Deemed versus Actual Employer – tax law changes holds both of them liable for tax on share incentives

There are a number of instances where an employee may derive a benefit under a share incentive scheme. The intention is that employment tax attributable to that benefit should be withheld from the cash remuneration payable to the employee or from any consideration payable for the release of the right to acquire shares.

Gerald Seegers, PricewaterhouseCoopers SA Director of Human Resources, says that in theory, this would be given effect if it was assumed that the employer from whom the employee derived a salary (“the actual employer”) was the same person as the “deemed employer”. “In such a case, employment tax could be withheld from the salary or consideration paid for the release.

“But this intention could give rise to some frustration when the deemed employer is not also the actual employer (particularly SARS). Only employers who are resident in South Africa are required to account for employees’ tax and so a deemed employer that was resident in another jurisdiction was not liable to account for employees’ tax.”

Seegers highlights that The Revenue Laws Amendment Act, No. 35 of 2007, which was promulgated on 8 January 2008, amended paragraph 11A of the Fourth Schedule to the Income Tax Act, effectively changing this position.

“In terms of this amendment, if the person who is deemed to be the employer in relation to this benefit (i.e. the grantor of the benefit) is –

• an “associated institution” as defined, in relation to the actual employer; and

• where it is unable to withhold employees tax;

then the “actual employer” and the “deemed employer” (one and the same person for PAYE purposes) must deduct or withhold from the remuneration or consideration payable to the employee amounts equal to the aggregate tax payable in respect of the benefit. They are now both jointly and severally liable for that tax. Effectively employee share trusts and non-resident group companies granting share incentive benefits would fall within this definition.”

Seegers says this amendment is deemed to have come into effect from the commencement of years of assessment ending on or after 1 January 2008. “However, it is difficult to imagine that SARS could succeed in attacking an employer in respect of any benefit that accrued in these circumstances prior to that date, as there was no liability at that time, and it is to be expected that our courts would not construe these provisions as having retroactive effect to events that preceded their passage into law.

“However, for awards that accrued or accrue after 8 January 2008, the actual employer (normally the SA subsidiary of a foreign parent company) is clearly at risk. The effect of the amendment is that SARS does not have to look beyond this employer to recover employees’ tax. Failure to withhold and pay over employees’ tax on the part of this employer exposes it to a risk of penalty and interest.”