Page 544 - SAIT Compendium 2016 Volume2

IN 62 Income Tax acT: InTeRPReTaTIon noTes IN 62
Section 11 (lA) permits an employer a deduction of an amount equal to the market value of qualifying equity shares granted to employees, less any consideration paid by the employees for those shares.
The deduction may not, in any year of assessment, in aggregate exceed R10 000 for a single employee. Any amount in excess of R10 000 may be carried forward to the following year of assessment. Deductions that may have been permitted under any other provision of the Act are prohibited.
Only the employer is entitled to claim the deduction, even though the shares may have been granted by an associated institution in relation to that employer. The associated institution is not entitled to a deduction under this section.
5. Conclusion
It is important to ensure that all the requirements of section 8B are met before a scheme becomes eligible as a broad- based employee share plan. Should all the requirements not be met, it could result in an under-deduction of employees’ tax, with all the resultant legal consequences.
Legal and Policy Division
Example 6 – Deduction for employers for shares granted in terms of section 8B
Facts: XYZ Ltd sold 1 000 equity shares (each share having a par value of R1) to each of its employees for R1 per share. The equity shares were qualifying equity shares. The market value of each share on the date of grant was R45. Results: XYZ Ltd is entitled to a deduction in the determination of its taxable income of R35 000, being the market value of the qualifying equity shares issued to employees (R45 000 [1 000 shares at R45 per share]) less the consideration paid by the employees for those shares (R10 000). The deduction is limited to R10 000 per employee per year. The excess deduction of R25 000 (R35 000 less R10 000) can be carried forward to the subsequent year of assessment.
SOUTH AFRICAN REVENUE SERVICE
Section 8B – Taxation of amount derived from broad-based employee share plan
(1) Notwithstanding section 9C, there must be included in the income of a person for a year of assessment any gain made by that person during that year from the disposal of any qualifying equity share or any right or interest in a qualifying equity share, which is disposed of by that person within ve years from the date of grant of that qualifying equity share, otherwise than—
(a) in exchange for another qualifying equity share as contemplated in subsection (2);
(b) on the death of that person; or
(c) on the insolvency of that person.
(2) If a person disposes of a qualifying equity share in exchange solely for any other equity share in that employer or any company that is an associated institution as de ned in the Seventh Schedule in relation to that employer, that other equity share acquired in exchange is deemed to be—
(a) a qualifying equity share which was acquired by that person on the date of grant of the qualifying equity share
disposed of in exchange; and
(b) acquired for a consideration equal to any consideration given for the qualifying equity share disposed of in
exchange.
(2A) If a person acquires any equity share by virtue of any qualifying equity share held by that person, that other
equity share so acquired is deemed to be a qualifying equity share which was acquired by that person on the date of grant of the qualifying equity share so held by that person.
(2B) If a person disposes of any right or interest in a qualifying equity share, the amount of consideration incurred in respect of the acquisition of that qualifying equity share that is attributable to that right or interest must be determined in accordance with the ratio that the amount received for the disposal of that right or interest bears to the market value of that qualifying equity share immediately before that disposal
(3) For the purposes of this section—
‘broad-based employee share plan’ of an employer means a plan in terms of which—
(a) equity shares in that employer, or in a company that is an associated institution as de ned in the Seventh Schedule in relation to the employer, are acquired by employees of that employer, for consideration which does not exceed
the minimum consideration required by the Companies Act, 1973 (Act 61 of 1973);
(b) employees who participate in any other equity scheme of that employer or of a company that is an associated institution as de ned in the Seventh Schedule in relation to that employer are not entitled to participate and where at least 80 per cent of all other employees who are employed by that employer on a permanent basis on the date of grant (and who have continuously been so employed on a full-time basis for at least one year) are entitled to
participate;
(c) the employee who acquire the equity shares as contemplated in paragraph (a) are entitled to all dividends and full
voting rights in relation to those equity shares; and
(d) no restrictions have been imposed in respect of the disposal of those equity shares, other than—
Annexure – The law
(i) (ii)
a restriction imposed by legislation;
a right of any person to acquire those equity shares from the employee or former employee who acquired the equity shares as contemplated in paragraph (a)—
(aa) in the case where the employee or former employee is or was guilty of misconduct or poor performance,
at the lower of market value on the date of grant or market value on the date of acquisition by that employer; or
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saIT comPendIum oF Tax LegIsLaTIon VoLume 2