A critical analysis of the tax efficiency of share incentive schemes in relation to employees in South Africa

Jonas, Samantha
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Stellenbosch : Stellenbosch University
ENGLISH ABSTRACT: Share incentive schemes have become an important part of the remuneration package of employees in South Africa. Employers offer share incentive schemes to employees in order to attract and retain high quality workers while aligning the interests of the employees with those of the shareholders. Employees are motivated to participate in share incentive schemes due to the opportunity to invest in their financial future, as well as the opportunity to share in the economic success and growth of the employer company. Due to the increase in the utilisation of share incentive schemes to remunerate employees, the South African Revenue Service (the SARS) increased its focus on the taxation of such schemes. Section 8C of the Income Tax Act No. 58 of 1962 (the Act) was introduced by the SARS on 24 January 2005 to govern the taxation of share incentive schemes in South Africa. Prior to the introduction of section 8C, section 8A sought to tax the gains realised by employees participating in share incentive schemes, being the difference between the market value on the exercise date and the grant price. The tax liability incurred by employees in terms of section 8A did not tax the full gain eventually realised by employees upon vesting of the shares and the SARS sought to close this loophole through the introduction of section 8C to the Act. The employer company is required by the Fourth Schedule to withhold employees’ tax amounting to the gain realised by the employee in terms of section 8C of the Act. This assignment analysed the workings of the four share incentive schemes most commonly found in the South African marketplace, namely: share option scheme, share purchase scheme, deferred delivery share scheme and phantom share scheme. The current normal income tax legislation governing share incentive schemes in relation to employees was examined by considering literature contained in the Act, amendment bills and acts, case law and other material. Based on current income tax legislation, the tax implications of each of the four selected share incentive schemes was determined and compared in order to determine which of the selected share incentive schemes are most tax efficient in relation to the employee. It was concluded that the share option scheme and the deferred delivery share scheme are the most tax efficient schemes in relation to the employee. Based on case studies conducted, along with an analysis of the current income tax legislation contained in the Act, the share option scheme and the deferred delivery share scheme resulted in the lowest overall tax liability for employees. It was further concluded that employers will be required to revisit the structuring of their current share incentive schemes in order to ensure that any dividends paid to employees in terms of the schemes will remain exempt in terms of the amended section 10(1)(k)(i)(dd). The assignment includes recommendations relating to how share incentive schemes can be structured to be more tax efficient.
AFRIKAANSE OPSOMMING: Aandele-aansporingskemas het ’n belangrike deel van die vergoedingspakkette van werknemers in Suid-Afrika geword. Werkgewers bied aandele-aansporingskemas aan werknemers om sodoende hoë-kwaliteit werkers te lok en te behou terwyl die belange van die werknemers met dié van die aandeelhouers belyn word. Werknemers word gemotiveer om aan aandele-aansporingskemas deel te neem vanweë die geleentheid om in hul finansiële toekoms te belê, sowel as die geleentheid om in die ekonomiese sukses en groei van die werkgewer-maatskappy te deel. Weens die toename in die aanwending van aandele-aansporingskemas om werknemers te vergoed, het die Suid-Afrikaanse Inkomstebelastingdiens (die SAID) sy fokus op die belasting van welke skemas verskerp. Artikel 8C van die Inkomstebelastingwet Nr. 58 van 1962 (die Wet) is deur die SAID op 24 Januarie 2005 ingestel om die belasting van aandele-aansporingskemas in Suid-Afrika te beheer. Voor die instelling van artikel 8C het artikel 8A gepoog om die winste gerealiseer deur werknemers wat aan aandele-aansporingskemas deelneem, te belas, synde die verskil tussen die markwaarde op die uitoefeningsdatum en die toekenningsprys. Die belastingaanspreeklikheid aangegaan deur werknemers ingevolge artikel 8A het nie die volle wins uiteindelik gerealiseer deur werknemers ten tye van vestiging van die aandele belas nie, en die SAID het gepoog om hierdie skuiwergat te sluit deur die instelling van artikel 8C in die Wet. Daar word van die werkgewer-maatskappy verwag om werknemersbelasting ingevolge die Vierde Bylaag te weerhou ten bedrae van die wins deur die werknemer ingevolge artikel 8C van die Wet gerealiseer. Hierdie studie het die werking van die vier mees algemene aandele-aansporingskemas in die Suid-Afrikaanse mark geanaliseer, naamlik: die aandele-opsieskema, aandeleaankoopskema, uitgestelde-leweringskema, en die skyn-aandeleskema. Die huidige normale inkomstebelastingwetgewing wat aandele-aansporingskemas ten opsigte van werknemers beheer, is ondersoek deur die literatuur in die Wet, wysigingswetsontwerpe en wette, beslissings en ander materiaal in oënskou te neem. Gebaseer op huidige inkomstebelastingwetgewing is die belastingimplikasies van elk van die vier geselekteerde aandele-aansporingskemas bepaal en vergelyk om sodoende te bepaal watter van die geselekteerde aandele-aansporingskemas die mees belastingdoeltreffend ten opsigte van die werknemer is. Daar is gevind dat die aandele-opsieskema en die uitgestelde-leweringskema die mees belastingdoeltreffende skemas ten opsigte van die werknemer is. Gebaseer op gevallestudies wat uitgevoer is, tesame met ’n analise van die huidige inkomstebelastingwetgewing vervat in die Wet, het die aandele-opsieskema en die uitgestelde-leweringskema gelei tot die laagste algehele belastingaanspreeklikheid vir werknemers. Daar is verder tot die gevolgtrekking gekom dat daar van werkgewers verwag gaan word om die strukturering van hul huidige aandele-aansporingskemas te hersien om sodoende te verseker dat enige dividende wat aan werknemers in terme van die skemas betaal word, vrygestel sal bly ingevolge die aangepaste artikel 10(1)(k)(i)(dd). Die studie sluit aanbevelings in oor hoe aandele-aansporingskemas gestruktureer kan word om meer belastingdoeltreffend te wees.
Thesis (MAcc)--Stellenbosch University, 2012.
Incentives in industry -- Taxation -- South Africa, Employee ownership --Taxation -- South Africa, Theses -- Accountancy, Dissertations -- Accountancy, Assignments -- Accountancy, Dissertations -- Taxation, Theses -- Taxation, Assignments -- Taxation