If you are appointed on a board of directors as a non-executive director, it pays to think twice before you claim any expenses you believe are incurred in the production of your income.

The question that should be asked is regarding the true nature of your appointment. Are you independent or are you seen as an employee of the company? If the company is a listed company, you would possibly be seen as an independent contractor. However if the company is a private company, SARS could argue that you are a holder of an office and therefore subject you to the limitations imposed by section 23(m) of the Income Tax Act. They could therefore disallow all the expenses claimed against the director’s remuneration.

It is important to determine if you are carrying on a trade. The definition of a trade is very broad. It states the following:

“Trade” includes every profession, trade, business, employment, calling, occupation or venture…

It is contended that the acceptance of a non-executive directorship could meet the definition of a trade. A non-executive director is in essence by the requirements of the appointment, independent to the company and should not be seen as an employee of the company. It should also be stated that the non-executive director would not be subject to any control and supervision of anybody in the conduct of his trade. As a result, any necessary expenses incurred in the production of the income from that trade can be claimed in terms of section 11(a) of the Income Tax Act.

It is not uncommon that a non-executive director may incur home office expenses, for example to prepare for a board meeting, and these expenses incurred can be claimed under the general deduction formula of section 11(a).

However, you should be extremely careful that the expenditure is truly incurred at the home office – that you are not preparing for a board meeting at the company’s premises in an office provided by them.

In addition, if we refer to section 23(b) of the Income Tax Act, it does list a prohibition against the deduction of domestic or private expenses, including rent or cost of repairs or expenses in connection with any premises not occupied for the purposes of trade or of any dwelling-house or domestic premises, except in respect of such part as may be occupied for the purposes of your trade.

However the proviso to section 23(b) states that:

  1. Such part shall not be deemed to have been occupied for the purposes of trade unless such part is specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for such purposes; and
  2. No deduction shall in any event be granted where the taxpayer’s trade constitutes any employment or office unless-
    1. His income from such employment of office is derived mainly from commission or other variable payments which are based on the taxpayer’s work performance and his duties are mainly performed otherwise than in an office which is provided to him by his employer; or
    2. His duties are mainly performed in such part.

 

It is therefore important that the home office could not have, for example, a bed or toy storage containers in it as it would then not be seen to be used exclusively for your trade.

Another matter that is not addressed in this article is whether or not a non-executive director’s trade meets the definition of an enterprise and should they register as a VAT vendor? This will be addressed in a subsequent article concerning non-executive directors.

In closing, if SARS has disallowed any expenses claimed against non-executive director’s remuneration, we advise that you contact your tax practitioner as it is not necessarily an easy argument to put forward to SARS.

Engela Crocker

Senior Tax Manager, Johannesburg

*Article originally published in Directorship Magazine

Also read: Changes to the Permanent Establishment Definition