[FAQ] Non-resident and the vesting of equity instruments

[FAQ] Non-resident and the vesting of equity instruments

• 10 December 2020
• Individuals Tax
• Piet Nel

Background

A taxpayer was employed by a South African company in South Africa for many years. She was transferred to the company's UK office ( a separate legal entity) in 2016. In June 2019, shares that she earned during her employment at the South African company vested and she was paid out and an IRP5 issued.

Is tax due in South Africa on a whole or a portion of the income? If she is not to be taxed in South Africa how should this be reflected on her 2020 ITR12?

Answer

The Income Tax Act

This is a relatively complex issue. We accept that the individual is a person who is (or was) deemed to be exclusively a resident of the RSA for purposes of the application of any agreement entered into between the governments of the RSA and the United Kingdom for the avoidance of double taxation.

You state that an IRP5 was issued. We accept that the employer, as they are required to do under paragraph 11A(2) of the Fourth Schedule, applied to SARS for a directive. The IRP5 would be populated to the employees’ ITR12.

How the section 10(1)(o)(ii) exemption affects gains included in income upon the vesting of any equity instrument under section 8C, is set out in issue 2 of the current practice generally prevailing.

The following is relevant to your request:

SARS states, and we agree with this, that section 8C ‘schemes’ “generally have 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 practice then is stated as follows:

“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.

Application of the principles

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:

Workdays outside the Republic in the sourcing period × Section 8C gain

Total workdays in the sourcing period

= Exempt portion of the gain under section 10(1)(o)(ii).”

Note that “weekends, public holidays and leave days are excluded from workdays for purposes of this calculation”.

Webinar Commentary

Further webinar commentary on Essentials Of International Tax Part 1- Introduction And The Concept Of Residence can be accessed here.

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