Share incentive schemes are once again in the spot light in this year's tax budget proposals. We have previously high-lighted in our weekly Tax Alerts that previous amendments to the Income Tax Act have triggered adverse tax consequences for share incentive schemes (e.g. amendments to section 10(1)(k)(i)(dd) and paragraph 38(2)(d) of the Eighth Schedule to the Income Tax Act).

It appears that these previous amendments have not satisfied Treasury's concerns on share incentive schemes and will be undertaking a review of the various types of share incentive schemes to eliminate purported loopholes and possible double taxation concerns.

The review will also consider the interrelationship between employer deductions and employee share scheme income. It si anticipated that the South African Revenue Service is concerned that taxpayers currently argue that the contributions to the employee share scheme for their employees are deductible (see Provider v Commissioner of Taxes, 17 SATC 40), while the contributions received by the Trust are capital in nature on the basis that the trust is not engaged in a profit making scheme (see CIR v Pick 'n Pay Employee Share Purchase Trust 54 SATC 271).

It also appears that the broad-based employee share plan contemplated in section 8B of the Income Tax Act will be reviewed and possibly merged into a single employee share scheme regime. Section 8B schemes are used by many taxpayers owing to the onerous requirements. If the section 8C and section 8B share scheme provisions are combined, it is anticipated that it will be to the detriment of high-net worth individuals. However, this process is said to take 2 years and we will have to wait and see what is proposed.

Written by Andrew Lewis, Senior Associate, Tax, Cliffe Dekker Hofmeyr