The following examples that are given by the South African Revenue Service (SARS) in its Interpretation Notes should be carefully perused by South Africans who are working outside South Africa.
Example – Meaning of the “reward” and “lock-in” period
Facts:
On 1 May 2013, X, an employee of a South African holding company, acquired shares from the South African company by virtue of employment. Under the agreement, X was not permitted to dispose of the shares until 1 May 2016. The shares were granted both for exceptional performance by X during the company’s previous financial year (1 May 2012 to 30 April 2013) and as an incentive to retain X’s services during the lock-in period.
Result:
The following periods are relevant to determine the sourcing period of the gain:
- The reward period: 1 May 2012 to 30 April 2013 (the period during which services were rendered in respect of the reward).
- The lock-in period: 1 May 2013 to 30 April 2016 (the period during which the shares have not yet vested and for which the employee is required to render services until the restriction is lifted).
The sourcing period runs therefore from 1 May 2012 to 30 April 2016, since under the agreement the shares were granted to X for both as a reward for exceptional performance during the company’s previous financial year and as an incentive to retain X’s services during the lock-in period.
The location of services rendered during both the “reward” period and the “lock-in” period must be taken into account when determining the period of apportionment of the gain under section 10(1)(o)(ii).
The gain is deemed to have accrued evenly, and must therefore be apportioned evenly, over the period that the services were rendered.
The sourcing period for section 8C gains will, depending on the circumstances, be as follows:
- From the first day of the “reward” period that gave rise to the granting of a right to participate in a share scheme, up to the date of vesting of the equity instrument under section 8C; or
- From the date of grant to the date of vesting of the equity instrument, where there is simply a “lock-in” period and no “reward” period.
Once the sourcing period of the gain is determined and the employee has qualified for the section 10(1)(o)(ii) exemption, the exempt portion must be calculated based on the following apportionment method:
Working days outside the Republic in the sourcing period × section 8C gain total working days in the sourcing period = exempt portion of the gain under section 10(1)(o)(ii).
Weekends, public holidays and leave days are excluded from working days for purposes of this calculation.
The “sourcing period” in this formula refers to the “reward” period and the “lock-in” period that the share gains relate to, as discussed above.
Example – Apportionment of gains made under section 8C
Facts:
On 1 July 2009, DG, an employee of a South African holding company, acquired 5 000 shares (at R5 each) from the South African company by virtue of employment. Under the agreement, DG was not permitted to dispose of the shares until 1 July 2014. The shares were granted solely to retain DG’s services. DG rendered services to a Nigerian subsidiary company during the period 1 February 2011 to 31 January 2013. DG met the 183 day and 60 continuous day tests for this entire period, and thus any remuneration earned for services rendered outside the Republic during that period qualifies for exemption under section 10(1)(o)(ii). DG was in Nigeria and rendered services for a total of 460 actual working days during that qualifying period. DG also rendered services outside the Republic during the lock-in period but outside any qualifying period as follows:
- 1 October 2009 to 30 October 2009; and
- 10 April 2014 to 26 May 2014.
On 1 July 2014, when DG became entitled to dispose of the shares, they vested under section 8C, and had a market value of R43 per share. DG therefore made a gain of R190 000 [5 000 × (R43 – R5)]. To simplify illustration in this example, any leave days taken are ignored.
Result:
The portion of the gain made by DG on the vesting of the equity instruments that relates to services rendered outside the Republic during the qualifying period of 12 months is exempt from taxation under section 10(1)(o)(ii). The exempt portion must be calculated as follows:
Working days outside the Republic for the sourcing period × section 8C gain total working days for the sourcing period = exempt remuneration under section 10(1)(o)(ii) = 460/1 250 × R190 000 = R69 920. The balance of the section 8C gain of R120 080 remains taxable in South Africa. There are a total of 1 250 working days during the sourcing period, being from 1 July 2009 to 1 July 2014. The gain is deemed to be spread evenly over this period. The gains attributable to periods where services were rendered outside the Republic, but that do not fall within a qualifying 12 month period, being the periods of 1 to 30 October 2009 and 10 April 2014 to 26 May 2014, do not qualify as days outside the Republic under the formula, and the gains attributable to services rendered during those periods remain fully taxable in South Africa.
Contact Fanus Jonck, Tax Consultant, at tax@jonck.net with your tax queries.
