Treasury to review tax on Esops

Ann Crotty LAST November 24 000 employees of Impala Platinum who were members of the company’s employee share ownership plan (Esop) were each awarded a payout from the scheme of R3 000. Although the majority of the 24 000 Esop members were low-income earners the payout they actually received was significantly reduced by the taxman.

As the tax rules currently stand members of an Esop can only be paid out a benefit after the Esop has received a tax directive from the SA Revenue Service (Sars). This means after the scheme has paid the full tax amount due.

In essence employees on minimum pay have the same tax obligations as executives on multimillion-rand remuneration packages that include multimillion-rand share option awards. Sars’s tough treatment of lowincome beneficiaries of Esops appears to be motivated by a desire to ensure that high income earners do not secure tax advantages from having their remuneration channelled through share option schemes.

But things might be about to change. This year’s Budget Review says that the government is set to review the whole issue of Esops in order to address “audit controversy and legislative uncertainty”.

The review will consider the interrelationship between employer deductions and employee share scheme income.

“The incentive regime for low-income earner share schemes also needs to be reviewed and possibly merged into a single employee share scheme regime.”

The Budget Review notes that many companies use Esops to motivate employees and to meet black economic empowerment objectives, most of which use employee share trusts.

“These trusts obtain funding from an employer company, with a trust holding the shares for the benefit of the employees. While this legitimate practice is to be supported, these schemes are often mixed with executive share schemes that tend to undermine tax.”

The review is expected to be completed over two years.