Picture: DAILY DISPATCH
Picture: DAILY DISPATCH

THE Western Cape High Court delivered an early Christmas tax gift to many employees who exercised their rights to buy shares in their company under a deferred delivery scheme before 2004.

Last week, the court confirmed that the employees had paid the right amount of tax — that applicable at the time they exercised their right to buy the shares. The South African Revenue Service (SARS) challenged the tax payments under the scheme last year. The judgment could be widely applicable to deferred delivery schemes.

SARS spokesman Adrian Lackay said it received the judgment only on Wednesday and was still studying it to determine whether or not SARS would appeal.

According to Edward Nathan Sonnenbergs (ENS), there were three different share incentive schemes that were popular from about 1996 to 2004, when the Income Act changed. One scheme, that was challenged by SARS in the special tax court last year, the deferred delivery scheme, was adopted by many listed companies and approved by leading advisers.

Before 2004, section 8A of the Income Act Tax determined the tax treatment whenever employees received shares as a result of their employment. The section says employees must pay tax at the time they "exercise their right of acquisition".

In the case that started in the tax court and ended in the Western Cape High Court, employees were challenged by SARS on the tax payment on the options to buy shares they exercised before 2004, but only took delivery of in 2006. They were granted the option before the law was changed, and applied section 8A.

In 2004, the act changed, introducing section 8C, which required the taxpayer to calculate and pay the tax only when the shares were delivered and paid for, thereby taxing the full gain of the shares over the scheme period, which could run for between three and 10 years.

Robert Gad, a tax director at ENS, said almost everybody believed the way the deferred delivery scheme was taxed was when an employee exercised the option to buy the shares, or concluded the contract. The tax on the gain was calculated and paid up front.

"If you were offered a share for R1 and it had a market value at that time of R1.10 the gain was 10% and was paid up front. When the shares were ultimately delivered and paid for there was no further tax paid, no matter what the gain had been over the period."

Many of the schemes at the time ran for 10 years before the shares were delivered and paid for. When SARS challenged the taxpayers who applied section 8A on the shares they exercised their right to acquire on or before 2004, they took the matter to the special tax court.

Last year, the tax court ruled in favour of SARS, saying the tax should have been determined when people took delivery of the shares and paid for them, not when the option to buy the shares was exercised.

ENS took the matter on appeal to the Western Cape High Court, which confirmed that the taxpayers’ interpretation of the legislation at the time was correct, and that they paid the correct amount of tax.

"If the judgment stands, people will not be better or worse off; it has just been confirmed they paid the right amount of tax, " Mr Gad said.