Income Tax amendments make it easier to implement and benefit from broad-based employee share plans
Section 8B of the Income Tax Act was introduced with effect from 26 October 2004 to provide for tax-free broad-based employee share plans.
The rules established in terms of section 8B are aimed at promoting long-term, broad-based employee empowerment by facilitating employee participation in the success of their employer companies at a minimal tax cost.
Further, section 8B allows for tax beneficial treatment, as an employer can grant shares to employees without an immediate taxable benefit being created in the hands of the employee, whilst the employer qualifies for a deduction.
However, since the qualifying requirements of section 8B were too restrictive and burdensome, section 8B has been seldom applied by employers. Accordingly, the tax incentives allowed in terms of that section have not been passed on to potentially qualifying employees (who generally fall within the low to middle income brackets).
In light of the restrictiveness of section 8B, certain legislative amendments have been introduced. These amendments are geared towards the relaxation of the provisions that prevented or limited the application of section 8B.
Taxation of employees
No tax is payable on the granting of the shares. When an employee disposes of a qualifying equity share within five years from date of grant, any gain will be taxed at normal tax rates. If an employee disposes of the shares after five years from date of grant, the gain will be subject to the lower Capital Gains Tax rate.
Employer benefits
A deduction equal to the market value of the qualifying equity shares at the date of grant is allowed (subject to a maximum of R50 000 per employee spread over five years). Assuming 1 000 employees participating in the scheme, the employer potentially qualifies for a deduction of R10 million per year over five years, even where there is a direct issue of shares and no actual expense.
Broadening of the requirements of section 8B
- Value of awards - Previously, a scheme only qualified for section 8B if all the shares acquired by a particular employee did not, in aggregate, exceed R9 000 over a period of three years. In terms of the latest amendments to section 8B, the R9 000 tax-free ceiling has been raised to R50 000 over a period of five (as opposed to three) years. These amendments assist in justifying the administration costs. A scheme awarding shares to a single employee with a value in excess of R50 000 will not qualify for the beneficial section 8B tax treatment.
- Number of employees - Before the amendments, the broad-based employee share plan had to be offered to at least 90% of all employees employed on a permanent basis (excluding those participating in other share schemes of the employer). The 90% restriction has been relaxed and the threshold has been reduced to 80%. The amendment enables employers to exclude non-performing employees from participation and provides greater flexibility related to the classification of employees (eg the distinction between permanent and non-permanent employees could change from time to time in any financial year).
- Shares issued - Section 8B schemes are no longer limited to the granting of shares in the employer company or in another company within the same group of companies. Shares in companies under the same management and control will also now qualify, re-aligning broad-based employee share plans with other fringe benefit schemes.
Keep in mind that in order to benefit from section 8B:
- Employees must enjoy full dividend and voting rights;
- The restrictions that may be imposed on the shares are specifically regulated in terms of section 8B; and
- Employees may not pay more than par value for the shares.
As a result of the relaxation of the requirements and scope of section 8B, as well as the associated tax benefits (to employees and employers), it may now be beneficial to assess the commercial viability of a section 8B broad-based employee share plan.
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