On 13 April 2016, the South African Revenue Service (SARS) issued Binding Private Ruling 228 (Ruling), which dealt with s8EA of the Income Tax Act, No 58 of 1962 (Act). Section 8EA is an anti-avoidance provision, which treats the yield on third-party backed shares as income instead of dividends in the hands of the holder.
Saving more and investing through a tax-free savings account is a very tax efficient way of ensuring maximum after-tax returns for your hard earned money, according to Francis Marais, research and investment analyst at Glacier by Sanlam. “Fortunately, in South Africa, we have a few tools to help with achieving maximum tax efficiency. Some are explicit tax savings vehicles, while some are less explicit, but worth keeping in mind,” said Marais.
Author: Peter Dachs (MNE Tax). South Africa’s Minister of Finance has announced tax changes affecting business in the 2016 budget, including a measure to curb perceived abuses associated with hybrid debt instruments and a warning about future action on share buybacks Under South African domestic law, hybrid debt instruments, i.e. debt instruments with certain equity features, result in the return thereon being treated as a tax-exempt dividend. The budget, issued February 24, states that with immediate effect in circumstances where a nonresident issuer obtains a tax deduction for a payment on a hybrid debt instrument, the South African taxpayer receiving the return will be taxable thereon.
It was announced as part of the Budget proposals that National Treasury may recharacterise the proceeds that are received by a shareholder that is a company in circumstances where it disposes of its shares through means of a share buyback as opposed to selling the shares outright to a third party. This conundrum is currently arising on a daily basis where a shareholder in a company has two ways in which to dispose of the shareholding in the company, being:
Section 8C of the Income Tax Act acts as an anti-avoidance mechanism that prevents employees from treating what is essentially fully taxable salary or bonus income at reduced tax rates through the use of restricted shares and other incentive schemes. Essentially, s8C delays taxation in respect of the receipt or accrual until such time that the employee becomes entitled to the full value of the share or rights under the relevant scheme. Dividends received or accrued on the underlying shares are also generally not exempt under s10(1)(k) of the Income Tax Act unless the shares are equity shares as defined.
We often comment that the tax legislation applicable to share incentive schemes is complex and, as a result, a number of advance tax rulings have been published by the South African Revenue Service (SARS) dealing with the issues. Another Binding Private Ruling, No 199 (Ruling), was released by SARS this week which dealt with the questions of whether: the participation rights held by beneficiaries of a share incentive trust constituted “restricted equity instruments” for purposes of s8C(7) of the Income Tax Act, No 58 of 1962 (Act); and the dividends received by the beneficiaries by virtue of these participation rights will be tax as income or exempt from normal tax in terms of s10(1)(k)(i) of the Act.
The taxation of employee share incentive schemes has been on National Treasury’s radar for a number of years now and this year is no different. The Minster announced in the Budget today that the interrelationship between the application of section 8C of the Income Tax Act, which includes the taxation of directors and employees on the vesting of equity instruments, the attribution of capital gains to beneficiaries, the income tax exemption of dividends and the employees’ tax provision related to the return of capital will be reviewed to remove anomalies.
This article, which examines the taxation treatment that results from the sale of share scheme shares, concludes that it is advisable to hold any shares for a period of at least three years before disposing of them – including shares acquired in terms of an employer’s share incentive scheme. Section 8C of the Income Tax Act (‘the Act’) taxes gains and allows for the deduction of losses arising on the vesting of ‘equity instruments’ that are acquired by virtue of employment, or office of director of any company, or from any person by arrangement with the taxpayer’s employer. The most common type of ‘equity instrument’ encountered is an equity share acquired by the taxpayer in his or her employer company – for example, in terms of a share incentive scheme.
Author: Ben Strauss (Cliffe Dekker Hofmeyr) Often parties to a sale of shares agreement agree to an ‘earnout’ or ‘agterskot’ clause: a provision that part of the price will be paid in future if certain conditions are met. For example, the parties may agree that, while the seller must transfer ownership of all the shares to the purchaser at the time of the sale, the purchaser will pay a part of the purchase price only if the company reaches specified financial targets in future.
The South African Revenue Service (SARS) issued Binding Private Ruling 174 (Ruling) on 29 July 2014. The applicant was a share incentive trust established by a local company for the benefit of its employees in senior management. It was proposed that the company would make cash contributions to the trust and the trust would use the cash to purchase shares in the company on the open market. In terms of the incentive scheme, the trust would award the shares in tranches to the employees over a period. When the shares vest, the trust would transfer the shares to the employees.