THE TAXATION OF EMPLOYEE INCENTIVE SCHEMES

B3It has become popular commercial practice for many employers to design employment incentive schemes whereby employees are remunerated for services rendered over a period of time by allowing them to participate in share incentive schemes. Typically, these schemes take the form of either cash-based settled schemes or share-based settled schemes. The former involves participating employees receiving a cash payment after a certain period at the exercise of their share appreciation rights equal to the increase in value of the underlying share value to which the scheme is linked. Share-based payments, on the other hand, involve the employees receiving actual shares in the employer company and which would (ideally) have increased in value over the period of time, due in part to the employees’ endeavours and involvement in the company’s activities.

In terms of section 8C of the Income Tax Act,[1] these benefits received by employees through participation in such schemes are taxed on income tax account, in other words, on the same basis as though these benefits had been a salary earned.

Depending on whether the rights granted under the scheme are restricted or not, the tax consequences arising for the employee will fall due either when the options are granted to the employees (in the case where no restrictions in relation to the options exist), or only once they are exercised or vest for purposes of section 8C (typically when the restrictions linked to the rights granted falls away).[2] At that stage, the gain to be taxed is calculated as being the value of the benefits received in terms of the scheme minus the amount paid (if any) to acquire those benefits.[3]

Restrictions for section 8C’s purposes typically take the form of a restriction on when the rights acquired may be exercised (typically linked to an employee remaining in service of the company for a number of years), or a prohibition on the employee transferring or selling those rights at market value to other persons (the rights granted are often not permitted to be sold to another).[4]

Take the following as an example: Company A grants an employee the right to receive shares in it worth R10 by paying an amount of R1 only. If that right to take up shares may be exercised immediately, and no restriction linked to transferability thereof for example exists, that “unrestricted equity instrument” will give rise to a taxable gain of R9 when the option is received. Where the right to subscribe for shares in Company A for R1 may however only be exercised if the employee is still in employment of Company A within 3 years’ time, or may be exercised at any point in time but may not be sold to another, then the gain realised for section 8C’s purposes will only be calculated when and at the value of the shares when these are eventually acquired. In such an instance, the gain calculated should be reduced by the subscription price of R1 paid for the shares. Similarly, if the reward does not involve the subscription of shares, but rather a payment to the employee of the increased value of shares over a predetermined period in time, the value of the shares minus the R1 paid to acquire the options will be the amount of the gain subject to income tax.

Section 8C has been the focus of many legislative amendments over the past few years and involves arguably one of the most complex provisions of the Income Tax Act. Employees and employers alike would therefore be well-advised to take detailed tax advice prior to entering into, and exercising, rights provided for in terms of employment incentive schemes such as these described above.

[1] 58 of 1962

[2] Section 8C(3)

[3] Section 8C(2)

[4] See the definition of “restricted equity instrument” in section 8C(7)

This article is a general information sheet and should not be used or relied upon as 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)

SECURITIES TRANSFER TAX

B2Levied at 0.25% of the value of shares transferred,[1] the securities transfer tax (“STT”) is a tax often neglected and forgotten. Introduced in 2008, the tax is levied on the transfer of shares held in South African companies or the transfer of membership interests held South African close corporations. The issuing of a share is however not a “transfer” for purposes of the Securities Transfer Tax Act, nor the buying back / redemption / cancellation of a share by the company whose share it is itself where that company is in the process of having its existence terminated.[2]

Due to being a tax which is often overlooked, taxpayers often neglect the administrative requirements linked to the tax too, not only in terms of their relative payment obligations towards the fiscus and doing so timeously, but also due to their failure to observe the relevant filing obligations linked to the requisite tax payments.[3] Such administrative oversights may affect a future application by taxpayers for tax clearance certificates to be issued to them, and may also have a bearing on applications for the suspension of amounts of tax in dispute (STT or other) and ostensibly due to the Commissioner.[4]

STT is ultimately borne by the purchaser of the shares being transferred,[5] although a number of exemptions may apply.[6] Primary among these are transfers of shares to which the so-called “group relief” provisions in the Income Tax Act[7] apply,[8] as well as a transfer of shares in property rich companies on which transfer duty is levied.[9] Finally, in terms of the de minimis provision in section 8(1)(r), STT will also not apply to transfers of shares where the STT payable is less than R100. In other words, no STT is levied on a transfer of shares where the shares transferred have a value of less than R40,000.

It is important to note that STT is levied on the transfer of both listed and unlisted shares, and clients are therefore encouraged, in the interest of a clean tax administrative record, to take their STT obligations seriously.

[1] Section 2(1) of the Securities Transfer Tax Act, 25 of 2007

[2] See the definition of “transfer” in section 1 of the Securities Transfer Tax Act

[3] These requirements are contained in the Securities Transfer Tax Administration Act, 26 of 2007

[4] In terms of section 164(3)(b) of the Tax Administration Act, 28 of 2011, a taxpayers compliance history is to be considered where the Commissioner decides to suspend an amount of tax in dispute from being payable pending the outcome of that dispute.

[5] Section 7 of the Securities Transfer Tax Act

[6] Section 8

[7] 58 of 1962

[8] Section 8(1)(a)

[9] Section 8(1)(n)

This article is a general information sheet and should not be used or relied upon as 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)

VAT AND TRANSFER DUTY

B1We are often asked whether the sale or purchase of immovable property is subject to VAT or to transfer duty. Confusion appears to creep in especially in those cases where only either the seller or purchaser is a registered VAT vendor.

The answer to the question lies in the Transfer Duty Act,[1] and specifically in sections 2 and 3 of that Act which determine that the transfer duty is payable on the value of immovable property acquired by any person, and that the duty is payable by the acquirer. In other words, the transfer duty is a tax on the purchaser.

Section 8 of the Transfer Duty Act provides for instances where the purchaser of the property will be exempt from transfer duty being levied against it. The list of potential exemption includes instances where the sale is a “VATable” transaction.[2] In other words, where the sale of the immovable property concerned is therefore a taxable supply for VAT purposes, no transfer duty will be leviable. (This is however subject to certain compliance related requirements being met, including that the prescribed declarations are submitted, that security is tendered for the tax to the extent necessary and that the Commissioner issues a certificate that this transfer duty exemption’s requirements have all been met.[3])

By implication therefore, since the sale will have to be a taxable supply for VAT purposes for the transfer duty exemption to be met, the implication is that the sale must be made by a VAT vendor, and therefore subject to VAT. The status of the seller (i.e. whether it is VAT registered or not) determines whether the purchaser is liable for either VAT or the transfer duty.

To summarise therefore, whether transfer duty or VAT is payable by a purchaser of immovable property is determined with reference to the status of the seller: if VAT registered, VAT is levied and not transfer duty. If the seller is not VAT registered, transfer duty is payable as the default position (and unless any of the other exemptions in section 8 of the Transfer Duty Act applies). Therefore, the purchaser of immovable property will always as a default be required to pay transfer duty, unless the seller is a VAT vendor (and the property is sold as part of its enterprise). In such an instance, the sale will be subject to VAT at 14% and payable by the purchaser, rather than transfer duty which would otherwise have been payable and according to the applicable sliding scales.

[1] 40 of 1949

[2] Section 8(15) of the VAT Act

[3] Section 8(15)(a) to (c) of the Transfer Duty Act

This article is a general information sheet and should not be used or relied upon as 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)