Share incentives schemes often involve the use of trusts to administer the awards made to employees. Previous rulings indicated that a share incentive trust will dispose of shares acquired for purposes of the scheme when these shares vest and therefore potentially be liable for CGT on this disposal. BPR277, however, suggests that a different position may exist if the trust acquires the shares for the beneficial interest of the employees from the date of initial acquisition.
Share incentive schemes are widely used as a tool to align the objectives of senior management and employees with those of a business by providing these persons with an ownership stake in the business. These schemes often involve the use of a trust to hold shares while it has not yet vested in the employees who may be entitled to it a some point in future. From a tax perspective, the presence of such a trust may raise a number of issues. SARS recently released 2 rulings that relate to the unwinding of a share incentive scheme that was administered by a trust set up of this purpose. This article specifically deals with the ruling that relates to the tax implications of the winding up process in the hands of the trust (Binding Private Ruling 277).
Scheme that the ruling applies to
The trustees of the trust made awards to employees from time to time. The trustees procured shares to fulfil the awards made. The instruments awarded to these employees were units in the trust, as opposed to the actual shares. A unit in the trust afforded the beneficiary:
- a vested right to one share in the employer company
- the right to delivery of a share, if conditions are met; and
- voting rights and distribution rights in the share, as set out in the trust deed.
A beneficiary was not entitled to pledge, encumber or dispose of the units or enter into any arrangement involving the attached voting rights. Upon vesting (final date), the beneficiary can elect whether to receive the shares (and pay all related tax and costs to the trust) or request that the trustees to sell the shares on his behalf.
Ruling and analysis
One of the matters that the ruling deals with is the tax consequences for the trust when the units vest and the shares are transferred to the beneficiaries or sold on their behalf.
The ruling states that in terms of a number of provisions of the Eighth Schedule of the Income Tax Act, which deal with capital gains tax and disposal events, no disposal of shares occurs in the hands of the trust when the shares are distributed to the beneficiaries. As a result, the vesting event has no capital gains tax (CGT) implications for the trust. This outcome can be compared to earlier rulings, such as BPR174 and BPR259, which suggested that the trust disposed of the shares but was not liable to CGT for other reasons. (The ruling does not apply to shares that remain the in the trust).
It appears that BPR277 is based on a number of critical facts alluded to in the document. The beneficiaries acquired a vested right, which could be forfeited, to the shares held in trust. The trustees acquired the shares for the beneficial interest or beneficial ownership of the shares that vest in the beneficiaries is emphasised strongly in the ruling.
It is submitted that the rulings referred to above suggest that the role of a share incentive trust may purely be a flow-through vehicle (such as BPR277) or a vehicle that acquires temporary beneficial ownership in shares (as appears to be the case in BPR174 and BPR259). When setting up a share incentive scheme, the role of a trust is an important consideration from the perspective of CGT for the trust but also other factors, such as the deductibility of the awards for the employer. (September 2017)
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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.