Share based payments are popular for B-BBEE purposes, but what are the tax implications?
Share-based payments, such as Employee Share Ownership Plans (ESOPs) and Share Awards, are often used for Broad-Based Black Economic Empowerment (B-BBEE) purposes in South Africa. Using share-based payments to achieve B-BBEE goals is a popular option because it allows companies to transfer ownership to black employees without requiring a large upfront investment.
Share-based payments also align the interests of employees with those of the company, promoting long-term commitment and a sense of ownership among employees. Companies doing business in South Africa are often required to meet specific ownership targets to comply with B-BBEE regulations. Using share-based payments as a B-BBEE tool is a way for companies to demonstrate their commitment to B-BBEE and to meet their obligations under the regulations.
Companies may consider share-based payments for several reasons.
Attracting and retaining top talent: Share-based payments, such as share options, can be a valuable tool for attracting and retaining top talent. By offering equity in the company, employees are given a stake in the company's success and are more likely to be motivated to work towards its long-term success.
Aligning interests of employees and shareholders: Share-based payments align the interests of employees with those of shareholders by giving employees a financial stake in the company's success. This can help to create a culture of ownership and increase employee motivation and engagement.
Raising capital: Companies may use share-based payments, such as Initial Public Offerings (IPOs) or follow-on offerings, to raise capital. These offerings provide a way for companies to raise large sums of money without incurring debt.
Complying with B-BBEE regulations: In South Africa, companies may use share-based payments as a tool for B-BBEE to meet their obligations under B-BBEE regulations and to demonstrate their commitment to promoting economic transformation and increased black ownership and participation in the economy.
Cost-effective alternative to cash-based compensation: Share-based payments can be a cost-effective alternative to traditional cash-based compensation. This is because the cost of share-based payments is often recognized over time, rather than in the year in which they are granted.
It is important for companies to carefully consider the tax and regulatory implications of share-based payments and to seek professional advice from tax and legal experts to ensure compliance with all relevant regulations.
In South Africa, the tax implications of a share-based payment depend on the nature of the payment and the recipient. Here are the general rules for share-based payments:
1. Employee Share Options: If an employee receives share options as part of their remuneration, the taxable benefit is the difference between the market value of the shares on the date of exercise and the price paid for the shares. The taxable benefit is subject to income tax, unemployment insurance fund (UIF) contributions, and the skills development levy (SDL).
2. Employee Share Ownership Plans (ESOPs): If an employee participates in an ESOP, the taxable benefit is the market value of the shares on the date they vest. The taxable benefit is subject to income tax, UIF contributions, and the SDL.
3. Share Awards: If an employee receives a share award, the taxable benefit is the market value of the shares on the date of receipt. The taxable benefit is subject to income tax, UIF contributions, and the SDL.
4. Director Share Awards: If a director receives a share award, the taxable benefit is the market value of the shares on the date of receipt. The taxable benefit is subject to income tax, but not UIF contributions or the SDL.
In South Africa, the tax implications of share-based payments are governed by sections 8B, 8C and 8D of the Income Tax Act, No. 58 of 1962.
Section 8B deals with the taxation of share options granted to employees. It provides the rules for determining the taxable benefit in respect of share options and the calculation of the amount of the taxable benefit.
Section 8C deals with the taxation of employee share ownership plans (ESOPs) and share awards. It provides the rules for determining the taxable benefit in respect of shares acquired under an ESOP or a share award and the calculation of the amount of the taxable benefit.
Section 8D deals with the taxation of director share awards. It provides the rules for determining the taxable benefit in respect of shares acquired under a director share award and the calculation of the amount of the taxable benefit.
These sections of the Income Tax Act are relevant to both the employees receiving share-based payments and the employers granting the payments. It is important for both parties to be familiar with the provisions of these sections to ensure compliance with South African tax laws.
The taxes get delayed to the exercise date. For this reason, a share option as B-BBEE vehicle makes most logical sense. Let Ownershield show you how.