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Further amendments relating to share incentive trusts

Friday, 04 August 2017   (0 Comments)
Posted by: Author: Heinrich Louw
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Author: Heinrich Louw (CDH)

In 2015, several amendments were made to the Income Tax Act, No 58 of 1962 (Act) relating to the tax treatment of share incentive schemes. These amendments caused a substantial amount of uncertainty, specifically in respect of the disposal of shares by the incentive trust.

For some time, the following view was held:

Under paragraph 11(1)(d) the vesting of an interest in an asset of a trust in a beneficiary is a disposal. The word ‘vesting’ is used in paragraph 11(1)(d) in the common law sense of unconditional entitlement. It does not mean a vesting as contemplated in s8C which occurs when all restrictions on the disposal of the share are lifted. If the common law vesting in an employee of a share by a share incentive trust precedes the vesting under s8C, paragraph 11(2)(j) prevents a disposal at the time of the common law vesting. When all restrictions are lifted on the share it vests under s8C but this event is not a disposal. It will therefore be observed that from the trust’s perspective, there is no disposal of the share either at the time of the common law vesting or at the time of the s8C vesting. Paragraph 11(2)(j) thus prevents any capital gain from arising in the trust and being attributed to the employee under paragraph 80(1). Such a capital gain if allowed to arise would result in double taxation since the employee would be taxed on a capital gain which is already reflected in the s8C income gain. (SARS Capital Gains Tax Guide: Issue 4 – December 2011).

In the Explanatory Memorandum to the 2015 Taxation Laws Amendment Bill, it was indicated that:

There is an anomaly in the interaction between taxation of share incentive trusts in s8C and time of disposal as well as attribution of capital gains to beneficiaries in the 8th schedule. It has come to our attention that paragraph 11(2)(j) of the 8th schedule has been misinterpreted to mean that there is no disposal event at all by a trust in respect of an equity instrument.

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