Category: Payroll | payroll directors remuneration
Tax Implications for Directors of Private Companies and Members of Close Corporations
The roles and responsibilities of directors of private companies and members of close corporations are pivotal. However, beyond their operational duties, these individuals also carry significant tax obligations. In this article, we delve into the intricacies of tax implications concerning these positions, referencing the pertinent provisions of the law.
Reference to the Act The tax obligations of directors and members of private companies and close corporations find their basis in various sections of the Income Tax Act. These provisions delineate the treatment of remuneration, tax deduction responsibilities, and the distinction between executive and non-executive director fees.
Meaning and Scope The definition of an employee under Paragraph 1 of the Fourth Schedule of the Income Tax Act includes directors of private companies. This broadens the scope of remuneration subject to Employees’ Tax, encompassing payments to both directors of private companies and members of close corporations.
Right of Recovery Employers have the right to recover Pay-As-You-Earn (PAYE) on deemed remuneration from directors. This recovery can be enforced against any amounts payable to the director by the company. However, if the company fails to recover the employees' tax from the director, the director is not entitled to receive an IRP5/IT3(a) certificate for the amount paid by the company.
Director Status Changes to Employee If a director ceases to hold office but remains an employee of the company, PAYE must be deducted from their remuneration as per standard employment practices. In such cases, only one IRP5/IT3(a) needs to be issued for the tax year.
Director Appointed During Tax Year When a person is appointed as a director during the tax year and was not previously an employee, PAYE is payable on the actual remuneration paid or payable during that period.
Non-Executive Director (NED) For resident non-executive directors (NEDs), director's fees are not considered remuneration, and employers are not obligated to deduct employees' tax. However, upon request, NEDs can opt for voluntary deduction of employees' tax, which should be reflected under the appropriate code on the IRP5/IT3(a) certificate. In contrast, non-resident NEDs' fees are treated as remuneration, necessitating the deduction of employees' tax by the employer.
