The workings of a share incentive schemes
Binding Class Ruling 069 was issued on 23 October 2019 and relates to the tax implications that arise in respect of proposed employee share schemes (“the Schemes”) in terms of the Income Tax Act and the Eighth Schedule.
The applicant is a listed resident company that intends to implement new share incentive schemes, which will be administered by two resident employee share ownership trusts. The participants of the Schemes are employees within the applicant’s group of companies.
The objective of the trusts is to operate as conduits for the acquisition of the shares by participants who will eventually be entitled to these shares in terms of the Scheme. The trusts may also dispose of and deal with such shares. The shares referred to are ordinary shares of the applicant and will not be limited to specified amounts as pertains to their rights to receive either dividends or returns of capital.
In terms of the rules, vesting in relation to a share award means that the participant is entitled to having the share(s) registered in his/her name or receiving a monetary pay-out. The award also becomes unrestricted in terms of section 8C once vesting takes place.
The employer companies will make contributions to the trusts to fund the acquisition of shares and pay for expenses relating to the administration of the Schemes. In terms of the ruling, these contributions will be deductible under section 11(a), read with section 23(g), where the contributions pertain to persons directly employed by the company.
The rules provide for the granting of conditional share awards and forfeitable share awards.
Participants of conditional share awards will not have any rights (conditional or otherwise) to the shares prior to settlement. If the participant ceases to be eligible employees, these awards will either lapse (in cases of ineligible termination, including reasons such as resignation or fraudulent conduct) or vest (in cases of eligible termination, including reasons such as retirement).
The ruling confirms that section 23H will not apply to expenditure in respect of any share relating to a conditional share award provided that the share is acquired by the trust and vested in the participant in the same tax year. Also, the vesting of shares in respect of these awards are deemed as disposal under paragraph 11(1)(d) and is subject to the time of disposal rules under paragraph 13(1)(a)(iiB).
No consideration will be payable by a participant on the vesting of the award which is considered to be an arm’s length consideration. Paragraph 38 will, therefore, not apply.
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 For example, to dispose of enough shares upon vesting to pay the employees’ tax and to satisfy any other withholding obligation when due.
 Or awarded within 6 months after the end of the tax year during which the expenditure was incurred.