A taxpayer worked for Sanlam in South Africa for many years until end of June 2016 at which point she was transferred to Sanlam UK, where she started working on 1st July 2016 and remains there as a UK resident exceeding 330 days in the tax year still working for Sanlam UK. In June 2019, the taxpayer received income code 3718 Vesting of Equity instruments from Sanlam South Africa, this incentive vested in June 2019, but was earned as an incentive whilst the tax payer worked here in South Africa in the years prior to June 2016. Sanlam SA deducted 8.14% PAYE on the payout. Please advise as to how the taxpayer would report this to SARS. Would tax be due in the UK on the above or would tax be payable in South Africa?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The fact that the individual, who based on the facts has not emigrated from the RSA, was physically outside the RSA for a continuous period of at least 330 full days, is irrelevant in respect of your request. From the information it appears the individual may well have remained ordinarily resident in the RSA, but it is possible that the individual may be a persons who is deemed exclusively to be a resident of the UK (see paragraph 4 of the treaty). It would then depend on where the person’s permanent home is. It is outside the scope of the service provided by us to provide guidance with respect to foreign legislation. Under paragraph 1, of Article 14 (of the relevant treaty), and subject to the provisions of Articles 15, 17 and 18 of the treaty, salaries, wages and other similar remuneration derived by a resident of the RSA in respect of an employment exercised in the UK, the remuneration as is derived therefrom may be taxed in the UK. The OECD commentary, in paragraph 2.1, of the Article that deals with income from employment, states the following: “Member countries have generally understood the term “salaries, wages and other similar remuneration” to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships).” With respect to ‘stock-options’, the commentary explains it as follows: “The treatment of employee stock-options” “12. The different country rules for taxing employee stock-options create particular problems which are discussed below. While many of these problems arise with respect to other forms of employee remuneration, particularly those that are based on the value of shares of the employer or a related company, they are particularly acute in the case of stock-options. This is largely due to the fact that stock-options are often taxed at a time (e.g. when the option is exercised or the shares sold) that is different from the time when the employment services that are remunerated through these options are rendered.”
“12.1 As noted in paragraph 2.2, the Article allows the State of source to tax the part of the stock-option benefit that constitutes remuneration derived from employment exercised in that State even if the tax is levied at a later time when the employee is no longer employed in that State.” The UK therefore has a right to tax the gain. The current practice general prevailing, issue 3, with respect to “share schemes” refers to “two periods relevant to the inclusion of the gain as income: the “reward” period and the “lock-in” period. The “reward” period is where employers grant rights to employees to participate in share schemes as a reward for past performance, for example, participation due to exceptional performance during the previous financial year of the employer. The “lock-in” period is a forward-looking period, where employees are prohibited from benefiting under the scheme until pre-determined fixed future dates, with the employees generally required to be in employment at the end of the lock-in period in order to participate in the benefits. The terms of the employment agreement and the rules and participation terms of the share scheme will determine what these periods are.” “The gain is taxable in the year that it vests, however, for purposes of determining the portion of the gain that is exempt 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” – see the interpretation note. 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). You must remember that, under section 9H(4)(b) of our Income Tax Act, sections 9H(2) and 9H(3) do not apply in respect of an asset of a person where that asset constitutes- … (d) any qualifying equity share contemplated in section 8B that was granted to that person less than five years before the date on which that person ceases to be a resident as contemplated in subsection (2) or (3); (e) any equity instrument contemplated in section 8C that had not yet vested as contemplated in that section at the time that the person ceases to be a resident as contemplated in subsection (2) or (3); or (f) any right of that person to acquire any marketable security contemplated in section 8A.