The Minister of Finance Nene, in his first Budget Speech announced that section 8C of the Income Tax Act (The Act) would be amended to deal with anomalies therein. This has had businesses start to think what could he possibly mean and what are the changes?

Section 8C deals with Share Schemes and Employee Share Schemes, allowing companies to create trusts or other vehicles to sell shares to their employees be they line workers or senior executives. Accordingly 8C applies in respect of gains or losses made by the tax payer in respect of:

‘[T]he vesting of an equity instrument which was acquired by a taxpayer by virtue of his employment or office of director.’

Further there are two types of ‘equity instrument’, the unrestricted instrument usually found in public companies, and the restricted instrument which is found in private companies but, can be used in a public company. Restricted meaning that something apart from legislation restricts the holder thereof of disposing or claim full ownership of the shares (vesting).

The Act has another section dealing with share schemes, but limits its application to BBBEE share schemes. It should be noted that section 8B of the act prohibits the employee from participating in any other share scheme, for example 8C.

The potential company or employer can use either, but with the proviso that if section 8B is used, the employees involved may not share in another BBBEE share scheme. But can they share in a section 8C scheme? Thus ambiguity could arise when an employer has to decide which section to use before starting an employee share scheme and whether it will mean restricting his employees from participating in other share schemes

Another area of possible contention and therefore possible change is the provision allowing a company to sell shares to an employee or employee trust for less than or no consideration (thus devaluing the company and creating a loan on the company’s books and encumbering the company). The company can claim this loan or its repayments as a write off under certain circumstances. Further any distribution of shares where no consideration is paid, the person set to acquire said shares will be deemed to have a nil assessment for tax purposes, section 40C of the Act.

Said ‘loan’ of which will only be repaid once shares are either sold or dividends have been used to pay for the shares. It is possible that as a result the payment of dividends into a share scheme, could be sued by the issuing company to offset the outstanding amount. The company could claim that this payment is in fact not a dividend but a loan repayment and thus not pay any tax on said amount and that the employee or employee trust will not pay dividends tax as it could also claim that the amount is going to pay an outstanding loan amount.

Another area of contention is ‘services rendered as consideration’ for unpaid or partially paid shares. This could change to allow the government to either define services rendered or remove this from the act.

Finally the act of vesting of shares has tax consequences. An example of such is as follows the Taxpayer is given an option to purchase 10 000 shares at R10 each. Said shares market value is R15 per share. The option is exercised and the taxpayer is issued the shares, these are then restricted as he may not sell them for three years (restricted equity instruments).

1. Firstly he will not be taxed on the value of said option as section 10(1)(nD) exempts this as the shares have not yet fully vested.
2. Yet if he exercises the option when the marker value is at R22 per share he will make a gain of R12. He will thus not be taxed on this gain and will not be taxed on this option as section 8C(3)(b) states that ‘when one restricted equity instrument (the option) is disposed of for another restricted equity instrument (the share), this does not constitute a vesting of the option.

Yet if the above is for a BBBEE person or scheme, the people or trustees must be allowed voting rights, which usually only happens once the shares have vested. Thus vesting or its meaning is or can lead to confusion.

Finally the Minister of Finance and the Treasury are keeping their proverbial cards close to their chests. The reason for this is that section 8C is a useful method for companies to shift shares to employees who might not be able to afford purchasing them or to Directors in lieu of actual remuneration. Any radical changes could see serious backlash or even a challenge in the courts.

Written by Robert Louw, Schoemanlaw Inc.