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Changes to the taxation of employee share schemes dividends
As a general rule, subject to certain exceptions, local dividends received and accrued to a South African tax resident are exempt from normal tax in terms of section 10(1)(k) of the Income Tax Act (ITA). Taxand South Africa investigates one such exception to employee share schemes by virtue of the application of section 10(1)(k)(i)(dd).
Section 10(1)(k)(i)(dd), which was introduced from 1 January 2011, prescribes that a dividend will not be exempt from normal tax if such dividend is received or accrued in respect of a restricted equity instrument (as defined in section 8C) unless:
- The restricted equity instrument constitutes an ‘equity share’ for purposes of the ITA, other than an equity share that would have constituted a ‘hybrid equity instrument’ as defined in section 8E but for the 3 year period requirement
- The dividend constitutes an equity instrument
- The restricted equity instrument constitutes an interest in a trust and, where that trust holds shares, all of those shares constitute equity shares, other than equity shares that would have constituted hybrid equity instruments as defined in section 8E but for the 3 year period requirement
Accordingly, dividends in respect of restricted equity instruments (for purposes of section 8C) will be taxed as normal income in the hands of the recipient, unless it falls within 1 of the abovementioned exclusions. The tests to be applied in each instance are as follows:
- First test - the employee must hold an 'equity instrument'
- Second test - the equity instrument must be acquired by virtue of employment
- Third test - the equity instrument must be restricted
- Fourth Test - the 3 subtests
Also published in Thomson Reuters' Taxnet Pro, 13 December 2013
The draft of the Taxation Laws Amendment Bill (TLAB) issued in July 2013 proposed to delete section 10(1)(k)(i)(dd) from the ITA in its entirety in order to remove the distinction between dividends received from restricted or unrestricted employee shares. It furthermore proposed that the recipient of a dividend from an equity instrument would be taxed on the dividend as ordinary income, unless the equity instrument had vested, ie it applied to restricted equity instruments. The draft TLAB, however, did not state which section it proposed to replace section 10(1)(k)(i)(dd) with, as the only further section it referred to under this topic was section 11(t).