The infamous Section 8c : how the section may extend beyond an employment link

• Record Number: btclq_v10_n3_a4
• Author: Michael Rudnicki
• DOI: 10.10520/EJC-18c02983d0
• Published date: 01 September 2019
• Pages: 18-25
• Date: 01 September 2019

18 © SIBER INK

The Infamous Section 8C:

HOW THE SECTION MAY EXTEND BEYOND AN

EMPLOYMENT LINK

MICHAEL RUDNICKI*

ABSTRACT

The infamous section 8C was introduced to defer the employees’ tax obliga-

tion of an ‘equity instrument’ acquired by virtue of employment (as a direct

cause of employment) until the instrument is disposed of or until the quali-

fying restrictions imposed thereon are lifted. The section will apply where the

proximate cause of acquisition is employment or off‌ice of directorship.

The article considers the impact of a particular provision of section 8C

which applies to the acquisition of a ‘restricted equity instrument’ during

the period of employment or off‌ice of director from the employer-company

or related company or employee or director of that company or related

company. The emphasis of this provision is the exclusion of the reference to

‘by virtue of employment’ or the proximate cause of the acquisition being

employment or directorship.

The scenario considered in this article is whether a so-called ‘founder

shareholder’ could fall within these provisions purely as a result of being a

director or employee of the company at the time of acquisition of the share.

It is questioned whether this was ever the intention of the Legislature but

taxpayers who are directors or employees of a company who acquire shares

in or from such company for investment purposes, could unbeknown to

them, fall within the ambit of the infamous section 8C.

The article concludes that albeit that the provision was introduced to

curb what was a perceived abuse of the section (ref‌lected in the Explanatory

Memorandum at the time), the impact of the provision will by way of an

objective test, cause a restricted equity instrument to fall within the provisions

of section 8C for a founder of a business that subscribes for shares during the

period of employment or off‌ice of director. In addition, not only does the

original founder of the business fall within the provisions, if such director or

employee disposes of his or her shares to a co-director or co-employee, such

person will acquire a ‘restricted equity instrument’ within the ambit of the

section.

Introduction

Since 2004, when section 8C of the Income Tax Act 58 of 1962 (‘the Act’)

was introduced, most executives who are awarded, as part of their remuner-

ation package or arrangements, equity in whatever form by their employ-

ment organisation (be it actual shares or phantom awards, i e cash awards

that mimic the employer company’s share performance or any other share

* Tax Executive, Bowman’s Attorneys, Johannesburg.