For there to be an obligation for PAYE to be withheld is typically dependent on three elements being present. These elements are all defined in the Fourth Schedule to the Income Tax Act and include the presence of an employer, an employee and the payment of remuneration. No employees’ tax can be charged if one of these elements is absent.
As a result of certain avoidance structures being implemented to avoid employees’ tax, specific tax provisions were introduced dealing with “personal service providers” (or “PSPs”) to combat such possible instances of tax avoidance and to limit the available deductions from income in the determination of taxable income for these entities. What individual taxpayers would do to limit their effective tax rate (and to ensure that PAYE is not withheld from remuneration paid to them) otherwise would be to earn their salaries in entities controlled by them. In other words, an employee would arrange with his/her employer that a company owned by the employee would rather be rendering the same services as an employee to the employer. This company would then earn remuneration, even though it would be performing exactly the same services as the employee otherwise would have and had that individual not rendered those services through that company.
It was therefore necessary to include a PSP in the definition of “employee” for tax purposes. A PSP can be a company, close corporation or trust, where any service rendered on behalf of the entity to its client (the would-be employer) is rendered personally by any person who stands in a connected person relationship to such entity. One of three additional requirements must be met for an entity to be a PSP:
A PSP is deemed to be an “employee” and any remuneration received by the PSP is subject to the withholding of employees’ tax in the form of PAYE too. Income tax deductions for PSPs are themselves also severely limited, typically akin to what would have been the case for individual employees themselves. It is recommended that clients of potential PSPs should have policies and systems in place to correctly identify and withhold tax from these entities.
 No. 58 of 1962.
 Also see SARS Interpretation Note 35 (Issue 4) dated 28 March 2018.
 Also includes any associated person in relation to the client.
 See the definition of “employee” in paragraph 1 of the Fourth Schedule to the Income Tax Act.
 See the definition in paragraph 1 of the Fourth Schedule to the Income Tax Act.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)