[FAQ] Exemption of remuneration earned by the crew member of a yacht

[FAQ] Exemption of remuneration earned by the crew member of a yacht

• 12 February 2021
• Individuals Tax
• Piet Nel

This article is based on tax law for the year ending 28 February 2021.

Background

Included in Section 10(1)(o)(i)(aa) is the following: “any officer or crew member employed of a ship (international or South African) engaged in international transportation for reward of passengers or goods.”

Please clarify SARS definition / interpretation of:

• Any ship: Is a super yacht included?
• Transportation for reward: Will the charter of a yacht owed by a company to cruise with guests on the yacht qualify as reward of transportation of passengers? Therefore, will a South African resident who is a crew member or officer employed on such a yacht (international) qualify for exemption of foreign income in terms of employment thereon?

Answer

The Income Tax Act

You are reminded that SAIT's technical query system policy prescribes that only guidance should be provided in relation to requests submitted. To do otherwise would cause SAIT to compete with its own members. Guidance implies that sources or references relevant to the request are provided, but that ultimately the tax practitioner’s own professional judgment is required to be applied to the specific circumstances. SAIT will therefore not answer the questions you raised. This is also a complex issue and you may need to obtain more information from the taxpayer concerned.

The following is relevant to provide your client with an opinion or tax position in this respect.

The exemption (from normal tax) is available to officers or crew members and it applies under specific circumstances – see section 10(1)(o)(i) and (1A). We accept that this is not a “South African ship” as defined in section 12Q(1).

The first requirement is that the remuneration must be derived by the person as an officer or crew member of a ship. Remember that remuneration derived outside the RSA other than as an officer or crew member of a ship, does not qualify for exemption under section 10(1)(o)(i).

The Income Tax Act doesn’t define the word ‘ship’. According to the Oxford dictionary (https://www.lexico.com/definition/ship), ‘ship’, when used as noun, “means:

• A large boat for transporting people or goods by sea
•  A sailing vessel with a bowsprit and three or more square-rigged masts.

When used informally, “any boat, especially a racing boat.” And ‘boat’ means “a small vessel for travelling over water, propelled by oars, sails, or an engine.” We submit that the word ship, when used in section 10(1)(o)(i) is not used informally – see the practice generally prevailing below.

Whether a yacht will be a ship, for purposes of section 10(1)(o)(i), is not something that we can give an opinion on. You may want to approach SARS for a binding private ruling or non-binding opinion to support your tax position.

Application of the principles

The most important requirement is that the ship must be engaged in the international transportation for reward of passengers or goods. According to the OECD commentary, profits obtained by leasing a ship on charter fully equipped, crewed and supplied must be treated like the profits from the carriage of passengers or cargo.

The following was taken from the practice generally prevailing:

• “Reward” in this context means compensation received for the transportation of the passengers or goods on the ship. This refers to merchant ships such as cruise ships, passenger liners and cargo ships travelling in international waters.
• “International traffic” is therefore the movement of a ship between the Republic and a foreign nation, or between two foreign nations, or between ports in a foreign nation.

We have mentioned that the crew member of officer must be an employee (see also IN34). A yacht hand, particularly on a charter, may well not be employed, but that you will have to confirm with your client. The following comments, from the OECD commentary, albeit with respect to another Article may be relevant to you with respect to ‘reward’:

“Profits obtained by leasing a ship or aircraft on charter fully equipped, crewed and supplied must be treated like the profits from the carriage of passengers or cargo. Otherwise, a great deal of business of shipping or air transport would not come within the scope of the provision. However, Article 7, and not Article 8, applies to profits from leasing a ship or aircraft on a bare boat charter basis except when it is an ancillary activity of an enterprise engaged in the international operation of ships or aircraft.”

“Profits derived by an enterprise from the transportation of passengers or cargo otherwise than by ships or aircraft that it operates in international traffic are covered by the paragraph to the extent that such transportation is directly connected with the operation, by that enterprise, of ships or aircraft in international traffic or is an ancillary activity.

One example would be that of an enterprise engaged in international transport that would have some of its passengers or cargo transported internationally by ships or aircraft operated by other enterprises, e.g. under code-sharing or slot chartering arrangements or to take advantage of an earlier sailing. Another example would be that of an airline company that operates a bus service connecting a town with its airport primarily to provide access to and from that airport to the passengers of its international flights.”

Another issue of course, not specifically referred to in your request, is the country where the ship is registered or where its place of effective management is – to determine if one country has a sole taxing right.

Webinar Commentary

For monthly tax updates the Webinar: Monthly Tax Update - January 2021 can be accessed here.

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