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Draconian Proposal to Hit Share Incentive Arrangement

13 September 2016   (0 Comments)
Posted by: Author: David Warneke
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Author: David Warneke (BDO)

The Draft Taxation Laws Amendment Bill of 2016 contains a proposal to tax dividends that would result in a punitive effective rate of tax that is neither fair nor conducive to the promotion of business in South Africa. 

The proposal is in respect of services rendered, with narrow exceptions, and would affect restricted equity instruments. These are usually units in a share incentive trust or shares that are subject to a restriction – usually that the employee may not dispose of his or her units or shares for a certain period.

Employers commonly place such restrictions on shares or units in order to align the economic interests of the employee with those of the employer in that the employee should contribute to an increase in the value of the company’s shares while he or she remains in employment. 

The basic principle of income tax that applies in these circumstances is that the employee is subject to income tax on the market value of the shares or units at the point at which the restrictions fall away (which is referred to as the "vesting date”), with a reduction for expenditure incurred (if any) in acquiring the shares or units. For example, if on the vesting date a share has a market value of R100 and the employee paid R40 to acquire it, the gain of R60 is taxed at the employee’s marginal income tax rate in the tax year in which the vesting date falls. 

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