Page 541 - SAIT Compendium 2016 Volume2

IN 62 Income Tax acT: InTeRPReTaTIon noTes IN 62
(c) Restrictions on the disposal of the equity shares by the employee or former employee within a period of ve years (but not exceeding 5 years) from the date of grant.
3.2 Date of grant
The date of grant in relation to an equity share is the date on which the granting of the equity share is approved by the directors or any other person or body of persons with comparable authority. This date is not necessarily the date when the ownership of the share is registered in the name of the employee.
3.3 Gain
A gain only occurs on disposal of either a qualifying equity share, or a right or interest in that share. The gain is the difference between—
• the amount received or accrued in respect of a disposal; and
• the consideration given by the employee for that share, right or interest.
Only amounts actually paid by the employee to acquire the share, right or interest may be considered. If the consideration is in any other form, for example services rendered or to be rendered, or accepting any restrictions or performing any actions, it may not be taken into account.
3.4 Market value
Market value is the price that could be obtained upon the sale of the equity share between a willing buyer and a willing seller dealing freely at arm’s length in an open market.
3.5 Qualifying equity share
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The following requirements must be met for a share to be a ‘qualifying equity share’:
The share must be an ‘equity share’. An ‘equity share’ is de ned in section 1 to mean part of the issued share capital of a company, but excluding any portion thereof that does not carry any participation rights. Options to acquire shares and convertible nancial instruments do not constitute qualifying equity shares.
The equity share must be acquired by the employee under a broad-based employee share plan.
The market value of the shares acquired may not exceed R50 000 during the current and previous four years of assessment. None of the shares acquired will be regarded as qualifying equity shares if an employee acquires shares where the market value exceeds the R50 000 limit, unless they are new shares acquired by virtue of shares already held.
3.6 Employer and employee
Neither the word ‘employee’ nor the word ‘employer’ is de ned for the purpose of section 8B. These words are also not de ned in section 1. When interpreting section 8B, these words must be given their ordinary meaning. In terms of the common law, the relationship between an employee and an employer arises out of a contract of employment. A contract of employment is an agreement under which one person (the common law employee) works for another person (the employer) in exchange for remuneration.
4. Application of the law
4.1 Acquisition of qualifying equity shares
Employees may acquire any qualifying equity share at no cost or for a consideration below the par value. The total value of all qualifying equity shares acquired under a broad-based scheme may not exceed a total market value of R50 000 during a ve year period consisting of the current and four previous years of assessment. All requirements of a ‘broad-based employee share plan’ must be met before an equity share may be regarded as a qualifying equity share.
Example 1 – Qualifying equity shares
Facts: ABC Ltd has 15 million authorised shares, 7.5 million of which were approved and issued at a par value of R1 each. ABC Ltd decides to grant 25 000 shares to each of the permanent employees on 7 March 2009, at par value. The market value of the shares at the date of grant was R2 each. No restrictions apply to these shares, but if an employee leaves ABC Ltd before 7 March 2014, the employee must sell all 25 000 shares back to the company at the market value of the share as at the date of acquisition. Employees have full dividend and voting rights.
Result: The employees are not taxed on the market value of the shares received from ABC Ltd. The shares granted to the employees are qualifying equity shares, because—
• they have been acquired by employees in terms of a ‘broad-based employee share plan’; and
• The total market value of the shares acquired by the employees does not exceed R50 000.
Note:
(a) Qualifying equity shares acquired, at no consideration or for a consideration below market value, are not included as taxable bene ts under proviso (iii) of paragraph 2 (a) of the Seventh Schedule to the Act.
(b) The market value of a qualifying equity share received by or accrued to a person on the date of grant is exempt in the hands of that person under section 10 (1) (nC).
4.2 Acquisition of deemed qualifying equity shares
In certain circumstances, shares acquired by employees already in possession of qualifying equity shares are deemed to be qualifying equity shares. These are broadly—
• the acquisition of equity shares as a result of the disposal of qualifying equity shares already held; or
• the acquisition of equity shares by virtue of equity shares already held.
The tax consequences of these transactions are discussed more fully below.
4.2.1 Acquisition of equity shares as a result of the disposal of qualifying equity shares
The following occurs where an employee acquires new equity shares in exchange for the disposal of qualifying equity share already held:
• The other equity share received in exchange is deemed to be a qualifying equity share (‘new equity share’).
• The date on which the new equity share is deemed to have been received is the date of grant of the original qualifying
equity share disposed of in exchange (‘original equity share’).
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