Another ruling on share schemes, but questions remain

It appears from the Ruling that the applicant, being a local trust (Trust), held shares in a certain special purpose vehicle (SPV), being a local company. The SPV in turn held certain shares in a locally listed company (ListCo).

The beneficiaries of the Trust are employees of ListCo and its subsidiaries, as part of a scheme to facilitate participation of historically disadvantaged employees in owning shares in ListCo.

After the expiry of a certain lock-up period, and the repayment of the acquisition funding, the SPV distributed shares in ListCo to the Trust.
In terms of the rules of the scheme, the Trust was obliged to distribute the ListCo shares to the beneficiaries on certain vesting dates.
It appears to have been accepted that, upon distribution of the ListCo shares by the Trust to the beneficiaries, the market value of the shares would be included in their income in terms of s8C of the Act.

Without providing any specific details about the nature of the Trust, and the rights of the beneficiaries in respect of the income, assets or gains of the Trust, the Trust appears to have been concerned about the possible application of paragraph 38(1) of the Eighth Schedule to the Act upon distribution of the ListCo shares to the beneficiaries.

Paragraph 38 of the Eighth Schedule to the Act applies to disposals made by way of donation, disposals between connected persons that do not reflect an arm’s length price and disposals where the consideration is not measurable in money. Essentially, it deems the proceeds upon disposal in these circumstances to be equal to the market value of the asset.

On general principles, and specifically in terms of paragraph 11(1)(d) of the Eighth Schedule, the vesting by a trust of an asset in a beneficiary constitutes a disposal. Also, trusts and their beneficiaries are “connected persons” in terms of the definition in s1 of the Act. It is therefore in principle possible for paragraph 38 to apply where assets are distributed by a trust to its beneficiaries.

In this Ruling, SARS unequivocally stated that paragraph 38(1) is not applicable to the distribution of the shares by the Trust to its beneficiaries. 

This matter is, however, complicated because of the interaction between s8C of the Act and the rules contained in the Eighth Schedule (specifically paragraph 80). Over the past few years a number of changes have been made to the Act in order to provide for the interaction between s8C and the capital gains tax rules in the context of employee share schemes.

Companies wanting to set up employee share schemes should seek expert advice in order to reduce the risk of incurring taxes at multiple levels of the structure.