, and to the verb itself, and these fall into three major categories:
-
those derived from the transitive verb "consult", which means to seek advice or an explanation from a person with knowledge, from a dictionary or other sources;
-
those derived from the intransitive verb "consult" which means to offer advice or information by such person. The Concise Oxford Dictionary, 10'h Edition, Revised, (p 306) defines a consultant as "1. a person who provides expert advice professionally 2...a hospital doctor of senior rank". The other dictionary definitions of this term refer specifically to "professional advice";
-
those related to the idea of consultation as a form of discussion between persons having different interests in a particular situation. For example, the National Roads Act 54 of 1971 requires that, before the National Roads Agency may declare any road to be a toll road, it must first consult with provincial and local authorities. Similarly, section 149(1)(a) of the Companies Act 71 of 2008 provides that a committee of employees or of creditors, duly appointed, may consult with a practitioner about any matter relating to business rescue proceedings instituted in terms of the Act.”
“In my 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. It is necessary to establish the intention of the legislature when passing the relevant provision.”
“The legislature's intention embodied in section 12E of the Act can clearly be seen from the contents of SARS' Interpretation Note 9, which was issued at the time of the introduction of that section, and which states (at p 5) that:
'Section 12E was enacted for the specific purpose of encouraging new ventures and employment creation, i.e. active small businesses. The provisions relating to SBC's are therefore not intended to benefit any professional person such as, for example, an architect or a lawyer who renders his/her service by means of a company or close corporation.' [The Judge emphasised the words in italics.]”
“Accordingly, in interpreting the term "consulting", as applicable to a personal service provided by a small business corporation for the purposes of section 12E(4), the term "professional person" is crucial in defining that term.”
“The view that a person providing a consulting service must of necessity be a professional person, or someone of that nature is supported by the application of the eiusdem generis-rule of interpretation. The fields of activity listed as personal services in section 12E(4)(d) fall into two categories, the first of which is accounting, actuarial science, architecture, auctioneering, auditing, broking, draftsmanship, education, engineering, health, information technology, law, management, real estate, research, secretarial service, surveying, translation, valuation and veterinary service which are all professional or quasi-professional activities, requiring a particular qualification and, in many cases, a licence, certificate, or membership of a professional body before the person concerned can participate in that activity. The second category comprises broadcasting, commercial arts, entertainment and sport, none of which is relevant to the activity carried out by the taxpayer.”
“Since the term "consulting" is the least easily defined of all the terms, the rules of interpretation that I have referred to, must be strictly applied. The dictionary definition of the term must be applied and it must be regarded as the offering of advice by a professional or qualified person. I am fortified in adopting this approach, by the specific reference to a "professional person" in Interpretation Note 9 explaining the legislature's basis of section 12E, as I have alluded to ... above.”
Unfortunately, SARS changed the Interpretation Note after the court case, and a number of times since.
This should enable you to provide the opinion to your client. You may want to approach SARS for a binding private ruling in the matter.