South Africa: Employees' Tax Withholding Obligations In Respect Of Share Incentive Arrangements

Last Updated: 22 June 2017
Article by Peter Dachs

Most Read Contributor in South Africa, July 2017

In terms of paragraph 2(1) of the Fourth Schedule to the Income Tax Act, 1962 (the "Act"), every employer, who is a resident of South Africa, or representative employer in the case of any employer who is not a resident, (whether or not registered as an employer under paragraph 15) who pays or is liable to pay any amount by way of remuneration to any employee shall, unless the Commissioner for the South African Revenue Service ("SARS") has granted authority to the contrary, deduct or withhold from that amount by way of employees' tax, an amount that will be determined as provided in the Fourth Schedule in respect of the liability for normal tax of that employee and must pay the amount so deducted or withheld to the Commissioner for SARS within seven days after the end of the month, during which the amount was deducted or withheld or within such further period as the Commissioner may approve.

The term "remuneration" is defined in paragraph 1 of the Fourth Schedule to the Act to mean any amount of income that is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered, subject to certain specific inclusions, one of which is any amount referred to in section 8C that is required to be included in the income of a person, and subject to certain that are not relevant for current purposes.

Therefore, any amount referred to in section 8C that is required to be included in the income of a person constitutes "remuneration" for purposes of employees' tax. To the extent that a section 8C gain arises upon the vesting of an equity instrument in terms of a share incentive arrangement, the employees' tax implications should be determined.

Paragraph 11A(1) of the Fourth Schedule to the Act provides, inter alia, that where the remuneration of an employee includes any amount referred to in section 8C, which is required to be included in the income of that employee, the person from whom the equity instrument was acquired is deemed to be a person who pays or is liable to pay to that employee the amount of the section 8C gain.

In terms of paragraph 11A(2), employees' tax in respect of such remuneration must, unless the Commissioner has granted authority to the contrary, be deducted or withheld by that person from, inter alia, any cash remuneration paid or payable by that person to that employee after that equity instrument has to the knowledge of that person vested.

However, in terms of the proviso to paragraph 11A(2), where that person is an "associated institution", as defined in paragraph 1 of the Seventh Schedule, in relation to any employer who pays or is liable to pay to that employee, any amount by way of remuneration during the year of assessment during which the section 8C gain arises and:

  • is not a resident nor has a representative employer; or
  • is unable to deduct or withhold the full amount of employees' tax during the year of assessment during which the gain arises, by reason of the fact that the amount to be deducted or withheld from that remuneration by way of employees' tax exceeds the amount from which the deduction or withholding can be made,

that person and that employer must deduct or withhold, from the remuneration payable by them to that employee during that year of assessment, an aggregate amount equal to the employees' tax payable in respect of that gain and shall be jointly and severally liable for that aggregate amount of employees' tax.

An "associated institution" is defined in paragraph 1 of the Seventh Schedule to mean, in relation to any single employer:

"(a) where the employer is a company, any other company which is associated with the employer company by reason of the fact that both companies are managed or controlled directly or indirectly by substantially the same persons; or
(b) where the employer is not a company, any company which is managed or controlled directly or indirectly by the employer or by any partnership of which the employer is a member; or
(c) any fund established solely or mainly for providing benefits for employees or former employees of the employer or for employees or former employees of the employer and any company which is in terms of paragraph (a) or (b) an associated institution in relation to the employer ..."

A "representative employer" is defined in paragraph 1 of the Fourth Schedule to mean, in the case of any employer who is not resident in South Africa, any agent of such employer having authority to pay remuneration who resides in South Africa.

Paragraph 11A(4) of the Fourth Schedule to the Act provides that, before deducting or withholding employees' tax in respect of a section 8C gain, that person and that employer must ascertain from the Commissioner, the amount to be so deducted or withheld. In practice, this requires a tax directive from SARS.

In terms of paragraph 11A(5), if that person and that employer are, by reason of the fact that the amount to be deducted or withheld by way of employees' tax, exceeds the amount from which the deduction or withholding is to be made, unable to deduct or withhold the full amount of employees' tax during the year of assessment during which the gain arises, they must immediately notify the Commissioner of that fact.

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.

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