Share incentive schemes are a popular way for companies to incentivize and reward their employees. In South Africa, these schemes are particularly attractive due to favorable tax treatment.
However, it is important to understand the tax implications of share incentive schemes for both the company and the employee.
In this article, we will explore the various types of share incentive schemes available in South Africa and provide an overview of their tax treatment.
What is a Share Incentive Scheme?
A share incentive scheme is a program that allows employees to receive shares in their company or cash incentives based on the performance of the company’s shares.
These schemes are typically designed to incentivize employees to perform well and help the company increase its share price.
Types of Share Incentive Schemes
There are several types of share incentive schemes available in South Africa, including share option schemes, share appreciation rights schemes, restricted share schemes, and phantom share schemes.
Each of these schemes has its unique features and tax implications.
Share Option Scheme
A share option scheme is a plan that allows employees to acquire shares in the company at a predetermined price.
The employee is granted an option to purchase shares at a specified price, which is typically lower than the market value of the shares.
The employee can exercise the option and purchase the shares after a specified period.
Share Appreciation Rights Scheme
A share appreciation rights (SARs) scheme is a plan that allows employees to benefit from the increase in the company’s share price without actually owning the shares.
The employee is granted a right to receive cash equal to the increase in the share price over a specified period.
Restricted Share Scheme
A restricted share scheme is a plan that allows employees to receive shares in the company that are subject to certain restrictions.
The restrictions may include a requirement to remain with the company for a specified period or meet certain performance targets.
Phantom Share Scheme
A phantom share scheme is a plan that allows employees to receive cash incentives based on the performance of the company’s shares.
The employee is granted a right to receive cash equal to the increase in the share price over a specified period, but without actually owning the shares.
Tax Implications for Employees
Employees who participate in share incentive schemes are subject to income tax and capital gains tax.
Income Tax
The tax treatment of share incentive schemes depends on the type of scheme and the timing of the acquisition of the shares.
If the employee acquires the shares at a discount, the discount is considered taxable income and is subject to income tax.
If the shares are held for more than three years, the employee may be entitled to a tax deduction equal to the lesser of the market value of the shares on the acquisition date and the market value of the shares on the date they are sold.
Capital Gains Tax
If the employee sells the shares, they will be subject to capital gains tax on the difference between the sale price and the market value of the shares on the acquisition date.
The capital gain is calculated as the sale price minus the base cost of the shares.
The base cost is determined by the market value of the shares on the acquisition date, plus any fees or commissions paid to acquire the shares.
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