Trusts set up for em­ploy­ees are un­der at­tack

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ERNEST MAZANSKY

DIV­I­DENDS from South African com­pa­nies are ex­empt from in­come tax, but are sub­ject to the 15% div­i­dends tax. This ex­emp­tion from in­come tax is, how­ever, re­moved in cer­tain lim­ited cases.

With ef­fect from 1 April 2014, the ex­emp­tion from in­come tax will be re­moved (so that it will be fully sub­ject to in­come tax at the max­i­mum mar­ginal rate of 40%, and will be ex­empt from the 15% div­i­dends tax), if the div­i­dend is re­lated to shares ac­quired in re­spect of ser­vices ren­dered or to be ren­dered or by virtue of em­ploy­ment or the hold­ing of any of­fice, but the shares are not held by the em­ployee him­self or her­self.

The pur­pose of this is to at­tack sit­u­a­tions where a trust is es­tab­lished for em­ploy­ees, and the trust holds shares in the em­ployer com­pany, and div­i­dends are then dis­trib­uted to the em­ploy­ees in gen­eral. The gov­ern­ment con­sid­ers this to be just another form of re­mu­ner­a­tion, and the div­i­dends should be fully tax­able. An ex­cep­tion is where shares are re­stricted eq­uity in­stru­ments un­der sec­tion 8C of the Act, be­cause there will be in­come tax on the growth when the shares vest.

Un­for­tu­nately, the pro­vi­sion is not worded as nar­rowly as this and it goes much fur­ther. For ex­am­ple, as­sume that many years ago an em­ployee paid full value for the shares they ac­quired in the em­ployer com­pany and trans­ferred the shares to a trust or fam­ily com­pany, as part of an es­tate plan­ning scheme, or even to a spouse. Be­cause the shares are not held by the em­ployee per­son­ally, the div­i­dend is fully tax­able as or­di­nary in­come. Another ex­am­ple might be where a per­son ac­quired shares in the em­ployer com­pany and has since re­tired, but has re­tained the shares in a fam­ily trust. Be­cause the shares were orig­i­nally ob­tained by virtue of em­ploy­ment, from 1 April the div­i­dend be­comes fully tax­able. Sim­i­lar rules ap­ply where the shares held pro­duce for­eign div­i­dends, which would nor­mally be taxed at the ef­fec­tive rate of 15%.

I have lit­tle doubt it was never in­tended that the leg­is­la­tion should go that far, but should be con­fined to trusts set up for the ben­e­fit of em­ploy­ees. Un­for­tu­nately, the draft­ing is so broad and im­pre­cise, that it is cap­tur­ing sit­u­a­tions which I be­lieve were never in­tended to be en­com­passed.

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