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IN 55 (2) Income Tax acT: InTeRPReTaTIon noTes IN 55 (2)
4.3.2 Market value
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Market value means in relation to an equity instrument—
of a private company (referred to in the Companies Act, 1973), an amount determined in terms of a method of valuation prescribed in the rules relating to that equity instrument, which is used consistently and is regarded as a proxy for the market value of that equity instrument for the purpose of those rules; or
of any other company, the price of which an instrument could be obtained between a willing buyer and a willing seller on the open market at arm’s length.
4.4 The gain or loss to be included in the taxpayer’s income
It is the vesting of an equity instrument that results in a gain or loss to be included in or deducted from the income of the taxpayer. Subject to certain exceptions discussed in 4.6, the gain is the amount by which the market value on the date of vesting exceeds any consideration paid in respect of the equity instrument. Conversely, the loss is the amount by which the consideration paid exceeds that market value on the date of vesting.
4.5 Timing of taxable event in respect of equity instruments
T he event that triggers taxation in the hands of the taxpayer is the vesting of an equity instrument. Unrestricted equity instruments vest when the employee acquires the instrument. Restricted equity instruments vest on the earlier of any of the following events:
(a) All the relevant restrictions on an equity instrument cease to have effect.
(b) Immediately after termination of—
(i) an option to acquire a restricted equity instrument; or
(ii) a nancial instrument which is convertible into a restricted equity instrument.
This provision does not apply when exercising the option, or when converting the nancial instrument, as the case may be.
(c) Death of an employee provided all restrictions relating to that equity instrument are or may be lifted upon the taxpayer’s death. The date of accrual is deemed to be the day immediately preceding the date of death.
(d) At the time an equity instrument is disposed of to the employer at less than market value.
(e) Immediately before disposal of the equity instrument by the taxpayer, except in the case of the following disposals: (i) The exchange of a restricted equity instrument to which section 8C applies, for another restricted equity
instrument.
(ii) Any disposal of an equity instrument that constitutes a qualifying equity share as contemplated in section 8B.
(iii) The disposal of a restricted equity instrument to another person in terms of a transaction which is not an arm’s length transaction.
(iv) The disposal of a restricted equity instrument to a connected person.
(v) The disposal is to the employer at less than the market value of the restricted equity instrument.
Example 1 – Vesting of a restricted equity instrument
Facts:
X is employed by Company J and acquired shares in Company J for R100, when the shares had a value of R100. In terms of the agreement, X is not allowed to sell the shares for two years. After a period of two years the market value of the shares is R150.
Result:
Section 8C comes into operation because X acquired the shares by virtue of his employment with Company J. The shares in Company J are restricted equity instruments since there is a restriction imposed on the disposal of the shares. The shares will only vest in X after the two-year period, when the restriction expires. The gain of R50 (R150 – R100) is included in X’s income in the year of assessment in which the shares vest in him.
Example 2 – Disposal of a restricted equity instrument to a connected person
Facts:
An employee, Y, is granted and accepts options to acquire 100 restricted equity shares from Company J by virtue of his employment with Company J, at R1 per share. The underlying shares may not be disposed of for ve years. After three years, when the underlying shares have a market value of R4 per share, Y disposes of the options to his wife. After ve years all restrictions fall away and his wife acquires the underlying shares at R1 per share when their market value is R7 per share.
Result:
The disposal of the option by Y to his wife is treated as a non-event for vesting purposes, as his wife is a connected person to Y. When all restrictions fall away and his wife becomes entitled to dispose of the shares, the gain of R6 per share made by his wife (R7 market value less R1 paid for the share) is deemed to be a gain made by Y. Y must account for income of R600 in his tax return, and Company J must withhold employees’ tax from Y’s remuneration.
Note: Section 58(2) deems the restricted instrument to be donation at the time that it is deemed to vest for the purposes section 8C, if a person disposes such an instrument to a connected person. The value for donations tax is the fair market value of that instrument at that time, reduced by any amount of consideration in respect of that donation.
The same principle in Example 2 applies where the original equity instrument was acquired by a person other than the taxpayer, for example, Y’s wife acquires an equity instrument from Company J by virtue of his employment with Company J. The instrument is deemed to be originally acquired by Y, and disposed of by him to his wife in the same way as described in Example 2 [section 8C(5)(b)].
An exception to the rules deeming disposals by other parties to accrue to the taxpayer is the situation where the taxpayer disposes of a restricted equity instrument to his employer for an amount less than the market value, and if the repurchase
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