[FAQ] Section (1)(o)(ii) - director and shareholder of the company

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[FAQ] Section (1)(o)(ii) - director and shareholder of the company

• 22 March 2023
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2023.

Background

Section 10(1)(o)(ii) is applicable to "Any employee, excluding an independent contractor or self-employed person" Does this mean that a director and shareholder of the company, who draws a salary from that company cannot claim Section 10(1)(o)(ii) as he is self-employed?

Answer

The SARS guide confirms that the exemption under section 10(1)(o)(ii) only applies if an employment relationship exists. This means that the services that are rendered for or on behalf of the employer must be rendered under an employment contract.

As the term employer is not defined in the act we rely on its ordinary meaning. An “employee” under the common law excludes an independent contractor or self-employed person. Directors in their capacity as directors are holders of an office, not employees, and to the extent that they earn director’s fees, such fees do not qualify for exemption under section 10(1)(o)(ii).

It, therefore, follows that a director can also be an employee if the employee also serves as a director of the company. There has to be an employment relationship between the company and the taxpayer and the remuneration being salary and other remuneration generally associated with employees has to be payable for the employment services rendered. It cannot be director's fees.

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