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National Treasury moves to prevent disguised employee bonuses
Earlier this year, National Treasury proposed a new regime to prevent “disguised bonuses” being paid to employees in the form of dividends on unvested or restricted employee share scheme shares. Taxand South Africa explores the tax implications the new regime would introduce.
National Treasury proposed that all such dividends received on restricted shares would be treated as taxable income and the company paying such dividend would potentially receive a corresponding deduction.
This proposal gave rise to the submission of several comments, which were duly addressed in the Response Document presented by the South African Revenue Service (SARS) and National Treasury to the Standing Committee on Finance. In general, it was submitted that the proposed regime would be too broad, negatively impacting on bona fide employee share schemes and BEE transactions, and leading to inequity. The Response Document indicated that these comments on the proposed regime were accepted by National Treasury and that the proposal would be “significantly narrowed”.
The final draft of the Taxation Laws Amendment Bill of 2013 has since been tabled by the Minister of Finance in Parliament. The amended proposal has been introduced in paragraph (ii) to the proviso contained in subsection 10(1)(k)(ii). Paragraph (ii) excludes from the operation of the exemption from tax on dividends. Such dividends will therefore be taxable. There will be no matching deduction for the employer. It is not entirely clear how this new proviso will apply to share incentive schemes in respect of which the relevant “restricted equity instrument” is not a share but a contractual right.
It is also unclear whether the intention is that, once the relevant “restricted equity instrument” has vested in the employee for purposes of section 8C of the Act and the employee has paid tax on the vesting of such instrument, the “dividends” received by that employee in respect of such instrument should be subject to tax.
Also published in Thomson Reuters' Taxnet Pro, 12 December 2013
It may well be that these law changes go beyond what is necessary to defeat the alleged avoidance and further consideration is warranted. They are proposed to be effective from 1 March 2014 and will be applicable in respect of dividends accrued on or after that date.