No place to hide for South African shareholders

Jonathan Faurie, FAnews Journalist

Despite the fact that South Africa pays lower personal income tax when compared to other nations in the world, the country is widely regarded as one of the most taxed nations in existence. And despite the fact that South Africa boasts this unwelcome accolade, Government still has a poor rate of tax collection.

Statistics released by PriceWaterhouse Coopers in 2013 shows that a paltry 7% of the South African population is responsible for making up the tax shortfall for the rest of the country. In order for Government to realise its ambition of 6% growth, higher tax collection needs to occur.

In line with this, National Treasury proposed a new regime at the beginning of January which would prevent disguised bonuses being paid to employees in the form of dividends on unvested or restricted employee share scheme shares. Treasury added 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.

Would treasury be shooting itself in the foot?

This proposal gave rise to the submission of several comments, which were addressed in a response document presented by the South African Revenue Service (SARS) and 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 black economic empowerment transactions, which would lead to inequity. The response document indicated that these comments on the proposed regime were accepted by 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 directive contained in subsection 10(1)(k)(ii).

The paragraph excludes from the operation of the exemption from tax on dividends any dividend received by or accrued to a person in respect of services rendered or to be rendered or in respect of or by virtue of employment or the holding of any office, other than a dividend received or accrued in respect of a restricted equity instrument as defined in section 8C held by that person or in respect of a share held by that person.

Such dividends will therefore be taxable. There will be no matching deduction for the employer. It is clear from the above that dividends received by an employee who is a participant in an employee share incentive scheme will qualify for the exemption contained in section 10(1)(k) of the Act, if such dividends are received in respect of any share held by that employee; or a share held by that employee that constitutes a restricted equity instrument for purposes of section 8C of the Act.

Clarity will prove to be a major headache

It is not entirely clear how this new provision will apply to share incentive schemes where the restricted equity instrument is not a share, but a contractual right. Robert Gad, Tax Director at ENSafrica, points out that in certain share incentive schemes employees acquire an interest in a trust, the value of which interest is determined with reference to a specified share held by that trust, and some or all of the dividends declared in respect of the specified shares are distributed to the employee.

"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 (double taxation). In fact, it seems possible that the dividend exemption may be at risk whenever the shares of any person are held through a trust, unless it can be said that the dividends are not received by virtue of services rendered or to be rendered or in respect of or by virtue of employment or the holding of any office,” says Gad.

Overcomplicating matters

One of the major criticisms of Treasury is that the laws governing Tax collection are so complex and riddled with indiscernible jargon that the man on the street simply does not know where they stand. In an effort to improve its tax collection, Treasury has instructed SARS to target companies and high net worth individuals in order to meet certain quotas.

But is this once again an indication that Treasury, as well as SARS who are acting on behalf of treasury, are using a baseball bat approach when it comes to tax collection? 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.

If large corporates and high net worth individuals remain the country’s main source of taxable income, is Treasury not running a risk of isolating itself from this important revenue group? Treasury needs to be very clear on what types of dividends would be taxable under this new proposal. There are many workers within the mining industry who own shares in the company which was given to them by employers in order to defeat rampant poverty within the sector. Is it wise that Treasury threatens to compromise this by possibly perpetuating a cycle corporate bosses have fought hard to overcome?

Editor’s Thoughts:
This is another example of how poor planning is placing a large number of South Africans at risk. Should Treasury not be sitting down to develop a tax collection strategy which would include new groups of tax payers rather than increasing the risk on a proven target market? Is it really motivated to do so? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.