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n Business Tax and Company Law Quarterly - The impact of section 8C on an employee share participation trust - unravelling complexity!

Volume 2, Issue 4
  • ISSN : 2219-1585

Abstract

Section 8C of the Income Tax Act is an important taxing provision that requires gains or losses in any year of assessment, determined in respect of the vesting of 'equity instruments' in the form of shares or rights in respect of shares acquired by employee taxpayers by virtue of employment or holding the office of director, to be included in or deducted from the income of such employees. Section 8C is a complex and intricate provision, the application of which affects both the employer companies and their employees and directors. In the modern South African economy, section 8C comes into play especially when listed companies initiate share participation schemes for their employees as a means of incentivising them and retaining their services, but also in order to promote black empowerment through equity participation in the employer or group for which the employee works. This article explores the tax implications for employees and directors of a typical share incentive trust scheme that has been utilised in South Africa to achieve these objects. The article seeks, in the absence of judicial precedent to illuminate and elucidate the uncertainties and complexities to which section 8C can give rise. Features of a typical share incentive trust and the rights of the employees who are the beneficiaries thereunder are examined. The applicable provisions of section 8C are then highlighted and the often difficult questions that arise in their application are posed and analysed in the light of the statutory regime. Suggestions are made as to how these issues should be approached, and solutions are proposed for the problems that may arise. The capital gains tax ('CGT') implications of the trust share incentive scheme are also discussed in a section that explores the interaction between the provisions of section 8C and the Eighth Schedule. The impact on the scheme is examined of paragraph 11(2)(j) of the Eighth Schedule, which provides that there is no disposal of an asset which constitutes an equity instrument contemplated in section 8C, that has not yet vested as contemplated in that section. The approach of SARS to this provision in the SARS Comprehensive Guide to Capital Gains Tax is discussed, as well as how that publication deals with the effect of the distribution of the relevant shares to the employees by the trust. The article further examines whether, where a disposal of shares does occur, employees may be exposed to double taxation, in the form of CGT under the Eighth Schedule and income tax under section 8C, and concludes that this result is avoided by applying the provisions of paragraph 20(1)(h)(i) of the Eighth Schedule, according to which the amount which is subject to tax under section 8C is included in the base cost of the shares for CGT purposes. This step-up in base cost will avoid the employees being taxed twice on the same gain. Finally, the article discusses two recent SARS binding class rulings - the first, BCR 001 of 6 March 2009, relates to a similar employee share participation trust scheme and is consistent with the analysis and conclusions in the article. The second, BCR 0031 of 14 October 2011, relates to a very different scheme involving the acquisition by the trust of shares in the employer company providing dividends for the benefit of employees that did not trigger the application of section 8C of the ITA.

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/content/btclq/2/4/EJC174528
2011-12-01
2019-12-07

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