Page 510 - SAIT Compendium 2016 Volume2

IN 55 (2) Income Tax acT: InTeRPReTaTIon noTes IN 55 (2)
by the employer is in terms of a restriction imposed in respect of that equity instrument. In these circumstances, if the employer subsequently disposes of that equity share, no gain is deemed to be made by the taxpayer [section 8C(5)(c)]. 4.6 Determination of a taxpayer’s income
(a) Inclusion in income
(a) In the circumstances described below, the amounts indicated must be included in a taxpayer’s income—
(i) if the restricted equity instrument is repurchased by the employer, the amount by which the sum received by or accrued to the taxpayer exceeds the sum of any consideration paid for that equity instrument [section 8C (2) (a)
(i) (aa)];
(ii) if the equity instrument is an option to acquire a share, or a nancial instrument convertible into a share, which
is disposed of by release, abandonment or which lapses, the amount by which the sum received by or accrued to
the taxpayer exceeds the sum of any consideration paid for that equity instrument [section 8C (2) (a) (i) (bb)];
(iii) if the taxpayer holds a restricted equity instrument, and a capital distribution as contemplated in paragraph 74 of the Eighth Schedule to the Act, other than a capital distribution of an equity instrument, is made in respect
of that instrument, the amount of the capital distribution [section 8C (1A)]; or
(iv) in any other case, the amount by which the market value at the date of vesting exceeds any consideration paid
by the taxpayer in respect of that instrument [section 8C (2) (a) (ii)].
(b) Deduction from income
If the amount so calculated results in a loss to the taxpayer, the loss may be deducted from the taxpayer’s income, notwithstanding the prohibition against such deductions contained in section 23 (m) [section 8C (1) (a) and (2) (b)].
(c) Special circumstances
If a taxpayer exchanges one restricted equity instrument acquired from the employer for another restricted equity instrument from that employer, and in addition receives any payment in a form other than a restricted equity instrument, the additional payment must be included in the income of the taxpayer, and the ‘new’ equity instrument so acquired is deemed to have been received by the taxpayer by virtue of his employment or of ce of director. However, the taxpayer may deduct any consideration attributable to that payment, for example, the amount paid for the ‘old’ restricted equity instrument. If the result is a loss, the loss may be deducted from the taxpayer’s income [section 8C (4) (a) and (b)].
Example 3 – Exchange of restricted equity share instrument for another equity instrument
Facts:
An employee of Company J, Z, acquires 100 shares, being restricted equity instruments, at a price of R2 per share from her employer. Z may not sell the shares until a period of three years has expired. After two years, Company J is acquired in a takeover by Company K. The original Company J shares acquired by Z are exchanged for 100 shares in Company K, with a market value of R3 per share. The balance of the restriction applicable to the old shares applies to the newly acquired shares. After another one year, when the restriction falls away and Z is entitled to dispose of the new shares, the market value is R8 per share.
Result:
The shares originally acquired are restricted equity instruments. As the new restricted equity instruments were acquired in exchange for the old shares, the new shares are deemed to have been acquired by virtue of Z’s employment, and section 8C applies to any vesting.
No amount is required to be included in income when the exchange of shares takes place, as no vesting has occurred. When the shares eventually vest, Z must include in her income the gain made of R6 per share (R8 market value at vesting less R2 paid for the original equity instruments).
Example 4 – Cash received upon exchange of restricted equity instrument
Facts:
The circumstances are the same as in Example 3, except that the market value of the shares received in exchange is R1 per share; and in addition to the new equity shares, Z receives R120 in cash. Nothing is paid for the new shares. Result:
The additional payment of R120 in cash is included as a gain in the taxpayer’s income in the year of exchange. No consideration may be deducted from the income, as nothing was paid for the new shares. Upon vesting, the gain to be included in Z’s income will be R6 per share (R8 market value at vesting less R2 paid for the original equity instruments).
5 Application of the law – Employees’ tax
5.1 Deduction upon vesting
(a) (b)
Any gain made upon the vesting of any equity instrument as contemplated in section 8C is deemed to be an amount of remuneration that is payable to the employee by the person by whom the right was granted or from whom the equity instrument was acquired, under paragraph 11A (1) of the Fourth Schedule to the Act.
Employee’ tax in respect of the gain must be deducted or withheld by the person who granted the right to the employee, or from whom the equity instrument was acquired, from—
(i) any consideration paid or payable to the employee in respect of the disposal of vested equity shares; or
(ii) any cash remuneration paid or payable by that person to the employee from the amount of the gain made on the
vesting of the equity instrument.
The employer must ascertain from the Commissioner the amount of employees’ tax which must be deducted from the amount of the gain made on the vesting of the equity instrument. Therefore, a tax directive application must be submitted to SARS. Employees’ tax must be deducted during the year of assessment in which the gain has arisen as a result of the vesting of the equity instrument.
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