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VIEWPOINT: EMPLOYEE SHARE INCENTIVE TRUSTS

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CAPITAL GAINS TAX IMPLICATIONS

Amendments have been introduced to the Income Tax Act to clarify the capital gains tax implications arising in employee share incentive trusts.

The non-disposal rule contained in paragraph 11(2)(j) of the Eighth Schedule that dealt with equity instruments contemplated in section 8C that had not yet vested is deleted from 1 March 2016 effective in respect of years of assessment commencing on or after this date. This deletion is to correct the misinterpretation that there is no disposal event of an equity instrument by the trust to the qualifying beneficiary.

A new paragraph 13(1)(a)(iiB) is inserted in the Eighth Schedule to the Act which defers the time of disposal of an equity instrument by trust to the qualifying employee beneficiary until the equity instrument is unrestricted and vests in the hands of the qualifying employee beneficiary for the purposes of section 8C.

The general default position where a trust vests an interest in an asset in a resident beneficiary is to tax the gain in the hands of the beneficiary in terms of paragraph 80(1) of the Eighth Schedule of the Act. Paragraph 80(1) of the Eighth Schedule is amended to clarify that where the trust vests an interest in an equity instrument in terms of section 8C in an employee, the trust is subject to capital gains tax. This therefore goes against the general default position as contained in paragraph 80(1) of the Eighth Schedule. This amendment applies in respect of years of assessment commencing on or after 1 March 2016.

The general default position where a trust vests an interest in the capital gain in respect of the disposal of an asset by a trust in a resident beneficiary is to tax the gain in the hands of the beneficiary in terms of paragraph 80(2) of the Eighth Schedule. Should the trust subsequently sell the already vested shares as referred to above and vests the capital gain in the qualifying employee, the capital gain will be taxed in the hands of the employee. This is in accordance with the provisions contained in paragraph 80(2) of the Eighth Schedule. This therefore follows the general default position as contained in paragraph 80(2) of the Eighth Schedule.

Where an employee holds an interest in an equity instrument in terms of which section 8C is applicable, and the trust vests an interest in a capital gain, paragraph 80(2) does not apply if such amount is to be taken into account in the hands of the qualifying employee beneficiary for the purposes of section 8C. Here the employee holds an interest in the equity instrument in terms of which section 8C is applicable. This amendment came into effect on 8 January 2016.

TRENDS

The reason for change cited by National Treasury in the Explanatory Memorandum on the Taxation Laws Amendment Bill 2015 is as follows: ‘There is an anomaly in the interaction between taxation of share incentive trusts in section 8C and time of disposal as well as attribution of capital gains to beneficiaries in the 8th schedule.’

Paragraphs 80(1) and 80(2) of the Eighth Schedule attribute capital gains to resident beneficiaries. They do not as such apply to capital losses that would be retained in the trust. Paragraph 80(2) only applies to same year distributions. Subsequent year gains distributed to resident beneficiaries would therefore be taxed in the hands of the trust.

Author: Muneer Hassan CA(SA) is a  Tax Consultant and a Senior Lecturer in Taxation at UJ

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