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.

The main provision in the Income Tax Act that one needs to consider when implementing an employee share incentive scheme is section 8C of the Income Tax Act. However, careful consideration must also be given to a number of other provisions in the Income Tax Act, including section 10(1)(k) dealing with the dividend exemption and the capital gains tax provisions contained in the Eighth Schedule.

Some of the anomalies that have arisen in recent years as a result of amendments to the legislation include the following:

  • Amendments were made to section 10(1)(k) of the Income Tax Act to provide that dividends received by participants in respect of certain share schemes should no longer be exempt. However, many of these amendments in section 10(1)(k) now conflict with each other, and dividends are being taxed that should in fact be exempt from tax.
  • Amendments were made to the deemed disposal at market value provisions contained in paragraph 38 of the Eighth Schedule to the Income Tax Act, on the basis that the provisions were obsolete. However, as a result of this amendment, adverse tax consequences can arise where the same amount is subject to capital gains tax in the hands of a trust and income tax in the hands of the participants.

Taxpayers and tax consultants have been lobbying for a number of years for these anomalies to be resolved and hopefully this will be the year it happens.