A taxpayer can apply to the South African Revenue Service (SARS) for a binding ruling if the application of legislation is uncertain. The taxation of share incentive scheme benefits has been the subject of a whopping eighteen binding rulings published on the SARS website. This bears testimony to the complexity of the legislation, despite SARS' efforts to clarify legislative interpretation through the publication of two interpretation notes.

Not only is the tax treatment of benefits in the hands of employees complicated, but the taxation is not aligned with the income tax deduction of the employer share scheme costs.

Also, the tax legislation does not adequately distinguish between, and therefore appropriately cater for, broad-based schemes (typically implemented to promote black economic empowerment) and executive share incentive schemes. Legislation intended for broad-based schemes is seldom applied because the requirements are too difficult to meet. By default, lower-income participants of broad-based schemes are taxed on the same basis as executives.

Due to these issues, it was announced in the 2013 budget that we may expect modifications to the tax treatment of employment share schemes. The only share scheme-related amendment in 2013 was a change to tax employment-related dividends that do not form part of share scheme benefits that are covered by the legislation.

A complete overhaul of the share scheme legislation requires extensive investigation and consultation. It may be too early to expect legislative change in 2014. It will, however, be no surprise if there is more detail regarding the proposals to change the taxation of share schemes in the 2014 budget.

This article first appeared on MoneyWebTax, 17 February 2014

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