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Tax implications of share-based staff incentives · Tax Break: South African tax for professionals

• 0:11
  Welcome and thank you for joining me for Tax Break.
• 0:14
  This is a podcast about South African Tax 4 South African tax
• 0:18
  professionals and practitioners. My name is Peter Vanderzwan and
• 0:22
  in each episode Ashima thoughts with you on a topic or a recent
• 0:25
  development in South African tax.
• 0:27
  And I tried to keep the episode short enough that you can listen
• 0:32
  to them whenever you've got a bit of a gap in your calendar.
• 0:35
  Now those of you have dealt with me in in in the capacity of of
• 0:40
  consulting and advisory work with now that I also do
• 0:43
  authorise consulting and advisory work.
• 0:46
  Now there are many differences between the tax law and the FA
• 0:51
  standards, but there are also many similarities, especially if
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  you stand back a bit and you look at it conceptually.
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  What these two sets of rules look to achieve, Or are they
• 1:04
  applied to the same economic transaction?
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  And it's often useful to understand both sides as the one
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  set of rules may point to some issues to consider when it comes
• 1:15
  to the other. Now I would like to talk about
• 1:18
  an area that in my experience is a key difference between these
• 1:23
  two sets of rules and that relates to really the tax
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  implications of increase 2 transactions for accounting
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  purposes. Now I freeze do if we look at it
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  and in very broad terms it deals with share based payment
• 1:40
  transactions and a shape payment transaction is really a
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  transaction where an entity receives goods or services and
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  pays for that by issuing its own shares or equity instruments or
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  makes a payment linked to the shares.
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  Now these goods or services that the entity receive may be
• 2:00
  accounted for as an asset or as an expense.
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  If we look at the again still the sort of framework of what I
• 2:11
  do Kate is for it, it deals with two categories of transactions.
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  The first one is equity settled share based payments and the
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  other one is cash settled share based payments.
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  Now I think if we can without going into the accounting too
• 2:27
  much, just maybe talk about each of these two.
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  So cash settled this way a cash payment is made based on the
• 2:34
  value of the entities own equity and the underlying principles to
• 2:42
  the accounting for cash settled share based payments.
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  I don't think on that contagious.
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  So if we look at what our phrase do really does is it provides
• 2:51
  some guidance on out to accumulate the liability, when
• 2:55
  to recognise the expense until this liability is eventually
• 2:59
  settled in cash. However, when it comes to equity
• 3:03
  settled share based payments and you will see that if you look at
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  the basis for conclusions or to for our friends to the
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  conceptual arguments to follow are a lot more difficult.
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  So what the IB that the Russian Knoll for for accounting for an
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  equity share based payment in the manner that the standard
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  prescribes. So what the standard still says
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  is you need to account for credit to equity and a debit to
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  account for the goods or services that you receive.
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  If those goods or services are your debit, the asset if not you
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  David and explains so the Is's Russian all for this accounting
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  treatment was to say that if you issue shares you are receiving
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  something in exchange, whether it's cash or goods or services,
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  you still need to account for this transaction and the
• 4:01
  accounting treatment should basically should be consistent
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  irrespective of what you receive.
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  So the reasoning there is that if you whatever the
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  consideration is that you receive, you need to account for
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  that. And if you then consume that
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  that that consideration. So in there for example, in the
• 4:23
  case of services as you receive it, it's also consumed by the
• 4:27
  entity, then you need to account for that as an expense.
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  So that's really the basis for what I've currently prescribes
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  as insofar as equity settled share based payments are
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  concerned. Now when this the this treatment
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  was was developed, there were also a lot of arguments against
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  it. A few of them are that in
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  essence this is a transaction between the shareholders and the
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  supplier, not the entity and the supplier.
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  If you look at it from the entities perspective, there is
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  no real cost. It doesn't cost the entity
• 5:01
  anything to issue its own shares.
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  And in the absence of an outflow, this treatment may also
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  be inconsistent with the definition of an expense that we
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  find in the conceptual framework.
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  Now what the ISB did, they addressed each of these things
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  in the basis for conclusions and as we know, they still settled
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  with the current accounting treatment types.
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  The last thing I would like to mention about the accounting
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  standard before we move on to what to look out for from a tax
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  perspective is that it also caters for group schemes.
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  So for example, if you've got a scheme where you've got a parent
• 5:44
  entity holding company or a trust or another group entity
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  settling the transactions, in other words, issuing the shares
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  to the counterparty where a subsidiary and operating company
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  receives the service. So a good example would be the
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  employee is employed by the an operating company, but the
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  group's holding company settles the in the wards.
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  You'll get to a treatment where both the setting entity and the
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  receiving entity needs to account for this transaction.
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  And it might well be that the the operating company, the
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  subsidiary should recognise and expense, although the
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  transaction is settled by someone else, right.
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  So I think that's enough about the accounting side.
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  I've highlighted a few things that I would now like to link to
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  the tax treatment that you need to look out for.
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  Let's start by the with the easier one, the cash settled
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  transactions. Now I think in a lot of, in most
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  cases for cash settle transactions, they would be
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  outflows and from an accounting perspective, you'll recognise an
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  expense, but the real outflow only happens a lot later on.
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  So it might be that you end up having timing differences
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  between what happens for accounting and what happens for
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  tax. So for example, one of these
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  timing provisions could be Section 7B that deals with
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  variable remuneration and the effect of that could be that you
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  need to defer your your deduction until the actual
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  payment is made. Some transactions that are
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  accounted for as cash settled based on the substance of the
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  arrangement also might might involve share buybacks where you
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  don't necessarily get an A tax deduction for that.
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  So it's as I'm going to mention a few times going into the tax,
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  it's absolutely critical to understand exactly what this
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  transaction entails. That's being accounted for as a
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  share based payment, right. When we look at the equity
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  settled site, there's, there's quite a few complexities there.
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  So a few years ago there was a, a case that was decided by the
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  Supreme Court of Appeal, the Labatt Africa case.
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  So the company issued Chase to acquire assets and the dispute
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  as I've mentioned went all the way to the appeal court and the
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  court concluded that the company did not incur, did not actually
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  incur expenditure when issuing its own shares.
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  The the courts reasoning was based on the fact that it was
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  the other shareholders who were impoverished, not the company.
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  So issuing a company, a company issuing its own Chase is not
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  expenditure actually in good. Now since then in the context of
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  assets, these provisions deeming the the company to have incurred
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  expenditure. But there's nothing similar for
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  services. So if you're looking at an
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  arrangement where you've got an iframe stood charge, an expense
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  for a scheme that's equity settled by the company that also
• 8:54
  receives the services, it's very unlikely that you will have a
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  reduction. Again, one needs to look at the
• 9:01
  whole scheme to make this determination.
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  Lastly, I would like to talk about these group schemes.
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  Now the group schemes you, well I think what's important there
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  is you need to identify who in the group actually increase the
• 9:17
  expense. It may not be the entity or all
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  the entities that recognise accounting expenses.
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  You also need to consider the overall deductibility of the
• 9:28
  expense in the context of that person then.
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  So in other words, what is the person's trait is the expense
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  incurred for purposes of the person's straight etcetera.
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  So to do this one really needs to understand the whole
• 9:41
  structure, how it's funded, it's etcetera, but it's not.
• 9:47
  I think the the key message here is the tax deduction wouldn't
• 9:52
  just follow where the office to charge sits for accounting
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  purposes. So in summary, I think first
• 10:00
  important point to take home is that Africa's DO is likely to
• 10:05
  give you an accounting treatment that looks a lot different from
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  the tax rules. So in in many instances, you'll
• 10:11
  have either temporary or permanent differences between
• 10:14
  these two sets of rules for tax purposes.
• 10:17
  You need to understand all the intricacies of the scheme to to
• 10:21
  assess is there a tax deduction, When is the tax deduction and
• 10:26
  who gets the tax deduction. That's it for today's episode.
• 10:30
  If you have any feedback, comments, ideas for future
• 10:34
  episodes, please send me an e-mail.
• 10:36
  My e-mail address is in the show notes.
• 10:38
  If you like the podcast, please subscribe for it on your
• 10:42
  favorite podcast platform and tell all your friends and
• 10:45
  colleagues about it. Just a reminder, as always, that
• 10:49
  nothing in this podcast is intended to be tax advice.
• 10:52
  I'm only presenting the podcast for awareness purposes.
• 10:56
  If you've got a specific scheme or arrangement that you're
• 10:59
  looking at, you need to get advice based on the facts and
• 11:02
  circumstances of that. Until next time, goodbye.