SARS Interpretation Note 55 Issue 2: Taxation of directors and employees on vesting of equity instruments (source: https://www.sars.gov.za/lapd-intr-in-2012-55-taxation-directors-employees-vesting-equity-instruments/)
INTERPRETATION NOTE: NO. 55 (Issue 2)
DATE: 30 March 2011
ACT : INCOME TAX ACT NO. 58 OF 1962 (the Act)
SECTION : SECTION 8C AND 10(1)(nD), PARAGRAPH 11A OF THE FOURTH
SCHEDULE AND PARAGRAPH 2(a) OF THE SEVENTH SCHEDULE
SUBJECT : TAXATION OF DIRECTORS AND EMPLOYEES ON VESTING OF
EQUITY INSTRUMENTS
Preamble
In this Note –
• references to sections are to sections of the Act; and
• unless the context otherwise indicates, any word or expression in this Note bears
the meaning ascribed to it in the Act.
1. Purpose
This Note provides clarity on the tax implications of any gain made or loss incurred
by any director or employee on the vesting of an equity instrument.
2. Background
Section 8C has been introduced to replace section 8A. Section 8C includes in a
taxpayer’s income any gains or losses made on the vesting of equity instruments,
which were acquired by virtue of employment or the holding of any office of director,
on or after 26 October 2004.
3. The law
For ease of reference, the relevant sections of the Act are quoted in the Annexure.
4. Application of the law – Income tax
Any gain or loss made by an employee as a result of the vesting of any equity
instrument during any year of assessment must be included in or deducted from the
income of the employee. Section 8C prescribes the requirements, circumstances,
exclusions, valuation methodology as well as procedural matters relating to the
inclusion or deduction of amounts that relate to the vesting of equity instruments in
the hands of employees and holders of the office of director. Excluded from the
operations of section 8C are “qualifying equity shares” acquired under a broad-based
employee share plan contemplated in section 8B.
4.1 Application of section 8C
Section 8C applies to any person who acquired an equity instrument –
(a) by virtue of employment or office of a director of any company or from any person
by arrangement with the person’s employer;
(b) by virtue of the fact that the taxpayer already held restricted equity instruments
(for example, as a result of a capitalisation issue or the unbundling of a company)
[section 8C(1)(a)]; or
(c) as a restricted equity instrument during the period of employment by or office of
director of any company from –
(i) that company or any associated institution in relation to that company; or
(ii) any person employed by or that is a director of that company or any
associated institution in relation to that company.
4.2 Nature of equity instruments and restricted equity instruments
It is important to distinguish between a restricted and an unrestricted equity
instrument as it determines the timing of the taxable event.
(a) The definition of an “equity instrument” in section 8C is very wide and
includes –
(i) any share or part thereof in the equity share capital of a company or a
member’s interest in a company, which is a close corporation;
(ii) any non-equity share, such as a redeemable preference share;
(iii) an option to acquire such a share, part of a share or member’s interest;
(iv) any other financial instrument that is convertible to a share, part of a share
or member’s interest; and
(v) any contractual right or obligation the value of which is determined directly
or indirectly with reference to a share or member’s interest, for example, a
contingent or vested interest in a trust that holds shares.
(b) If any of the following restrictions are placed on an equity instrument, the equity
instrument will be a “restricted equity instrument”, as defined in section 8C:
(i) Any restriction (other than restrictions imposed by legislation) that prevents
the taxpayer from freely disposing of the equity instrument at market value,
for example, a requirement that the taxpayer must retain a share for a
specified number of years or may only dispose of the share to a specified
person.
(ii) A restriction whereby the taxpayer could either forfeit ownership of the
equity instrument or the right to acquire ownership of the equity instrument,
at a price other than at market value, for example, where the taxpayer is
required to remain in employment for a period, failing which options to
acquire shares are forfeited or shares already acquired must be resold to
the employer at cost. This will include a restriction where the taxpayer may
be subjected to financial penalties, for example, by the grantor of the
shares, for not complying with the terms of the acquisition agreement.
(iii) A restriction granting any person a right to impose one of the restrictions
contemplated in (i) or (ii) above, for example, an option by the employer to
impose an additional retention period before the shares may be disposed
of.
(iv) In the case of an option to acquire a share, if the share to be acquired is a
restricted equity instrument the option will then also be a restricted equity
instrument. For example, an option to acquire a share that may not be
disposed of for a specified period.
(v) In the case of any financial instrument which is convertible into a share or
member’s interest that is restricted, the financial instrument will be a
restricted equity instrument. For example, convertible debentures that may
only be converted into restricted shares.
(vi) Any instrument that is linked to an undertaking by the employer, at the time
of acquisition by the taxpayer, to either –
• cancel the purchase transaction; or
• repurchase the equity instrument at a price exceeding its market value,
if the market value of the equity instrument declines after that acquisition,
then the equity instrument so acquired will be a restricted equity instrument.
(vii) If the equity instrument is not deliverable to the taxpayer until the happening
of a future event, whether fixed or contingent. For example, where the share
certificate is held by the employer until a loan granted to the taxpayer to
acquire the equity instrument has been repaid, the equity instrument will be
a restricted equity instrument.
Any other equity instrument which does not fall into restricted status in terms of the
categories mentioned above is an “unrestricted equity instrument”, as defined in
section 8C.
4.3 Definitions
4.3.1 Consideration
In respect of an equity instrument it is any amount given or to be given by (otherwise
than in the form of services rendered or to be rendered or anything done, to be done
or not to be done) –
(a) the taxpayer in respect of that equity instrument;
(b) the taxpayer in respect of another restricted equity instrument which has been
disposal by the taxpayer in exchange for that equity instrument; or
(c) any other person in acquiring equity instrument at an arm’s length or from a
connected person in relation to that taxpayer. The actual amount paid by that
person for the equity instrument will be ignored and is replaced by the amount
which would have been paid by the taxpayer, who originally owned the equity
instrument.
Excluding
The market value of an equity instrument given by the taxpayer in exchange for a
new equity instrument acquired. For example, employee A acquired an equity
instrument to the value of R100 and paid R50 as consideration on the date of grant.
Later employee A receives a new equity instrument to the value of R200 in exchange
for the equity instrument already held. The market value of the old equity instrument
(R100) will not be taken into account in determining the consideration. The employee
has still only paid a consideration of R50.
Provided that:
Where a taxpayer acquired any marketable security (that is, security, stock,
debenture, share, option or other interest capable of being sold in a share-market or
exchange or otherwise) in exchange for any other right and that right so acquired
constitutes an equity instrument, the consideration for that equity instrument will be
the initial amount paid in acquisition of original marketable security. The equity
instrument acquired is deemed to be acquired by virtue of employment, and the
value, if the marketable security is disposed of, may not be taken into account in
determining the consideration paid for the new equity instrument acquired.
4.3.2 Market value
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
The 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 financial instrument which is convertible into a restricted equity
instrument.
This provision does not apply when exercising the option, or when converting the
financial 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 five 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 five 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 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
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 financial
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 office 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) 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.
(b) 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.
(c) In the circumstances where the equity instrument was granted by or acquired
from an associated institution in relation to the employer, and that associated
institution is unable to deduct or withhold employees’ tax on the gain (due to the
amount required to be deducted exceeding the remuneration from which the
withholding must be made), then both –
• the person who granted the right to acquire the equity instrument, or from
whom the equity instrument was acquired; and
• the employee’s employer,
are jointly and severally liable for an amount equal to the amount of employees’
tax attributable to the gain. If this occurs, the employees’ tax to be deducted or
withheld must be aggregated over the year of assessment during which the gain
is made. The local SARS office must immediately be notified of this fact.
In the case where the remainder of the year of assessment is insufficient to
deduct or withhold the employees’ tax due in respect of the gain, or where such a
deduction may cause the employee undue hardship, the local SARS office must
be approached for guidance.
(d) An employee may make a gain under a transaction which the employer or the
person who granted the right or from whom the equity instrument was acquired,
was not a party to. In such cases, the employee must immediately inform these
parties of the fact that a gain has been made, and the amount of the gain. Any
employee who fails to perform this duty will be guilty of an offence, and may be
criminally prosecuted.
5.2 Acquisition from an associated institution
An associated institution and the employer are deemed to be jointly and severally
liable for an amount equal to the amount of employees’ tax attributable to that gain
where –
(a) the equity instrument was granted to the employee by an “associated institution”
in relation to the employer (as defined in the Seventh Schedule to the Act) of that
employee; and
(b) that associated institution is unable to deduct or withhold employees’ tax in
respect of the gain, due to the amount required to be deducted exceeding the
remuneration from which the withholding must be made.
The employee must inform his or her employer and the associated institution that
gains have been made in respect of such equity instruments and the amount of the
gain must be disclosed to the employer and the associated institution.
This means that, for example, upon an employee resigning from a previous employer
within the same group but still retains restricted equity instruments in the previous
employer which is an associated institution in relation with that employer, he or she
must inform the current employer about any gain made from the vesting of that equity
instruments from the previous employer.
Example 5 – Acquisition from an associated institution
Facts:
B is employed by Company J. Company K is the holding company of Company J,
and is an associated institution, as defined. B acquires 100 restricted equity
instruments for R300 in Company K by virtue of his employment with Company J. B
may not dispose of those instruments for three years. The market value on the date
of acquisition was R300. When the instruments vest after three years, the market
value is R1 000. There is no cash paid by Company K to B.
Result:
Company K is deemed to pay an amount of remuneration to B, being equivalent to
the amount of the gain of R700 (R1 000 market value at vesting less R300 market
value at acquisition). As Company K does not pay remuneration to B, Company J is
deemed to be jointly and severally liable together with Company K for the deduction
of employees’ tax on the gain.
In some cases, employee’s (residents) who were awarded with restricted equity
instruments are seconded overseas for a certain period before the restriction ceases.
Where the vesting occurs upon return to the Republic or while overseas, the
provision of section 10(1)(o)(ii) will apply. The gain made will be deemed to have
accrued evenly over the period of services rendered. This means that the gain will be
apportioned evenly according to the period relating to services rendered outside the
Republic that qualifies (section 10(1)(o)(ii) exemption) and the period relating to
services rendered in the Republic. The portion of a gain that relates to services
rendered in the Republic will be included in the taxpayer’ income and be taxed
accordingly.
Persons who are not residents are taxed on their receipts or accruals from sources,
within or deemed to be within the Republic. If a person ceased to be a resident, that
person is subjected to immediate deemed disposal of all the assets (that is, restricted
and unrestricted equity instrument) for capital gains tax purposes. However,
paragraph 12(2)(a)(iii) of the Eighth Schedule to the Act exempts unvested equity
instruments, because these instruments will only be subjected to ordinary gain or
loss when vesting takes place. Immediately when a restricted equity instrument
vests, the gain or loss made upon vesting must be apportioned. The portion relating
to the period of service rendered while in the Republic will be subjected to tax in the
Republic.
5.3 Disposal of restricted equity instruments to the employer
An employee, who disposes of an equity instrument to his or her employer in terms of
a restriction imposed by the employer, and for an amount less than the market value
of that equity instrument, must include the amount received, less any consideration
paid for the equity instrument, in his or her income. This amount is also deemed to be
an amount of remuneration paid by the employer to the employee, and is subject to
the deduction of employees’ tax.
5.4 General
An employee that fails to inform his or her employer that he or she has made any
gain on the vesting of any equity instrument, is guilty of an offence and is liable on
conviction to a fine not exceeding R2 000 in terms of paragraph 11A(7) of the Fourth
Schedule to the Act.
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 certificate.
6. Conclusion
Section 8C will apply to every vesting of an equity instrument acquired by virtue of
employment or the holding of an office 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 artificial
characterisation as capital.
Legal and Policy
SOUTH AFRICAN REVENUE SERVICE
Date of first issue: 31 March 2010
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 office 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
office 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
financial instrument contemplated in paragraph (a) or (b) of the definition 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
financial instrument contemplated in paragraph (a) or (b) of the definition 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) in the case of the acquisition of an unrestricted equity instrument, at the time of that
acquisition; or
(b) 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 definition of “equity instrument” or a financial instrument
contemplated in paragraph (b) of that definition, terminates (otherwise than by the
exercise or conversion of that equity instrument);
(iv) immediately before that taxpayer dies, if all the restrictions relating to that equity
instrument are or may be lifted on or after death; and
(v) the time a disposal contemplated in subsection (2)(a)(i) or (b)(i) occurs.
(4) (a) If a taxpayer disposes of a restricted equity instrument which was acquired in the manner
contemplated in subsection (1) for an amount which consists of or includes any other restricted equity
instrument in the employer of the taxpayer or an associated institution in relation to the employer, that
other restricted equity instrument acquired in exchange is deemed to be acquired by that taxpayer by
virtue of his or her employment or office of director of any company.
(b) If the amount received or accrued in respect of the restricted equity instrument which
is disposed of as contemplated in paragraph (a) includes any payment in a form other
than restricted equity instruments, that payment less any consideration attributable to
that payment must be deemed to be a gain or loss which must be included in or
deducted from the income of the taxpayer in the year of assessment during which that
restricted equity instrument is so disposed of.
(5) (a) If a restricted equity instrument which was acquired by a taxpayer in the manner
contemplated in subsection (1) is disposed of by that taxpayer to any person—
(i) otherwise than by or under a disposal made in terms of a transaction at arm’s
length; or
(ii) who is a connected person in relation to that taxpayer,
the provisions of subsection (2), (3) and (4) apply mutatis mutandis in the
determination of any gain or loss made by that person as if that person had been the
taxpayer, and that gain or loss is for purposes of subsection (1) deemed to be made
by that taxpayer in respect of the vesting of that equity instrument.
(b) If an equity instrument was acquired by any person other than the taxpayer by virtue
of the taxpayer’s employment or office of director, that equity instrument must, for
purposes of this section, be deemed to have been so acquired by that taxpayer and
disposed of to that person in the manner contemplated in paragraph (a).
(c) Paragraph (a) does not apply where a taxpayer disposes of any restricted equity
instrument (including by way of forfeiture, lapse or cancellation) to his or her
employer, an associated institution or other person by arrangement with the employer
in terms of a restriction imposed in relation to that equity instrument for an amount
which is less than the market value of that restricted equity instrument.
(6) If a person who acquires a restricted equity instrument from the taxpayer as contemplated in
subsection (5), disposes of that restricted equity instrument to any other person in the manner
contemplated in subsection (5)(a)(i) or to a connected person in relation to the taxpayer,
subsection (5) applies in respect of that other person as if he or she had acquired that restricted
equity instrument directly from that taxpayer.
(7) For the purposes of this section, unless the context otherwise indicates—
“associated institution” means an associated institution as contemplated in paragraph 1 of the
Seventh Schedule;
“consideration” in respect of an equity instrument means any amount given or to be given
(otherwise than in the form of services rendered or to be rendered or anything done, to be done or not
to be done)—
(a) by the taxpayer in respect of that equity instrument,
(b) by the taxpayer in respect of any other restricted equity instrument which had been
disposed of by that taxpayer in exchange for that equity instrument, reduced by any
amount attributable to the gain or loss determined in terms of subsection (4)(b); or
(c) by any person contemplated in subsection (5)(a) or (b) in respect of that restricted
equity instrument to the extent that the amount does not exceed the amount the
taxpayer would have been disposed of by him or her, but does not include any
amount given or to be given by that person to the taxpayer to acquire that restricted
equity instrument:
Provided that where a taxpayer acquires—
(a) an equity instrument in exchange for any other equity instrument, as contemplated in
subsection (4)(a), the market value of the equity instrument, as contemplated in
subsection (4)(a), the market value of the equity instrument given in exchange must
not be taken into account in determining the consideration in respect of the equity
instrument so acquired; or
(b) a right to acquire any marketable security in exchange for any other such right, as
contemplated in section 8A(5), and the right so acquired constitutes an equity
instrument acquired in the manner contemplated in subsection (1), the consideration
for that equity instrument must be determined as if it was acquired in the manner
contemplated in subsection (4)(a);
“employer” means an employer as contemplated in paragraph 1 of the Seventh Schedule;
“equity instrument” means a share or part thereof in the equity share capital of a company or a
member’s interest in a company which is a close corporation, and includes—
(a) an option to acquire such a share, part of a share or member’s interest; and
(b) any other financial instrument that is convertible to a share, part of a share or
member’s interest; and
(c) any contractual right or obligation the value of which is determined directly or indirectly
with reference to a share or member’s interest;
“market value” in relation to an equity instrument—
(a) of a private company contemplated in section 20 of the Companies Act, 1973 (Act
No. 61 of 1973), or a company that would be regarded as a private company if it were
incorporated under that Act, means an amount determined as its value in terms of a
method of valuation—
(i) prescribed in the rules relating to the acquisition and disposal of that equity
instrument;
(ii) which is regarded as a proxy for the market value of that equity instrument for the
purposes of those rules; and
(iii) used consistently to determine both the consideration for the acquisition of that
equity instrument and the price of the equity instrument repurchased from the
taxpayer after it has vested in that taxpayer; or
(b) of any other company, means the price which could be obtained upon the sale of that
equity instrument between a willing buyer and a willing seller dealing freely at arm’s
length in an open market and, in the case of a restricted equity instrument, had the
restriction to which that equity instrument is subject not existed;
“restricted equity instrument” in relation to a taxpayer means an equity instrument—
(a) which is subject to any restriction (other than a restriction imposed by legislation) that
prevents the taxpayer from freely disposing of that equity instrument at market value;
(b) which is subject to any restriction that could result in the taxpayer—
(i) forfeiting ownership or the right to acquire ownership of that equity instrument
otherwise than at market value; or
(ii) being penalised financially in any other manner for not complying with the terms
of the agreement for the acquisition of that equity instrument;
(c) if any person has retained the right to impose a restriction contemplated in
paragraph (a) or (b) on the disposal of that equity instrument;
(d) which is an option contemplated in paragraph (a) of the definition of “equity
instrument” and where the equity instrument can be acquired in terms of that option
will be a restricted equity instrument;
(e) which is a financial instrument contemplated in paragraph (b) of the definition of
“equity instrument” and where the equity instrument to which that financial instrument
can be converted will be a restricted equity instrument;
(f) if the employer, associated institution in relation to the employer or other person by
the arrangement with the employer has at the time of acquisition by the taxpayer of
the equity instrument undertaken to—
(i) cancel the transaction under which that taxpayer acquired the equity instrument;
or
(ii) repurchase that equity instrument from that taxpayer at a price exceeding its
market value on the date of repurchase,
if there is a decline in the value of the equity instrument after that acquisition; or
(g) which is not deliverable to the taxpayer until the happening of an event, whether fixed
or contingent, and
“unrestricted equity instrument” means an equity instrument which is not restricted equity
instrument.
Section 10(1)(nD) – Exemptions
any amount received by or accrued to that person which constitutes—
(i) an equity instrument contemplated in section 8C acquired by that person and in
respect of which that section applies; or
(ii) consideration for the disposal of an equity instrument contemplated in
subparagraph (i),
which had not yet vested as contemplated in that section at the time of that acquisition
or disposal;
Paragraph 1 of the Fourth Schedule – Definitions
“remuneration” means
(e) any gain determined in terms of section 8C which is required to be included in the
income of that person;
Paragraph 11A of the Fourth Schedule – Remuneration of an employee
(1) Where by virtue of the provisions of paragraph (b), (d) or (e) of the definition of
"remuneration" in paragraph 1, the remuneration of an employee includes—
(a) any gain made by the exercise, cession or release of any right to acquire any
marketable security as contemplated in section 8A;
(b) any gain made from the disposal of any qualifying equity share as contemplated in
section 8B; or
(c) any gain made are a result of the vesting of any equity instrument as contemplated in
section 8C,
the amount of that gain must for the purposes of this Schedule be deemed to be an amount of
remuneration which is payable to that employee by the employer by whom that right was granted, or
from whom that equity instrument or qualifying equity share was acquired, as the case may be.
(2) Employees’ tax in respect of the amount of remuneration contemplated in subparagraph (1)
must, unless the Commissioner has granted authority to the contrary, be deducted or withheld by that
employer from any consideration paid or payable by him or her to that employee in respect of the
cession or release of that right or the disposal of that equity instrument of qualifying equity share, as
the case may be, or from any cash remuneration paid or payable by that employer to that employee
after that right has to the knowledge of that employer been exercised, ceded or released or that equity
instrument has to the knowledge of that employer vested or that qualifying equity share has to the
knowledge of that employer been disposed of.
Provided that where that person—
(i) is an “associated institution”, as defined in paragraph 1 of the Seventh Schedule,
in relation to any employer who pays or is liable to pay to that employee any
amount by way of remuneration during the year of assessment during which the
gain contemplated in subparagraph (1) arises; and
(ii) is or will be unable, for the reason described in subparagraph (5), to deduct or
withhold the amount of employees’ tax or part of it in respect of that gain during
that year of assessment,
that person and that employer must deduct or withhold from the remuneration payable by them to that
employee during that year of assessment an aggregate amount equal to the employee’s tax payable
in respect of that gain shall be jointly and severally liable for that employee’s tax.
(3) The provisions of this Schedule apply in relation to the amount of employees’ tax deducted or
withheld under subparagraph (2) as though that amount had been deducted or withheld from the
amount of the gain referred to in subparagraph (1).
(4) Before deducting or withholding employees tax under subparagraph (2) in respect of
remuneration contemplated in subparagraph (1)(a) or (c), the employer must ascertain from the
Commissioner the amount to be so deducted or withheld.
(5) If that employer is, by reason of the fact that the amount to be deducted or withheld by way of
employees’ tax exceeds the amount from which the deduction or withholding is to be made, unable to
deduct or withhold the full amount of employees’ tax during the year of assessment during which the
gain arises, he or she must immediately notify the Commissioner of the fact.
(6) Where an employee has under any transaction to which the employer is not a party made
any gain or an employee has disposed of any qualifying equity share as contemplated in
subparagraph (1), that employee must immediately inform the employer thereof and of the amount of
that gain.
(7) Any employee who without just cause shown by him or her fails to comply with the provisions
of subparagraph (6), shall be guilty of an offence and liable on conviction to a fine not exceeding
R2 000.
Proviso (iv) of paragraph 2(a) of the Seventh Schedule to the Act provides that no
taxable benefit will arise in terms of paragraph 2(a) in respect of –
(iv) any equity instrument as contemplated in section 8C
Diamond Export Levy Act, 2007
