The sourcing and retention of highly skilled and competent staff is an important consideration for any employer. Various methods are employed to ensure that the best quality personnel are attracted and kept. One of the ways that employers attract and retain highly skilled executive and senior personnel is through the offering of share incentive schemes.
A share incentive scheme is a scheme whereby certain staff are offered the option to obtain shares in the company at a predetermined value (usually much lower value than the normal market value) at a future predetermined date if the employee remains in the service of the company. The option therefore only vests in the employee on the predetermined date, and if the employee remains employed by the company.
What is Section 8C of the South African Income Tax Act?
This is a provision that taxes an individual for gains or losses made on the vesting of equity instruments, which were acquired on or before 26 October 2004 as a result of employment or the holding of any office of director. Equity instruments include shares, options, and other rights to acquire shares.
Who does section 8C of the Income Tax Act apply to?
This section is designed to ensure that all taxpayers – regardless of their residency status – are taxed on their income from employment and directorships. As such, this section applies to both resident and non-resident taxpayers.
However, there are some exceptions for non-residents. For example, non-residents who are not ordinarily resident in South Africa are not liable to tax on gains or losses made on the vesting of equity instruments that were acquired in terms of a broad-based employee share ownership scheme.
How are non-resident South Africans impacted by Section 8C of the Income Tax Act?
The section has a number of other implications for expat non-residents. For example, expat non-residents who are still employed by a South African company may be liable to pay tax on gains or losses made on the vesting of equity instruments that were acquired in terms of their employment. Expat non-residents who are directors of a South African company may also be liable to pay tax on gains or losses made on the vesting of equity instruments that were acquired in terms of their directorship.
Expat non-residents who are considering acquiring equity instruments in a South African company should be aware of the potential tax implications of Section 8C.
Here are some of the key Section 8C considerations to keep in mind for expat non-residents:
- You may be liable to pay tax on gains or losses made on the vesting of equity instruments that were acquired by virtue of your employment or directorship.
- The amount of tax you are liable to pay will depend on your residency status and the type of equity instrument.
- You may be able to claim certain deductions, such as the cost of acquiring the equity instrument.
Here are some examples of how Section 8C could apply in real life:
- As an employee, you are granted options to acquire shares in your employer company. The options vest after three years. You then exercise your options and acquire the shares at a discounted price. You then sell the shares on the open market for a profit. You will be liable to pay tax on the profit, even if you have not yet received any dividends from the shares.
- As a director, you are granted shares in the company as part of your remuneration package. The shares vest after five years. You sell the shares on the open market after three years for a profit. You will be liable to pay tax on the profit, even if you have not yet received any dividends from the shares.
How does Section 8C apply to CGT losses?
Section 8C taxes gains or losses made on the vesting of equity instruments, which were acquired by virtue of employment or the holding of any office of director. CGT losses are losses that are incurred when an asset is sold for less than its purchase price.
- CGT losses that are incurred on the disposal of equity instruments that were acquired by virtue of employment or the holding of any office of director are not deductible for tax purposes under Section 8C.
- This is because Section 8C taxes the entire gain or loss on the vesting of equity instruments, regardless of whether the gain or loss is realised on the disposal of the equity instruments.
As a result, if you incur CGT losses on the disposal of equity instruments that were acquired by virtue of employment or the holding of any office of director, it is important to note that you will not be able to offset these losses against other CGT gains for tax purposes.
What does Section 8C allow SARS to do?
Section 8C gives SARS the authority to adjust the value of an asset if it believes that the value that was declared on the tax return is too low. This can happen if the asset has increased in value since it was acquired, or if the taxpayer has failed to take into account all of the relevant costs associated with the asset. This is to rectify the so-called “inadvertent 8C trap”, which happens when a taxpayer unintentionally declares a lower value for an asset than its true value.
This can happen for a number of reasons, such as:
- The taxpayer is not aware of the true value of the asset
- The taxpayer makes a mistake in the calculation of the asset’s value
- The taxpayer fails to disclose all of the relevant costs associated with the asset
If SARS believes that you, as a taxpayer, have fallen into the inadvertent 8C trap, they may adjust the value of the asset and assess additional tax. This can be a very costly mistake for you, as you may have to pay additional tax, interest, and penalties.
Tips for taxpayers to avoid falling into the inadvertent Section 8C trap:
- Get professional advice on the valuation of assets
- Carefully calculate the value of assets
- Disclose all of the relevant costs associated with assets
- Keep accurate records of all financial transactions
Here are three important facts you need to know about Section 8C of the Income Tax Act:
Section 8C of the Income Tax Act has an impact on non-resident capital gains tax (CGT) in a few ways.
- Section 8C allows SARS to adjust the value of an asset if it believes that the value that was declared on the tax return is too low. This can happen if the asset has increased in value since it was acquired, or if the taxpayer has failed to take into account all of the relevant costs associated with the asset. If SARS adjusts the value of an asset, the non-resident taxpayer may have to pay additional CGT.
- Section 8C can affect the calculation of the non-resident CGT exemption. The non-resident CGT exemption is a provision that allows non-residents to exclude a certain amount of capital gains from taxation. The amount of the exemption is based on the number of days that the non-resident was present in South Africa during the year of assessment. If a non-resident taxpayer disposes of an asset that has increased in value since it was acquired, the increase in value may be subject to CGT, even if the taxpayer is eligible for the non-resident CGT exemption. This is because section 8C allows SARS to adjust the value of the asset to its market value at the time of disposal.
- Section 8C can affect the calculation of the non-resident CGT rate. The non-resident CGT rate is a flat rate of 18%. However, if a non-resident taxpayer disposes of an asset that has increased in value since it was acquired, the increase in value may be subject to a higher CGT rate. This is because section 8C allows SARS to treat the increase in value as a dividend, which is taxed at a higher rate than capital gains.
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