Employee share incentive schemes – Income tax implications

Feb 20, 2022 | FYI's



It is important for taxpayers who claim deductions in respect of contributions to share incentive arrangements for employees, particularly where trusts are involved, to consider the potential impact of Commissioner for The South African Revenue Service v Spur Group (Pty) Ltd (the Spur Case).

Section 95(1)(c) of the Companies Act 71 of 2008 (“Companies Act”) defines an employee share scheme as:

a scheme established by a company, whether by means of a trust or otherwise, for the purpose of offering participation therein solely to employees and officers of the company or a subsidiary of the company, either—

(i) by means of the issue of shares in the company; or

(ii) by the grant of options for shares in the company

The section therefore allows participant employees to benefit from the growth in value of the shares of the company by giving employees the option of acquiring shares in the company or rights associated with shares.

There are many different forms that share schemes can take and it is important to note that the scheme must comply with the abovementioned definition for it to be classified as such for tax purposes.

The Income Tax Act 58 of 1962 (“Tax Act”) entitles taxpayers to deduct certain losses and expenses incurred by them from their taxable income if the losses and expenses comply with the requirements of (among other deduction provisions) section 11(a) of the Act.

Section 11(a) states:

For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived-

(a) expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature…” …

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Employee share incentive schemes – Income tax implications by Stacy-Lee Dennis

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