n Business Tax and Company Law Quarterly - Executive share scheme tax traps

Volume 2 Number 2
  • ISSN : 2219-1585


Senior employee incentivisation packages nowadays will commonly include some form of equity participation. The legal form will typically comprise either direct ownership in the underlying equity of the employer company, options to acquire ownership in the underlying equity, or a more synthetic version of equity ownership, namely participation through vested income rights in a trust. The latter equity variations are referred to as 'equity instruments' in section8C of the Income Tax Act. The section provides that gains or losses determined in terms of this section will constitute remuneration, which will be subject to an employees' tax withholding by the employer company. The consequence of the gain may be that the employee will find him or herself in a liquidity constraint, because the timing of the gain may not coincide with the disposal of the 'equity instrument'.The timing of the gain or 'vesting', as it is referred to in the section, will depend on the restrictions that are placed on the equity instruments. The gain will typically be triggered when the restrictions lift or are no longer applicable. This article unpacks some of the aspects of section 8C as they relate to common forms of equity participation provided to executive employees.

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