Pro­posal to tax share-scheme ben­e­fits re­moved from re­vised draft tax­a­tion bill

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Na­tional Trea­sury has aban­doned its plans to tax the ben­e­fits you re­ceive from an em­ployee share plan or a broad-based black eco­nomic em­pow­er­ment (BBBEE) trust set up by your em­ployer as in­come, rather than as div­i­dends or cap­i­tal gains.

The pro­pos­als had at­tracted much crit­i­cism for ap­pear­ing to dis­cour­age broad-based em­ployee share own­er­ship.

This week, Trea­sury re­leased a re­vised draft Tax­a­tion Laws Amend­ment Bill, to­gether with its feed­back on com­ments on the ini­tial pro­posal, con­firm­ing that the share-scheme pro­posal has been re­moved from the bill.

In its place, how­ever, is a mea­sure to deal with what is known as “div­i­dend strip­ping”.

The ini­tial draft bill had pro­posed an amend­ment to the In­come Tax Act that would deem any dis­tri­bu­tions from shares you ac­quired as a re­sult of your em­ploy­ment to be in­come, which would be taxed at between 18 and 41 per­cent, de­pend­ing on your mar­ginal rate of tax. The pro­posal also ap­plied to shares to which you had re­stricted ac­cess – for ex­am­ple, an em­ployer prom­ises you shares if you re­main em­ployed for five years.

Cur­rently, the div­i­dends paid from these shares are taxed at 15 per­cent, and the cap­i­tal gains you make on the shares when you get full own­er­ship and sell them are taxed as cap­i­tal gains, which de­pends on your in­come tax rate, but has a max­i­mum ef­fec­tive rate of 16.4 per­cent.

David Warneke, the head of tax tech­ni­cal at tax and au­dit firm BDO, de­scribed the ini­tial pro­posal as dra­co­nian and said it would re­sult in a puni­tive ef­fec­tive rate of tax that was nei­ther fair nor con­ducive to the pro­mo­tion of busi­ness in South Africa.

Dan Foster, a tax di­rec­tor at law firm Web­ber Wentzel, said the ini­tial pro­posal ran “con­trary to the stated pol­icy of broad-based black eco­nomic em­pow­er­ment, whereby many com­pa­nies seek to increase eco­nomic par­tic­i­pa­tion of black em­ploy­ees through share schemes”.

Trea­sury told Par­lia­ment’s stand­ing com­mit­tee on fi­nance re­cently that the ini­tial pro­posal in the tax amend­ment bill raised nu­mer­ous con­cerns among tax­pay­ers and prac­ti­tion­ers.

SCHEME VI­A­BIL­ITY

It said com­men­ta­tors had pointed out that div­i­dend flows are the rea­son BBBEE schemes are a vi­able in­cen­tive. Typ­i­cally, par­tic­i­pants in these schemes buy the shares on a loan that is re­paid from the div­i­dends earned by the shares. With div­i­dends tax of 15 per­cent, 85 per­cent of the div­i­dend re­mains to pay off the loan, but if the tax is higher, there will be less to go to the loans.

In ad­di­tion, Trea­sury re­ceived com­ments about the pro­posal in­tro­duc­ing com­plex­ity for em­ploy­ers de­duct­ing pay-as-you-go (PAYE) tax from em­ploy­ees and a pro­posed de­duc­tion for em­ploy­ers for the cost of es­tab­lish­ing share in­cen­tive schemes in­tro­duc­ing asym­me­try and in­equity in the tax sys­tem.

This week, Trea­sury re­leased re­vi­sions to the draft bill for comment, which must be sub­mit­ted by Oc­to­ber 10.

Among the amended pro­vi­sions in the draft bill is one to pre­vent tax avoid­ance through div­i­dend strip­ping. This is when com­pa­nies buy back the shares and dis­trib­ute the pro­ceeds as div­i­dends shortly be­fore the re­stric­tions on the shares fall away and the growth in the shares’ value be­comes tax­able in the em­ploy­ees’ hands. Em­ploy­ees end up pay­ing less tax than they should.

Trea­sury pro­poses that if, be­fore the re­stric­tion is up, you re­ceive the cap­i­tal in­vested in the shares back by way of a distri­bu­tion from those shares, this will be treated as in­come.

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