Income Tax Act, 1962 (Act No. 58 of 1962)Chapter II : The TaxesPart I : Normal Tax8C. Taxation of directors and employees on vesting of equity instruments |
(1)
| (a) | Notwithstanding sections 9C and 23(m), a taxpayer must include in or deduct from his or her income for a year of assessment any gain or loss determined in terms of subsection (2) in respect of the vesting during that year of any equity instrument, if that equity instrument was acquired by that taxpayer— |
| (i) | by virtue of his or her employment or office of director of any company or from any person by arrangement with the taxpayer’s employer; |
[Section 8C(1)(a)(i) substituted by section 12(1)(a) of the Taxation Laws Amendment Act, 2010 (Act No. 7 of 2010) - effective 1 January 2011]
| (ii) | by virtue of any restricted equity instrument held by that taxpayer in respect of which this section will apply upon vesting thereof; or |
[Section 8C(1)(a)(ii) substituted by section 12(1)(b) of the Taxation Laws Amendment Act, 2010 (Act No. 7 of 2010) - effective 1 January 2011]
| (iii) | as a restricted equity instrument during the period of his or her employment by or office of director of any company from— |
| (aa) | that company or any associated institution in relation to that company; or |
| (bb) | any person employed by or that is a director of— |
| (A) | that company; or |
| (B) | any associated institution in relation to that company; |
[Section 8C(1)(a)(iii) inserted by section 12(1)(c) of the Taxation Laws Amendment Act, 2010 (Act No. 7 of 2010) - effective 1 January 2011]
[Section 8C(1)(a) substituted by section 6 of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014)]
| (b) | This section does not apply in respect of any equity instrument which— |
| (i) | was acquired by the exercise or conversion of, or in exchange for the disposal of any other equity instrument where this section applied in respect of the vesting of that other equity instrument before that exercise, conversion or exchange; or |
[Section 8C(1)(a)(b)(i) substituted by section 12(1)(b) of Act No. 31 of 2005 - effective 8 November 2005]
| (ii) | constitutes a qualifying equity share contemplated in section 8B. |
| (1A) | A taxpayer must include any amount received by or accrued to him or her during a year of assessment in respect of a restricted equity instrument in his or her income for that year of assessment if that amount does not constitute— |
| (a) | a return of capital or foreign return of capital by way of a distribution of a restricted equity instrument; |
| (b) | a dividend or foreign dividend in respect of that restricted equity instrument; or |
| (c) | an amount that must be taken into account in determining the gain or loss, in terms of this section, in respect of that restricted equity instrument. |
[Section 8C(1A) substituted by section 13(1) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - effective 1 March 2017 and applies in respect of amounts received or accrued on or after that date]
(2)
| (a) | The gain to be included in the income of a taxpayer — |
(i) in the case of —
| (aa) | a disposal contemplated in subsection (5)(c); |
| (bb) | a disposal by way of release, abandonment or lapse of an option or financial instrument contemplated in paragraph (a)or (b) of the definition of "equity instrument", |
is the amount received or accrued in respect of that disposal which exceeds the sum of any consideration in respect of that equity instrument; or
| (ii) | in any other case, is the amount by which the market value of the equity instrument determined at the time that it vests in that taxpayer exceeds the sum of any consideration in respect of that equity instrument; |
| (b) | The loss to be deducted from the income of a taxpayer — |
(i) in the case of—
| (aa) | a disposal contemplated in subsection (5)(c); or |
| (bb) | a disposal by way of release, abandonment or lapse of an option or financial instrument contemplated in paragraph (a) or (b) of the definition of "equity instrument", |
is the amount by which the sum of any consideration in respect of that equity instrument exceeds the amount received or accrued in respect of that disposal; or
| (ii) | in any other case, is the amount by which the consideration in respect of the equity instrument exceeds the market value of that equity instrument determined at the time that it vests in that taxpayer. |
[Section 8C(2) substituted by section 12(1)(c) of Act No. 31 of 2005 - effective 8 November 2005]
| (3) | An equity instrument acquired by a taxpayer is deemed for the purposes of this section to vest in that taxpayer— |
| (a) | in the case of the acquisition of an unrestricted equity instrument, at the time of that acquisition; or |
| (b) | in the case of the acquisition of a restricted equity instrument, at the earliest of— |
| (i) | when all the restrictions, which result in that equity instrument being a restricted equity instrument, cease to have effect; |
| (ii) | immediately before that taxpayer disposes of that restricted equity instrument, other than a disposal contemplated in subsection (4) or (5)(a), (b) or (c); |
[Section 8C(3)(b)(ii) substituted by section 12(1)(d) of Act No. 31 of 2005 - effective 8 November 2005]
| (iii) | immediately after that equity instrument, which is an option contemplated in paragraph (a) of the definition of "equity instrument" or a financial instrument contemplated in paragraph (b) of that definition, terminates (otherwise than by the exercise or conversion of that equity instrument); |
[Section 8C(3)(b)(iii) substituted by section 11(1)(b) of the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007) - effective 1 October 2007]
| (iv) | immediately before that taxpayer dies, if all the restrictions relating to that equity instrument are or may be lifted on or after death; and |
[Section 8C(3)(b)(iv) substituted by section 11(1)(c) of the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007) - effective 1 October 2007]
| (v) | the time a disposal contemplated in subsection (2)(a)(i) or (b)(i) occurs. |
[Section 8C(3)(b)(v) substituted by section 11(1)(d) of the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007) - effective 1 October 2007]
(4)
| (a) | If a taxpayer disposes of a restricted equity instrument which was acquired in the manner contemplated in subsection (1) for an amount which consists of or includes any other restricted equity instrument in the employer of the taxpayer or an associated institution in relation to the employer, that other restricted equity instrument acquired in exchange is deemed to be acquired by that taxpayer by virtue of his or her employment or office of director of any company. |
[Section 8C(4)(a) substituted by section 12(1)(e) of the Taxation Laws Amendment Act, 2010 (Act No. 7 of 2010) - effective 1 January 2011]
| (b) | If the amount received or accrued in respect of the restricted equity instrument which is disposed of as contemplated in paragraph (a) includes any payment in a form other than restricted equity instruments, that payment less any consideration attributable to that payment must be deemed to be a gain or loss which must be included in or deducted from the income of the taxpayer in the year of assessment during which that restricted equity instrument is so disposed of. |
[Section 8C(4) substituted by section 12(1)(e) of Act No. 31 of 2005 - effective 8 November 2005]
(5)
| (a) | If a restricted equity instrument which was acquired by a taxpayer in the manner contemplated in subsection (1) is disposed of by that taxpayer to any person— |
(i) otherwise than by or under a disposal made in terms of a transaction at arm’s length; or
(ii) who is a connected person in relation to that taxpayer,
the provisions of subsections (2), (3) and (4) apply mutatis mutandis in the determination of any gain or loss made by that person as if that person had been the taxpayer, and that gain or loss is for purposes of subsection (1) deemed to be made by that taxpayer in respect of the vesting of that equity instrument.
| (b) | If an equity instrument was acquired by any person other than the taxpayer by virtue of the taxpayer’s employment or office of director, that equity instrument must, for purposes of this section, be deemed to have been so acquired by that taxpayer and disposed of to that person in the manner contemplated in paragraph (a). |
| (c) | Paragraph (a) does not apply where a taxpayer disposes of any restricted equity instrument (including by way of forfeiture, lapse or cancellation) to his or her employer, an associated institution or other person by arrangement with the employer in terms of a restriction imposed in relation to that equity instrument for an amount which is less than the market value of that restricted equity instrument. |
[Section 8C(5)(c) substituted by section 12(1)(f) of Act No. 31 of 2005 - effective 8 November 2005]
| (6) | If a person who acquires a restricted equity instrument from the taxpayer as contemplated in subsection (5), disposes of that restricted equity instrument to any other person in the manner contemplated in subsection (5)(a)(i) or to a connected person in relation to the taxpayer, subsection (5) applies in respect of that other person as if he or she had acquired that restricted equity instrument directly from that taxpayer. |
| (7) | For purposes of this section, unless the context otherwise indicates— |
"associated institution"
means an associated institution as contemplated in paragraph 1 of the Seventh Schedule;
"consideration"
in respect of an equity instrument means any amount given or to be given (otherwise than in the form of services rendered or to be rendered or anything done, to be done or not to be done)—
| (a) | by the taxpayer in respect of that equity instrument; |
| (b) | by the taxpayer in respect of any other restricted equity instrument which had been disposed of by that taxpayer in exchange for that equity instrument, reduced by any amount attributable to the gain or loss in terms of subsection (4)(b); or |
[Paragraph (b) substituted by section 11(1)(e) of the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007) - effective 1 October 2007]
| (c) | by any person contemplated in subsection (5)(a) or (b) in respect of that restricted equity instrument, to the extent that the amount does not exceed the amount the taxpayer would have had to give to acquire that equity instrument had it not been disposed of or deemed to have been disposed of by him or her, but does not include any amount given or to be given by that person to the taxpayer to acquire that restricted equity instrument: |
[Paragraph (c) substituted by section 11(1)(e) of the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007) - effective 1 October 2007]
Provided that where a taxpayer acquires—
| (a) | an equity instrument in exchange for any other equity instrument, as contemplated in subsection (4)(a), the market value of the equity instrument given in exchange must not be taken into account in determining the consideration in respect of the equity instrument so acquired or |
| (b) | a right to acquire any marketable security in exchange for any other such right, as contemplated in section 8A(5), and the right so acquired constitutes an equity instrument acquired in the manner contemplated in subsection (1), the consideration for that equity instrument must be determined as if it was acquired in the manner contemplated in subsection (4)(a). |
[Definition substituted by section 12(1)(h) of Act No. 31 of 2005 - effective 8 November 2005]
"employer"
means an employer as contemplated in paragraph 1 of the Seventh Schedule;
"equity instrument"
means a share or a member’s interest in a company, and includes—
| (a) | an option to acquire such a share, part of a share or member’s interest; |
[Paragraph (a) substituted by section 11(1)(c) of the Revenue Laws Amendment Act, 2008 (Act No. 60 of 2008) - effective 21 October 2008]
| (b) | any financial instrument that is convertible to a share or member’s interest; and |
[Paragraph (b) substituted by section 11(1)(d) of the Revenue Laws Amendment Act, 2008 (Act No. 60 of 2008) - effective 21 October 2008]
| (c) | any contractual right or obligation the value of which is determined directly or indirectly with reference to a share or member’s interest; |
[Definition substituted by section 11(1)(b) of the Revenue Laws Amendment Act, 2008 (Act No. 60 of 2008) - effective 21 October 2008]
"market value"
in relation to an equity instrument —
| (a) | of a private company as defined in the Companies Act or a company that would be regarded as a private company if it were incorporated under that Act, means an amount determined as its value in terms of a method of valuation— |
| (i) | prescribed in the rules relating to the acquisition and disposal of that equity instrument; |
| (ii) | which is regarded as a proxy for the market value of that equity instrument for the purposes of those rules; and |
| (iii) | used consistently to determine both the consideration for the acquisition of that equity instrument and the price of the equity instrument repurchased from the taxpayer after it has vested in that taxpayer; or |
[Paragraph (a) substituted by section 10(1) of the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013), GG 37158, dated 12 December 2013 - effective 1 May 2011]
| (b) | of any other company, means the price which could be obtained upon the sale of that equity instrument between a willing buyer and a willing seller dealing freely at arm’s length in an open market and, in the case of a restricted equity instrument, had the restriction to which that equity instrument is subject not existed; |
[Definition substituted by section 7 of the Revenue Laws Amendment Act, 2006 (Act No. 20 of 2006)]
"restricted equity instrument"
in relation to a taxpayer means an equity instrument—
| (a) | which is subject to any restriction (other than a restriction imposed by legislation) that prevents the taxpayer from freely disposing of that equity instrument at market value; |
| (b) | which is subject to any restriction that could result in the taxpayer— |
| (i) | forfeiting ownership or the right to acquire ownership of that equity instrument otherwise than at market value; or |
| (ii) | being penalised financially in any other manner for not complying with the terms of the agreement for the acquisition of that equity instrument; |
[Paragraph (b) substituted by section 11(1)(f) of the Revenue Laws Amendment Act, 2008 (Act No. 60 of 2008)]
| (c) | if any person has retained the right to impose a restriction contemplated in paragraph (a) or (b) on the disposal of that equity instrument; |
| (d) | which is an option contemplated in paragraph (a) of the definition of "equity instrument" and where the equity instrument which can be acquired in terms of that option will be a restricted equity instrument; |
| (e) | which is a financial instrument contemplated in paragraph (b) of the definition of "equity instrument" and where the equity instrument to which that financial instrument can be converted will be a restricted equity instrument; |
[Paragraph (e) substituted by section 12(1)(j) of Act No. 31 of 2005 - effective 8 November 2005]
| (f) | if the employer, associated institution in relation to the employer or other person by arrangement with the employer has at the time of acquisition by the taxpayer of the equity instrument undertaken to— |
| (i) | cancel the transaction under which that taxpayer acquired the equity instrument; or |
| (ii) | repurchase that equity instrument from that taxpayer at a price exceeding its market value on the date of repurchase, |
if there is a decline in the value of the equity instrument after that acquisition; or
[Paragraph (f) substituted by section 12(1)(k) of Act No. 31 of 2005 - effective 8 November 2005]
| (g) | which is not deliverable to the taxpayer until the happening of an event, whether fixed or contingent; and |
[Paragraph (g) substituted by section 11(1)(f) of the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007) - effective 1 October 2007]
"unrestricted equity instrument"
means an equity instrument which is not a restricted equity instrument.
[Section 8C inserted by section 8(1) of Act No. 32 of 2004 - effective 26 October 2004]