Client has an engineering firm and does jobs for numerous clients, not just one client. He is the only director and no other employees. He’ turnover is less than R 20 million, no investment income and he is not a shareholder/member of any other entity. Wi
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) and the definition of ‘personal service’ in section 12E(4) is indeed relevant.
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” – 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 … 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 below), but the services used in the definition are not defined themselves. The relevant part in this regard is “... “personal service”, in relation to a company … means any service in the field of … 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 ...”
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:
“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).”
According to the Oxford electronic dictionary, ‘engineering’ when used as a mass noun in Enlish, means:
“1 The branch of science and technology concerned with the design, building, and use of engines, machines, and structures.
1.1 A field of study or activity concerned with modification or development in a particular area.
‘software engineering’ …”