Can government promote share ownership?

Budget 2018/19 - Deloitte Expectations

Income tax legislation for qualifying section 8B broad-based employee share plans can benefit from international models to promote share ownership.

For many years National Treasury has amended the Income Tax Act to fine tune the taxation of general employee share plans under section 8C as it is perceived that tax leakage continues in this space. However, many stakeholders in the industry continue to raise the ineffectiveness of the legislation pertaining to the broad-based employee share plans under section 8B which have not been addressed.

Our global research at Deloitte shows that the main drivers for operating a broad-based plan is mainly to expand the culture of ownership in the group, being competitive in the market followed equally by driving performance and providing corporate/group identity. In other words, employers are looking to link the reward aspect of the share plan to corporate identity and performance.

Without going into detail, essentially, section 8B effectively requires an employer to transfer shares (under a certain value) to employees without any linked performance or employment criteria. In other words, there is no direct incentive for the employees to align their interests with the employer.

In addition, while the SA tax treatment remains the same for cash and share based incentives and the cost of operating a share incentive plan remains higher, there is little to no incentive for a company to give its employees shares instead of cash.

As a result, in South Africa we are only aware of of relatively few broad-based employee share plans complying with section 8B. Companies that operated section 8B plans are also moving towards the traditional (and fully taxable) section 8C plans due to the limitations of section 8B.

Looking further afield, as a share plan advisor to many foreign multinational companies, Deloitte’s experience is that not one company looking to extend their “all employee” share plans into South Africa has considered complying with section 8B as it does not support the commercial objectives of companies.

Often these companies consider the ease of implementation before extending the plan to SA participants. However, as there is effectively no preferential tax treatment available coupled with stringent exchange control regulations, South African residents lose out on income as these plans, (which are usually over and above normal remuneration) are not extended to SA.

The introduction of the self-initiated tax free savings initiative – which is common globally – is a step in the right direction to promote a savings culture. However, is there room for employer share plan to assist in promoting a savings culture? Many countries have legislation for preferential tax treatment of share plans that are designed (within boundaries) to benefit all employees within a company.

There are “qualifying” or “approved” plans worldwide that will suit different businesses. For example, entrepreneurial businesses trying to attract good talent as well as large listed companies that endeavour to drive corporate identity amongst employees.

There are benefits for both employee and employer. The employer may be able to passively promote and drive certain behaviours from employees, drive overall organisational culture, reduce employee turnover and increase the bottom line. At the same time, the employee should see an increase in his or her net wealth through owning a capital asset (foreign-owned if the parent is not South African), a lower tax burden on the initial gain through preferential tax treatment and lower future taxes through capital gains tax disposals and dividend income. Why would a government allow this? The benefit to the country may include that the employer effectively contributes to longer term investments and perhaps a better distribution of shares across the working population.

So whilst one may argue that in the current economic climate, South Africa cannot afford further tax breaks, these types of beneficial plans may promote government’s objective to broaden equity participation whilst developing the interests of employers.

Did you find this useful?