South Africa: The Reinvention of Share Incentive Schemes

Last Updated: 3 February 2005
Article by Peter Simkins

1 Prior to 26 October 2004

1.1 The taxation of gains realised by directors and employees under share incentive schemes was previously governed by the provisions of s8A of the Income Tax Act, 1962 ("the Act"). That situation has changed with the introduction of the Revenue Laws Amendment Act 32/2004 ("the Amending Act") which was promulgated on 24 January 2005. The Amending Act contains far-reaching changes to the old regime. Section 8A of the Act has been replaced with an entirely new s8C which imposes taxes on share incentive schemes in a far more extensive manner. In addition, a new s8B has been introduced which will apply to the taxation of Broad-Based Employee Share Plans. These changes all take effect from 26 October 2004.

1.2 The old s8A essentially applied only to the taxation of gains arising on the exercise of options to acquire shares in the employer company. That section also provided relief to the taxpayer where the employer imposed a condition limiting the taxpayer’s right of disposal of the shares arising on the exercise of the option, until a later year of assessment. In those circumstances the taxpayer was taxed only in the year of assessment during which he or she became entitled to dispose of the shares. A further existing notable benefit for directors and employees was that, in terms of s10(1)(nE) (known as the ‘stop loss’ provision), taxpayers were able to walk away from schemes, without penalty, where the employer agreed to cancel the transaction under which the taxpayer purchased the shares, or agreed to repurchase the shares from the taxpayer at a price not exceeding the sale price. These provisions were applied in the past where the scheme was financially ‘under water’, with the result that taxpayers were able to exit without penalty or tax, including forgiveness of the debt for the shares so purchased.

1.3 For years directors and employees were able to avoid tax on gains arising out of share incentive schemes by virtue of the fact that the schemes were constructed, basically, as share purchases (with many variations), rather than as share options. Under a share purchase arrangement the taxpayer committed himself or herself to the purchase of the shares on day one, with the price being payable over a period of, say, five years. A loan was advanced to the taxpayer for this purpose, with or without interest. If the interest was less than the official rate, then that would constitute a taxable benefit in the taxpayer’s hands. On the date upon which the full purchase price became payable, the taxpayer repaid the loan (sometimes out of the proceeds of a sale of the shares) and the shares were delivered to him or her free of tax in that the transaction constituted a purchase, rather than an option. In the result, the taxpayer was taxed only on a subsequent disposal of the shares and then, if he or she was not a share dealer, only at capital gains tax rates.

1.4 The benefits were obvious. Directors and employees, more particularly in the recent past, have realised what have been criticized as unconscionable gains free of tax. These gains were usually referred to in the press as gains on option plans, but in reality they were tax free gains arising from share purchase schemes. The perceived inequality of the situation became readily apparent, particularly as the gains were mostly confined to the top echelon of management, with the rank and file getting minimal, if any, benefit.

2 On and after 26 October 2004

2.1 The new s8C of the Act has replaced the entire s8A. The old s8A will continue to apply to rights exercised under schemes in existence at 26 October 2004, but not to rights arising under schemes concluded on or after that date.

2.2 The basis upon which the new s8C is structured is totally different to that of the old s8A. It applies to share options, share purchases, deferred schemes and any other arrangement whereby a director or employee is granted rights to shares, and those rights are subject to one or other condition. Every share incentive scheme, whatever its structure, is in the very nature of things subject to various conditions. For example, the director or employee is not allowed to dispose of the shares until he or she has been in employment for a prescribed minimum number of years: the director or employee is not allowed to exercise voting rights whilst the shares are pledged as security for a loan: ownership does not pass until the full purchase price has been paid: or the rights of ownership are conditional upon the occurrence of some other event.

2.3 The new concept introduced by s8C is that upon any restriction ceasing to exist, i.e. when the employee acquires a vested right in and to full ownership of the shares concerned, the employee will, at that stage, be taxed on the difference between the consideration paid for the shares, and their market value at the date of vesting.

2.4 So, whatever the structure of the scheme, at the end of the day the director or employee will be taxed on the gain at normal income tax rates, as if it arose from employment. Thereafter, on a disposal of the shares in question, the director or employee will suffer capital gains tax if a gain is realised, or normal tax if he or she is taxed as a share dealer.

2.5 The Amending Act also provides for the deletion of the existing ‘stop loss’ provision, so that all gains or losses arising from the award of shares or options to directors or employees will be treated as income, or losses, and taxed accordingly.

3 Broad-Based Employee Share Plans

3.1 A new s8B has also been introduced. This applies to what are defined as Broad-Based Employee Share Plans.

3.2 Such Plans work as follows –

3.2.1 they apply to what will be known as ‘qualifying equity shares’ acquired by employees in the share capital of the employer or any other group company, for a consideration not exceeding the minimum subscription required by the Companies Act, which can be as little as 1 cent, or fractions of a cent, per share, depending upon the denomination in which the shares are issued;

3.2.2 employees who are already participants in other employer equity schemes will not be entitled to participate;

3.2.3 the Plan must be available to at least 90% of all employees other than those mentioned in 3.2.2 above;

3.2.4 each employee will be entitled to take up shares (on which the employee will be entitled to all dividends and full voting rights) in the employer company (or in any other group company) up to a maximum value of R9 000 over a period of three years. These shares can be taken up in any one, two or more of the three years, provided that the aggregate market value of such shares does not exceed R9 000, and

3.2.5 the employer will be entitled to a tax deduction for the market value of all the shares issued to participants in the plan limited to R3 000 per annum in respect of each employee, with the excess being carried forward for deduction in subsequent years i.e. the issue of such shares will be treated as a business expense, but at the same time it must be realised that the employer will receive very little if anything for the shares. Compare this to the current situation where for accounting disclosure purposes the cost of shares issued in respect of other employee equity schemes must be brought to account, but no tax deductions are permitted!

3.3 As the cost to the employee of his or her shares cannot exceed the minimum subscription price required in terms of the Companies Act to be paid for the shares concerned, the employee’s exposure will be minimal. If the par value of the shares allocated to the employee is, for example, R100, whilst their market value is R9 000, then the employee’s debt will be R100 and no more. This will obviously be less if the par value of the shares is expressed in cents or fractions of a cent.

3.4 The employee’s debt may or may not carry interest. Failure to charge interest, or to charge less than the official rate of interest, will not have any tax consequences.

3.5 The employer may impose restrictions on the right of the employee to dispose of the shares, but the employee may not be denied the right to dispose of the shares for more than five years. If the shares are sold within the five year period, then the employee will be taxed on the gain at normal tax rates. If sold after the five year period, then the gain will be taxed at capital gains tax rates.

3.6 In practice, the employee’s indebtedness for the purchase of the shares will be nominal and the risk minimal. In other words, if the share prices go ‘under water’ then the nominal debt will ultimately have to be repaid. If the investment is successful then the employee will stand to make a gain which will either be taxed at normal rates or at capital gains tax rates.

3.7 The potential benefits for all parties are enormous. The employee will be properly incentivised to perform; the risks to the employee are minimal; gains will be taxed in the normal course in most cases at low rates; the employer will be entitled to a tax deduction for the market value of the shares; and a solid foundation will be created upon which broad-based share participations can be achieved, and BEE objectives can be met.

4 Black Economic Empowerment Objectives

4.1 The Broad-Based Employee Share Plans will undoubtedly act as a platform for the acceleration of black economic integration in commerce, industry and other disciplines. The acceleration of the process can easily be achieved by an increase in the maximum permitted investment of R9 000, per participant, whenever deemed necessary to promote these objectives. At the same time the benefits to all interested parties will be maintained.

4.2 Expanding the scope of these Broad-Based Plans by creating special classes of shares for participants is also a possibility. Such separate classes of shares could be issued for fractions of a cent, with suitable adjustments to voting rights. The Listings Requirements of the JSE may, however, restrict this possibility where listed shares are involved.

4.3 But, overall, the impact of a Broad-Based Employee Share Plan could be significant in the context of Black Economic Empowerment objectives. Take, for example, a small cap R20 million unlisted company with 200 employees. Assume that all participate in the Plan. At a level of R9 000 each, shares to the value of R1.8 million would be issued to the participants. This would amount to an effective participation of 8.2% in the enlarged capital. What a significant step in the direction of Black Economic Empowerment in relation to existing and future Charters! And this process could be accelerated by simply increasing the maximum permitted participation of R9 000 per employee.

5 The legal structures for the above Schemes and Plans

We are developing schemes and plans to achieve these objectives of the new legislation. We should be pleased to assist and to advise on the legal structure and documents required for any of the aforegoing.


Established in the early 1920s, Deneys Reitz is one of the largest law firms in South Africa with offices in Johannesburg, Durban and Cape Town. The firm’s corporate client base includes the major financial institutions, mining houses, insurance companies, industrial conglomerates as well as professional firms and overseas companies. The firm’s 189 lawyers provide corporate clients with expert professional advice and assistance in all areas of law affecting these corporations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions