Page 512 - SAIT Compendium 2016 Volume2

IN 55 (2) Income Tax acT: InTeRPReTaTIon noTes IN 55 (2) An amount received or accrued from the vesting of any equity instrument must be disclosed under code 3718, and
code 3768 in respect of foreign services income, on the IRP 5 certi cate.
6. Conclusion
Section 8C will apply to every vesting of an equity instrument acquired by virtue of employment or the holding of an of ce on or after 26 October 2004. It is important in the case of restricted equity instruments to note that the valuation and taxing event is delayed until such time as all restrictions are lifted or are no longer applicable. This section seeks to trigger taxation only when an employee effectively cashes out the employee’s stake in the employer and the taxation under this section seeks further to preserve ordinary treatment for growth–related salary as opposed to arti cial characterisation as capital.
Legal and Policy
SOUTH AFRICAN REVENUE SERVICE
Annexure – The law
Section 8C – Taxation of directors and employees on vesting of equity instruments.
(1) (a) Notwithstanding section 9B, 9C and section 23 (m), a taxpayer must include in or deduct from his or her income for a year of assessment any gain or loss determined in terms of subsection (2) in respect of the vesting during that year of any equity instrument, if that equity instrument was acquired by that taxpayer—
(i) by virtue of his or her employment or of ce of director of any company or from any person by arrangement with the taxpayer’s employer;
(ii) by virtue of any restricted equity instrument held by that taxpayer in respect of which this section will apply upon vesting thereof; or
(iii) as a restricted equity instrument during the period of his or her employment by or of ce of director of any company from—
(aa) that company or any associated institution in relation to that company; or (bb) any person employed by or that is a director of—
(A) that company; or
(B) any associated institution in relation to that company.
(b) This section does not apply in respect of any equity instrument which—
(i) was acquired by the exercise or conversion of, or in exchange for the disposal of, any other equity instrument where this section applied in respect of the vesting of that other equity instrument before that exercise, conversion or exchange; or
(ii) constitutes a qualifying equity share contemplated in section 8B.
(1A) If a capital distribution as contemplated in paragraph 74 of the Eighth Schedule, other than a capital distribution
of an equity instrument, is received by or accrues to a taxpayer in respect of a restricted equity instrument, the taxpayer must include the amount of the capital distribution in his or her income for the year of assessment during which the amount is received or accrues.
(2) (a) The gain to be included in the income of a taxpayer—
(i) in the case of—
(aa) a disposal contemplated in subsection (5) (c); or
(bb) a disposal by way of release, abandonment or lapse of an option or nancial instrument contemplated in
paragraph (a) or (b) of the de nition of ‘equity instrument’,
is the amount received or accrued in respect of that disposal which exceeds the sum of any consideration in respect of that equity instrument; or
(ii) in any other case, is the amount by which the market value of the equity instrument determined at the time that it vests in that taxpayer exceeds the sum of any consideration in respect of that equity instrument.
(b) The loss to be deducted from the income of a taxpayer—
(i) in the case of—
(aa) a disposal contemplated in subsection (5)(c); or
(bb) a disposal by way of release, abandonment or lapse of an option or nancial instrument contemplated in
paragraph (a) or (b) of the de nition of ‘equity instrument’,
is the amount by which the sum of any consideration in respect of that equity instrument exceeds the amount received or accrued in respect of that disposal; or
(ii) in any other case, is the amount by which the consideration in respect of the equity instrument exceeds the market value of that equity instrument determined at the time that it vests in that taxpayer.
(3) An equity instrument acquired by a taxpayer is deemed for the purposes of this section to vest in that taxpayer—
(a) (b)
in the case of the acquisition of an unrestricted equity instrument, at the time of that acquisition; or in the case of the acquisition of a restricted equity instrument, at the earliest of—
(i) when all the restrictions, which result in that equity instrument being a restricted equity instrument, cease to have effect;
(ii) immediately before that taxpayer disposes of that restricted equity instrument, other than a disposal contemplated in subsection (4) or (5) (a), (b) or (c);
(iii) immediately after that equity instrument, which is an option contemplated in paragraph (a) of the de nition of ‘equity instrument’ or a nancial instrument contemplated in paragraph (b) of that de nition, terminates (otherwise than by the exercise or conversion of that equity instrument);
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