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News & Press: Capital Gains Tax

Correction of CGT treatment when a trust grants equity

28 July 2015   (0 Comments)
Posted by: Author: Dan Foster
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Author: Dan Foster (Webber Wentzel)

When an employee share trust distributes shares or other equity instruments to a beneficiary (usually an employee), any gain on that disposal by the trust is deemed to arise in the hands of the beneficiary, and not the trust, at that time. However, the share distributed may be acquired by virtue of employment, in terms of section 8C, and therefore subject to income tax upon 'vesting' (ie the earlier of disposal or when all restrictions on the equity instrument cease to have effect). The base cost of such an asset, for CGT purposes, in terms of paragraph 20(1)(h)(i) of the Eighth Schedule, is deemed to be the amount (market value or actual proceeds, as the case may be) used to determine the gain in terms of section 8C, which was subject to income tax.

The existing rules therefore seek to prevent the same gain in value from being subject to both income tax (in terms of section 8C) and to CGT. However, these rules presume that the section 8C gain will occur first (on 'vesting') and the CGT event later (on disposal). When a trust distributes a restricted equity instrument to an employee, the CGT event occurs first and the section 8C event later.

A timing miss-match for CGT may therefore occur when a restricted equity instrument is distributed by a trust to an employee, since section 8C vesting will only apply at a later point. It is proposed that the gain on disposal of the equity instrument by the trust will not be attributed to the beneficiary, as is currently the case in terms of paragraph 80(1), if such equity instrument was acquired in connection with employment (ie in terms of section 8C(1)). Furthermore, the disposal of the equity instrument will be deemed to occur, in terms of paragraph 13, only once the equity instrument vests in the hands of the employee for section 8C purposes.

he proceeds of the disposal by the trust to a beneficiary, being a connected person, are deemed to be market value. The base cost of that equity instrument will be market value (or actual proceeds, where applicable) used to determine the amount taxed in terms of section 8C (in the employee's hands). The trust may therefore have a gain of nil. However, any gain that does arise would be taxable at 27.3% (rather than 13.7% in the hands of an individual). It must be noted that section 8C uses actual proceeds, rather than market value, to determine the gain in cases where the employee disposes of the equity instrument to their employer for less than market value. A capital gain arising in the trust in this manner may be an unintended consequence of the proposed amendments and submissions will be made in this regard.

It is also noteworthy that the proposed amendment to paragraph 13 (the timing rule for CGT) refers to the "granting" of an equity instrument by a trust. It is unclear whether this is intended to capture only disposals of equity instruments by the trust to beneficiaries (which is the subject of the corresponding amendment to paragraph 80(1)) or also meant to capture the issuance of, for example, trust units to beneficiaries. If the later, then the amended timing rule would seem have no purpose. No Explanatory Memorandum has been issued with respect to these amendments; therefore the purpose is not entirely clear. Submissions will also be made in this respect.

These amendments are proposed to be retrospective from 1 March 2015.

Notably, no other changes to section 8C or the exemptions relating to related dividends have been proposed.

This article first appeared on


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