The Application of Section 8C of the Income Tax Act 58 of 1962 in the Context of Trust Structures

• Citation: (2024) 36 SA Merc LJ 87
• DOI: https://doi.org/10.47348/SAMLJ/v36/i1a4
• Published date: 14 January 2025
• Pages: 87-111
• Author: Moolman, L.
• Date: 14 January 2025

JOBNAME: SAMLJ Vol 31 Part 1 PAGE: 1 SESS: 41 OUTPUT: Sat Nov 23 10:07:40 2024 SUM: 36130993

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THE APPLICATION OF SECTION 8C OF THE

INCOME TAX ACT 58 OF 1962 IN THE

CONTEXT OF TRUST STRUCTURES

LUMEN MOOLMAN*

Partner, Webber Wentzel

RIAAN WESSELS

†

Senior lecturer, Department of Accountancy, University of Johannesburg

Abstract

Broadly, section 8C of the Income Tax Act 58 of 1962 seeks to tax

directors and employees at revenue rates on certain amounts arising in

the context of the ownership of shares or instruments deriving their

value from shares (ie, ‘equity instruments’ as defined in section 8C).

Paragraph (c) of the ‘equity instrument’ definition was introduced into

section 8C(7) with the purpose of ensuring that employees cannot

avoid the consequences of section 8C by interposing an intermediary

entity between themselves and the shares to which their incentives or

remuneration are linked. In terms of paragraph (c) of the ‘equity

instrument’ definition, the ambit of section 8C was extended to include

‘any contractual right à the value of which is determined directly or

indirectly with reference to a share’. This study considered the

application of paragraph (c) of the ‘equity instrument’ definition in

the context where an employee receives a contractual right, the value of

which is derived from shares as well as non-share-related assets. Based

on the wording of section 8C, read in the overall context and purpose

of the provision, an interpretation where section 8C applies either fully

to a contractual right (where the majority of the assets are shares) or

not at all (where the minority of the assets are shares) seems to best

marry all the relevant factors.

Keywords: section 8C; equity instrument; employee; vesting trust

* BAccLLB (US), BCom Honours in Chartered Accounting (UJ), MCom in South African

and International Taxation (UJ), CA(SA) and Admitted Attorney of the High Court of South

Africa.

†

BCom in Accounting (RAU), BCom Honours in Accounting (RAU) MCom (Tax),

CA(SA).

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I INTRODUCTION

The human resources of a business arguably have the greatest impact on

its efficiency and its ability to gain a sustainable advantage over

competitors.

1

It is for this reason that in the current South African

economy it is of the utmost importance for businesses to attract, retain

and incentivise the best human talent.

2

Share incentive schemes have

consequently become increasingly popular

3

and are generally used by

companies to incentivise and retain executives and employees to

ultimately forge a stable, engaged and capable workforce.

4

As share incentive schemes have evolved,

5

the National Treasury and

the South African Revenue Service (‘SARS’) have been updating tax

legislation

6

to keep abreast of developments.

7

It is within this context

that section 8C was introduced into the Income Tax Act 58 of 1962

(as amended) (‘the Act’) in 2004, and further developed over the years,

given concerns that previous provisions, as contained in section 8A of

the Act no longer sufficiently addressed the commerciality of employee

share schemes.

8

Broadly interpreted, section 8C seeks to tax executives and other

employees at revenue rates (as opposed to lower rates attributable to, for

instance, dividend income

9

or capital gains), on amounts arising in the

1

Nojedeh & Pasban, ‘A review of the role of human capital in the organization’ (2016) 230

Procedia – Social and Behavioral Sciences 249 at 251.

2

Urme, ‘The impact of talent management strategies on employee retention’ (2023) 28(1)

International Journal of Science and Business 127 at 129.

3

Steenkamp & Wesson, ‘Executive share-based remuneration in South Africa: Evidence

of alignment or rent-extraction?’ (2021) 30(1) Management Dynamics 1at1.

4

Seligson, ‘The impact of section 8C on an employee share participation trust –

unravelling complexity!’ (2011) 2(4) Business Tax and Company Law Quarterly 1at1.

5

According to PricewaterhouseCoopers’ 2011 Global Equity Incentives Survey, share

schemes have changed over time as the use of performance conditions in relation to the

vesting of instruments has increased significantly at the expense of simpler time-based

vesting. In addition, the National Treasury highlights that share schemes have become

increasingly complex, with top management entering into schemes that involve share rights

beyond simple share options.

6

National Treasury, ‘Explanatory memorandum on the Revenue Laws Amendment Bill’

(2004), available at https://www.sars.gov.za/wp-content/uploads/Legal/ExplMemo/LAPD-

LPrep-EM-2004–02-Explanatory-Memorandum-Revenue-Laws-Amendment-Bill-

2004.pdf, accessed on 1 November 2021.

7

National Treasury, ‘Explanatory memorandum on the Revenue Laws Amendment Bill’

(2004), available at https://www.sars.gov.za/wp-content/uploads/Legal/ExplMemo/LAPD-

LPrep-EM-2004–02-Explanatory-Memorandum-Revenue-Laws-Amendment-Bill-

2004.pdf, accessed on 1 November 2021.

8

Rudnicki, ‘Award of trust beneficiary interests to qualifying employees: Application of

section 8C’ (2018) 9(1) Business Tax and Company Law Quarterly 9at9.

9

It is noted that although dividends are included in a taxpayer’s gross income, they are

generally exempt from normal tax in terms of section 10(1)(k)(i) of the Act and consequently

not subject to tax at income tax rates (provided that the exclusions in section 10(1)(k)(i) do

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https://doi.org/10.47348/SAMLJ/v36/i1a4

(2024) 36 SA MERC LJ

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