SARS Interpretation Note 62: Broad-based employee share plan (source: https://www.sars.gov.za/lapd-intr-in-2012-62-broad-based-employee-share-plan/)
INTERPRETATION NOTE: NO. 62
DATE: 30 March 2011
ACT : INCOME TAX ACT NO. 58 OF 1962 (the Act)
SECTION : SECTIONS 8B, 10(1)(nC) AND 11(lA)
SUBJECT : BROAD-BASED EMPLOYEE SHARE PLAN
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 explains the tax consequences for an employee who participates in a broad-
based employee share plan.
2. Background
In his 2004/05 Budget Speech, the Minister of Finance proposed the introduction of
legislation which will allow a tax-free transfer of shares by an employer to employees in
order to encourage broad-based employee participation in companies.
Section 8B was subsequently introduced into the Act by section 8(1) of the Revenue
Laws Amendment Act No. 32 of 2004 and is applicable with effect from 26 October
2004. Section 8B deals with any “qualifying equity shares” acquired under a broad-
based employee share plan approved on or after 26 October 2004. The aim is to
encourage long-term empowerment of employees through the receipt of shares at less
than market value without adverse tax consequences.
Section 11(lA) was introduced to permit a deduction for the person granting qualifying
equity shares.
3. The law
The purpose of section 8B is to provide an exemption from income tax of certain gains
which may accrue to an employee from a qualifying broad-based employee share plan.
The exemption is limited to gains made upon the disposal of a “qualifying equity share”
acquired under a “broad-based employee share plan”. Certain strict conditions must be
met before the gains are exempt from income tax and capital gains tax.
In order to understand the provisions of section 8B, a few definitions are crucial. These
definitions are part of the legislation quoted in the Annexure to this Note.
3.1 Broad-based employee share plan
A plan will qualify as a “broad-based employee share plan” if the requirements set out
below are met.
3.1.1 Consideration
The equity shares in an employer or any other associated institution in relation to that
employer must be offered to employees for free or at a minimum consideration, which
does not exceed the par value of the shares, as required by the Companies Act, 2008.
3.1.2 Employees
Eligible employees are limited to employees who –
• do not participate in any other equity scheme associated with the employer; and
• are employed on a permanent basis and who have been employed on a permanent
basis for a period of at least one year.
The plan must allow for at least 80% of the above employees to be entitled to participate
in this scheme.
3.1.3 Shareholder rights
Employees who acquire qualifying equity shares must be entitled to all dividends and full
voting rights in the shares offered to them under the broad-based share plan.
3.1.4 Restrictions
No restrictions or conditions other than those listed below may be imposed on the
disposal of the shares acquired under the plan.
(a) Restrictions imposed by legislation.
(b) A right of any person to acquire the share from the employee or former employee
at –
(i) the market value on the date of such acquisition, or
(ii) 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 acquisition or market
value on the date of grant.
(c) Restrictions on the disposal of the equity shares by the employee or former
employee within a period of five 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
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 defined 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 financial 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 defined for the purpose of
section 8B. These words are also not defined 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 five 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 benefits 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”).
• The consideration for which the new equity share is deemed to have been acquired
is an amount equal to the consideration given for the original equity share.
• No amount is included in the person’s income by section 8B as a result of the person
having disposed of the original equity share.
The new equity share acquired as a result of the disposal of the original equity share is
deemed to be a qualifying equity share acquired on the same date and for the same
consideration as the original equity share.
The shares so acquired are deemed to be qualifying equity shares even if the market
value of the shares received in exchange exceeds R50 000 during the permitted time
period.
Example 2 – Acquisition of equity shares as a result of the disposal of qualifying
equity shares
Facts:
Sally is an employee of Subco Limited. Subco Limited and Otherco Limited are
subsidiaries of Holdco Limited. On 1 March 2010, Subco Limited granted 5 000
qualifying equity shares to Sally at R1 per share. The total market value of the shares at
the time of their acquisition was R50 000.
On 1 March 2011, Holdco Limited decides to rationalise its business by closing down
Subco Limited and transferring all of its employees to Otherco. Due to the rationalisation,
employees of Subco are required to dispose of their Subco shares and in return, they
receive equity shares in Otherco with a market value totalling R75 000.
Result:
The shares that Sally receives from Otherco Limited are deemed to be qualifying equity
shares, despite the market value of the new shares acquired being in excess of
R50 000. They are deemed to have been acquired by Sally on 1 March 2010. No
amount is included in Sally’s income as a result of the disposal of the original qualifying
equity shares, despite the fact that they were disposed of within 5 years from the date of
grant. The R5 000 that Sally paid for the original Subco Limited shares is deemed to be
a consideration paid for the new shares in Otherco Limited.
4.2.2 Acquisition of equity shares as a result of qualifying equity shares already held
An equity share acquired by a person as a result of any qualifying equity share already
held by that person is deemed to be a qualifying equity share. The equity share received
is further deemed to have been received on the date of grant of the original equity share
held by that person. The limit of R50 000 does not apply in these circumstances.
Example 3 – Acquisition of equity shares as a result of holding qualifying equity
shares
Facts:
Bafana is an employee of M Limited. M Limited is a subsidiary of P Limited. On
1 March 2005, P Limited granted to Bafana 1 000 qualifying equity shares at R1 per
share. The total market value of the shares at the time of their acquisition was R40 000.
On 1 March 2009, P Limited decided to unbundle its interests in M Limited. As a result of
the unbundling, and by virtue of the shares already held by him, Bafana received shares
in M Limited with a total market value of R60 000.
Result:
Bafana is deemed to have acquired qualifying equity shares from P Limited on the date
of grant (that is, 1 March 2005). The total market value of all the qualifying shares held is
R100 000 (R40 000 + R60 000). However, only the market value of the original
qualifying equity shares received (that is, R40 000) is considered in determining whether
the limit of R50 000 has been exceeded (even though the total market value of all shares
acquired is more than R50 000).
4.3 Taxation of the gain on disposal of qualifying equity shares
The gain made from the disposal of a qualifying equity share, or the disposal of any right
or interest in a qualifying equity share, must be included in the income of the person who
disposes of that share, if the share is disposed of by that person within five years from
the date of grant of that share. However, a disposal is not considered to be made –
• where a qualifying equity share is exchanged for another qualifying equity share (see
4.2);
• on the death of that person (see 4.4); or
• on the insolvency of that person.
4.3.1 Disposal of any qualifying equity share or any right or interest within five years
Any gain made from the disposal of any qualifying equity share, or the disposal of a right
or interest in a qualifying equity share, within five years from the date of grant must be
included in the income of the taxpayer.
Example 4 – Calculation of gain when a disposal occurs within five years
Facts:
The facts are the same as Example 1. Lesego, an employee of ABC Ltd, resigns from
her employment on 1 August 2009. Under the terms of the plan, her shares must be sold
back to the company at the market value determined at the date that she acquired the
shares, in this case R50 000 (that is, 25 000 shares at R2 per share).
Result:
The proceeds from the disposal of the shares constitute income in Lesego’s hands,
since the shares were disposed within five years from the date of grant of the shares.
The gain on the disposal of the shares is calculated as the proceeds of R50 000 less the
R25 000 consideration paid for the shares (that is, 25 000 shares at R1 per share). The
gain of R25 000 must therefore be included in Lesego’s income.
Note:
(a) Any gain made from the disposal of a qualifying equity share acquired under a
broad-based employee share plan is deemed to be an amount of remuneration
payable to the employee by the person by whom the right was granted or from whom
the qualifying equity share was acquired, under paragraph 11A(1) of the Fourth
Schedule to the Act.
(b) Employees’ 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 qualifying equity instrument
was acquired, from–
(i) any consideration paid or payable to the employee in respect of the disposal of
qualifying equity shares; or
(ii) any cash remuneration paid or payable by that person to the employee after that
qualifying equity share has been disposed of.
It is not necessary to apply for a tax directive to ascertain the employees’ tax to be
deducted or withheld from gains made by the disposal of qualifying equity shares.
(c) In the circumstances where the qualifying equity share 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 share, or from whom the
equity share 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 qualifying equity share 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.
4.3.2 Disposal of any qualifying equity share or any right or interest after five years
Section 8B does not include the gain in income where a person disposes of a qualifying
equity share after the period of five years from the date of grant. The gain will be
regarded as being of a capital nature due to the provisions of section 9C, and will
therefore be subject to capital gains tax (CGT). Detailed information relating to CGT can
be found in the Comprehensive Guide to CGT available on the SARS website
4.3.3 Disposal of any rights or interest in a qualifying equity share
The disposal of any rights or interest in a qualifying equity share, for example, voting
rights or the right to receive dividends, within five years from the date the qualifying
equity share was granted, constitutes a gain that must be included in the taxpayer’s
income.
The gain is calculated as the proceeds received or accrued as a result of the disposal of
the right or interest, less a pro rata portion of the cost incurred on acquisition of such
qualifying equity share.
The portion of the cost attributable to the disposed rights or interest must be calculated
based on the ratio that the amount received or accrued upon disposal of that right or
interest bears to the market value of the qualifying equity share at the time of the
disposal of the right.
Example 5 – Apportionment when disposing of a right or interest
Facts:
Ms V acquired qualifying equity shares for R40 000 (R2 per share x 20 000 shares). The
shares had a market value of R50 000 on the date of grant. Ms V sold her voting rights
in the qualifying equity shares on the 15 May 2008, for R25 500. Immediately before the
disposal of the voting right, the qualifying equity share had a market value of R78 000.
Result:
The amount of the consideration permitted to be deducted from the disposal proceeds of
a right or interest in qualifying equity shares will be apportioned based on the
consideration received, against the market value of the share as follows:
Acquisition cost x Consideration received ___
Market value of qualifying equity shares
= R40 000 x R25 500
R78 000
= R13 077
The acquisition cost attributable to the voting right is R13 077. Ms V will be taxed on the
gain of R12 423 (that is, R25 500 – R13 077) made on the sale of the voting right. The
acquisition cost attributable to the balance of the qualifying equity share (including the
remaining rights or interest in the qualifying equity share) is an amount of R26 923 (that
is, R40 000 – R13 077).
Note: In this example, the R50 000 market value of the shares on date of grant has no
bearing on the calculation of the attributable cost.
4.4 Death of the taxpayer – Section 25
A disposal is deemed to be made by the taxpayer to his or her estate when a taxpayer
dies. Section 8B(1)(b) deems that, even if a disposal is made within the five year period,
no gain is deemed to be made by such a disposal.
However, the provisions of section 25 deem that –
• if the amount would have been income in the hands of the taxpayer had the disposal
taken place before the taxpayer died; and
• there is an ascertainable heir or legatee for that amount,
the amount is deemed to be income of that heir or legatee.
However, as death is generally considered to be a no-fault disposal, and the intention
was not to tax the estate or the heir or legatee on the disposal, section 8B(4) provides
that section 25 does not apply to amounts received or accrued from such disposal after
the date of death.
Therefore neither the estate, nor the ascertained heir or legatee is subject to a
section 8B gain on the disposal of a qualifying equity share, even if the disposal takes
place within five years of receipt of that share. There may, however, be a capital gain.
4.5 Deduction under of Section 11(lA)
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.
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.
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
SOUTH AFRICAN REVENUE SERVICE
Annexure – The law
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 five
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 defined 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
defined 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 No. 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 defined 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—
(i) a restriction imposed by legislation;
(ii) 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
(bb) in any other case, at market value on the date of acquisition by that person; or
(iii) a restriction in terms of which the employee or former employee who acquired the
equity shares as contemplated in paragraph (a) may not dispose of those equity
shares for a period, which may not extend beyond five years from the date of grant;
“date of grant” in relation to an equity share means the date on which the granting of that equity
share is approved by the directors or some other person or body of persons with comparable authority
conferred under or by virtue of the memorandum and articles of association of the employer company;
“gain” in relation to the disposal by a person of a qualifying equity share or a right or interest in a
qualifying equity share, means the amount by which any amount received or accrued to that person from
that disposal exceeds the consideration given by him or her for that qualifying equity share, right or
interest (otherwise than in the form of services rendered or to be rendered or anything done or to be done
or not to be done);
“market value” in relation to an equity share means the price which could be obtained upon the sale
of that equity share between a willing buyer and a willing seller dealing freely at arm’s length in an open
market and without having regard to any restrictions imposed in respect of that equity share;
“qualifying equity share” in relation to a person means an equity share acquired in a year of
assessment in terms of a broad-based employee share plan, where the market value of all equity shares
(as determined on the relevant date of grant of each equity share and excluding the market value of any
qualifying equity shares acquired in the circumstances contemplated in subsection (2A)), which were
acquired by that person in terms of that plan in that year and the four immediately preceding years of
assessment, does not in aggregate exceed R50 000.
(4) The provisions of section 25 do not apply in respect of any amount received or accrued from the
disposal of any qualifying equity share after the date of death of the person contemplated in
subsection (1).
Section 10(1)(nC) – Exemptions
(nC) any amount received by or accrued to that person in the form of a qualifying equity share
contemplated in section 8B
Section 11(lA) of the Income Tax Act allows for deduction from income
(lA) an amount equal to the market value of any qualifying equity share granted to an
employee of that person as contemplated in section 8B, as determined on the date of
grant as defined in that section less any consideration given by that employee for that
qualifying equity share, which applies in lieu of any other deduction which may otherwise
be allowed to that person or any other person in respect of the granting of that share:
Provided that the deduction under this paragraph may not during any year of assessment
in aggregate exceed R10 000 in respect of all qualifying equity shares granted to a single
employee and so much as exceeds that amount may be carried forward to the
immediately succeeding year of assessment and that excess is deemed to be the market
value of qualifying equity shares granted to the relevant employee during that immediately
succeeding year for purposes of this paragraph;
Diamond Export Levy Act, 2007
