My company is a normal (private) company, taxed at a flat rate of 28% but an accountant advised me last week that I am a personal services provider which left me very disappointed due to the limitations on permissible deductions of a personal services pro
Important:
This answer is based on tax law year ending 28 February 2019.
Answer:
Based on the facts the company is not a ‘personal service provider’ (as defined in the Fourth Schedule to the Income Tax Act), but the definition of ‘personal service’ in section 12E(4) is indeed relevant.
So, 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”. I said that is not an issue here.
I 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 … accounting, … consulting, … law, … 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 ...”
Section 12E of the Income Tax that “personal service” defines the term ‘personal service’ (extract copied above), but 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.”
I agree that the words ‘in the field of’ extends the meaning of the word.
Judge Mbha (in case 12680) said the following:
“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).”
With regard to the word consulting the judge said:
“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 ...”
SARS, in Interpretation note 9, gives the following example (relevant to the full-time employee issue that is not relevant to you):
“For example, a receptionist in an accounting firm who does not directly perform the accounting services for which a client is invoiced but is involved on a full-time basis in the support services which allow that accounting service to be provided, will be considered to be involved in the business of performing that service. The receptionist would be included in the three or more full-time employee count because he or she is engaged in the business of the qualifying entity of rendering that service, ‘that service’ meaning the accounting service falling in one of the categories listed in section 12E(4)(d).”
The question then is whether ‘taxation’ related work falls in the field of accounting. To this question I have not had a conclusive answer and believe that it may well do so. But that is because I am a chartered accountant and the international body sees taxation to be included in the work done by an accountant.
Taxation work done by you will not fall under consulting.
So, your company is not a ‘personal service provider’, but will in all probability not qualify as a small business corporation.