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

[摘要] ENGLISH ABSTRACT: Share incentive schemes have become an important part of the remuneration package ofemployees in South Africa. Employers offer share incentive schemes to employees inorder to attract and retain high quality workers while aligning the interests of theemployees with those of the shareholders. Employees are motivated to participate in shareincentive schemes due to the opportunity to invest in their financial future, as well as theopportunity to share in the economic success and growth of the employer company. Dueto the increase in the utilisation of share incentive schemes to remunerate employees, theSouth African Revenue Service (the SARS) increased its focus on the taxation of suchschemes.Section 8C of the Income Tax Act No. 58 of 1962 (the Act) was introduced by the SARSon 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 byemployees participating in share incentive schemes, being the difference between themarket value on the exercise date and the grant price. The tax liability incurred byemployees in terms of section 8A did not tax the full gain eventually realised by employeesupon vesting of the shares and the SARS sought to close this loophole through theintroduction of section 8C to the Act. The employer company is required by the FourthSchedule to withhold employees' tax amounting to the gain realised by the employee interms of section 8C of the Act.This assignment analysed the workings of the four share incentive schemes mostcommonly found in the South African marketplace, namely: share option scheme, sharepurchase scheme, deferred delivery share scheme and phantom share scheme. Thecurrent normal income tax legislation governing share incentive schemes in relation toemployees was examined by considering literature contained in the Act, amendment billsand acts, case law and other material. Based on current income tax legislation, the taximplications of each of the four selected share incentive schemes was determined andcompared in order to determine which of the selected share incentive schemes are mosttax efficient in relation to the employee. It was concluded that the share option scheme and the deferred delivery share schemeare the most tax efficient schemes in relation to the employee. Based on case studiesconducted, along with an analysis of the current income tax legislation contained in theAct, the share option scheme and the deferred delivery share scheme resulted in thelowest overall tax liability for employees. It was further concluded that employers will berequired to revisit the structuring of their current share incentive schemes in order toensure that any dividends paid to employees in terms of the schemes will remain exemptin terms of the amended section 10(1)(k)(i)(dd). The assignment includesrecommendations relating to how share incentive schemes can be structured to be moretax efficient.

[发布机构] Stellenbosch University