A popular employee incentive scheme involves the formation of a trust by a company. The company funds the trust which then uses the funds to buy shares in the company. The company's employees are given units in the trust, usually free of charge. The units entitle the employees to receive distributions from the trust on the underlying shares. The employees forfeit their units in certain circumstances and generally cannot dispose of them. The trust may repurchase the units from the employees in certain circumstances.

Section 8C of the Income Tax Act (58/1962) generally applies to such schemes. This provision states that if an employee acquires a restricted equity instrument by virtue of his or her employment, he or she must pay income tax (and not capital gains tax (CGT)) when the instrument vests.

An equity instrument includes not only a share, but also a unit in a trust (as indicated above). An instrument will be restricted if the employee:

  • may not freely dispose of the instrument; or
  • forfeits it when he or she leaves the company within a specified period or is dismissed for cause.

An instrument vests when the restrictions that apply come to an end.

Income tax is determined on the difference (if any) between the amount paid by the employee to acquire the instrument and the market value of the instrument at the time that it vests. The company or trust must withhold employee pay-as-you-earn (PAYE) tax on the amounts accruing to the employees.

The application of Section 8C of the act is generally relatively clear in schemes such as the one described above. What is not always clear is the interaction between Section 8C and the incidence of tax in the hands of the trust.

SARS ruling

A scheme similar to the one outlined above was the subject of Binding Private Ruling 261 issued by the South African Revenue Service (SARS) on January 30 2017. The trust repurchased the employees' units. However, to fund the repurchase price, the trust had to sell some shares in the company.

SARS ruled as follows:

  • The proceeds received by a trust on the disposal of shares accrue to the trust, which must calculate any capital gain or capital loss arising on the disposal.
  • For CGT purposes, the trust must reduce the base cost of the shares by the amount of the contributions made by the relevant companies to enable the trust to acquire the shares. This must be done under Paragraph 20(3)(b) of Schedule Eight of the Income Tax Act, which states, among other things, that a taxpayer must reduce the cost of an asset by any amount that has been paid by any other person.
  • If the trust realises any capital gains on the disposal, those gains will not be taxable in the trust under Paragraph 80(2) of Schedule Eight. Paragraph 80(2A) of Schedule Eight will not apply.
  • As the repurchase of the units results in vesting, Section 8C of the act applies and any gain determined in respect of the vesting will be subject to PAYE tax, which the trust must withhold.

Paragraph 80(2) of Schedule Eight essentially provides that the beneficiary (and not the trust) must account for CGT where:

  • a trust realises a capital gain on the disposal of an asset; and
  • the beneficiary has a vested interest in the capital gain, but not in the asset.

Paragraph 80(2A) of Schedule Eight applies where a beneficiary of the trust holds an equity instrument to which Section 8C of the act applies. The provision states that, in such case, Paragraph 80(2) of Schedule Eight does not apply in respect of a capital gain that is vested in the beneficiary by reason of:

  • the vesting of that equity instrument in the beneficiary; or
  • the disposal of that equity instrument under Section 8C(4)(a) and Section 8C(5)(c) of the act.


The ruling suggests that Paragraph 80(2) of Schedule Eight applies in respect of any gains realised on a disposal of shares and must be disregarded by the trust where the gains are vested in the beneficiaries. However, the ruling is silent as to whether any such gains must be taken into account for the purposes of calculating the beneficiaries' aggregate capital gains or losses. The ruling does not explicitly state whether the beneficiaries should account for CGT.

It is possible that – in light of the ruling – there is no CGT, and that the only tax that arises is income tax in the hands of the beneficiaries on the repurchase of the units under Section 8C of the act. However, the ruling does not provide clarity on the interplay between CGT and income tax in schemes such as that described above. Generally, this issue is a vexed one and greater clarity from SARS or the legislature is welcome.

For further information on this topic please contact Ben Strauss at Cliffe Dekker Hofmeyr by telephone (+27 21 481 6300) or email ( The Cliffe Dekker Hofmeyr website can be accessed at

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