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.
Category: Shares
Securities transfer tax and “earnout” provisions
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.
Securities transfer tax and "earnout" provisions
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.
Disposals by share incentive trusts
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.
Binding Private Ruling – Buy back of shares
An interesting advance tax ruling was released by the South African Revenue Service (SARS) on 12 March 2014. Binding Private Ruling 164 (Ruling) deals with the buy-back of ordinary shares by a company at an amount in excess of the market value of the shares.
Valuation of pre-valuation date shares
Valuation of pre-valuation date shares – ABC (Proprietary) Limited v The Commissioner for the South African Revenue Service ABC (Pty) Ltd (Appellant), a minority shareholder in D Entity, realised a capital gain when it disposed of small percentages of its shareholding in D Entity during the 2002 and 2003 years of assessments. D Entity held a casino licence, but was involved in litigation concerning the location of the casino and had consequently not commenced operation of the casino at the time of the disposal.
Contributed tax capital in a company context
Author: Emil Brincker (DLACliffeDekkerHofmeyr) The creation of contributed tax capital (CTC) and the return thereof by a company to its shareholders has been the subject matter of some misconception over the years. The CTC of a company is a notional amount that is created pursuant to the subscription of shares by holders of a specific class of shares as consideration for the issue of those shares by the company. To the extent that a
The fine line between a restricted and unrestricted equity instrument
The complex tax legislation applicable to share incentive schemes has resulted in a number of taxpayers requesting advance tax rulings from the South African Revenue Service (SARS). On 30 May 2014, Binding Private Ruling No. 170 (Ruling) was released by SARS, which dealt with the question of
The fine line between a restricted and unrestricted equity instrument
The complex tax legislation applicable to share incentive schemes has resulted in a number of taxpayers requesting advance tax rulings from the South African Revenue Service (SARS). On 30 May 2014, Binding Private Ruling No. 170 (Ruling) was released by SARS, which dealt with the question of whether the conditions imposed on an employee in respect of an employee share scheme would result in the shares constituting ‘restricted equity instruments’ for purposes of s8C of the Income Tax Act, No. 58 of 1962 (Act). It is clear from the Ruling that there is often a fine line between whether or not one is dealing with a ‘restricted equity instrument’.
BINDING PRIVATE RULING – DEFINITION OF UNRESTRICTED EQUITY INSTRUMENT
BINDING PRIVATE RULING: BPR 170 DATE: 30 May 2014 ACT : INCOME TAX ACT NO. 58 OF 1962 (the Act) SECTION : SECTION 8C(7) SUBJECT : DEFINITION OF UNRESTRICTED EQUITY INSTRUMENT