NEWS & OPINION
31 October 2019
Beware of 45% tax on restricted shares in start-ups
F
ounders, directors and employees of start-up companies in South Africa should be aware that acquiring or owning shares carrying restrictions such as ‘lock-ins’ could land them with a tax liability of 45%. “If you hold restricted shares, you pay a much higher tax rate when you exit or when the restrictions lift – at the marginal tax rate of 45% compared to capital gains tax of 18% on unrestricted shares,” say Michael Rudnicki, Executive: Tax at Bowmans. The wide gap between tax on restricted versus unrestricted shares is an often-overlooked fact tucked away in Section 8C of the Income Tax Act, which deals with equity instruments acquired because of employment or holding a director position, or purely because a taxpayer is employed or holds the office of director. “Founders ask how this is possible … but the law is what it is,” Rudnicki says. “If you acquire a restricted equity instrument in connection
with employment or even as a result all if there are restrictions.” of being an employee or director, it He says there are several legislated may fall into Section 8C.” In a typical restrictions that will result in the start-up phase of a business where holder of restricted shares being taxed capital has not been raised, it may be at 45% when disposing of them or that restrictions on shares do not exist when such restrictions are lifted, one and are only negotiated at a later stage of the most common being ‘lockwhen capital is raised. ins’. An example is where an investor This section can have favourable tax awards shares to a founder, director implications for or employee as an those who acquire incentive to stay in THE WIDE GAP unrestricted shares the business for a BETWEEN TAX ON in the company minimum period, and pay the tax RESTRICTED VERSUS during which he upfront. “It can or she may not sell UNRESTRICTED be a great thing the shares. if there are no Compulsory SHARES IS AN OFTENrestrictions and share disposal OVERLOOKED FACT you can dispose requirements, of them freely. If the value is low, you and even conditions set for ‘good pay tax based on the market value leavers’ or ‘bad leavers’, may also well at the time, which may be nominal, be considered a restriction that would and you cannot be re-taxed later trigger 45% tax on exit, Rudnicki adds. as an employee or director, when He states that tax at 45% would not restrictions are imposed. But falling only be triggered when the holder of into Section 8C is not a good thing at restricted shares sells them, but also
WHY YOUR INVESTMENT CHOICES MATTER. Our investors want their investments to do well and do good. That’s why we incorporate environmental, social and governance factors into all our investment and ownership decisions. And why we have committed over R122bn of our clients’ capital to sustainable investments that generate longterm returns, while solving some of society’s biggest challenges.
when the restrictions on the shares are lifted. “That has implications for the employer as well,” he says, referring to the employer’s obligations to withhold employees’ tax. Should SARS challenge the way this has – or has not – been done, it could result in the employer having to pay penalties. Rudnicki urges the founders of start-up companies to be aware of the consequences of Section 8C when seeking investment funds. “Often, when founders commence with their activities, the focus is not on the consequences of this particular piece of legislation. As a result, it is often forgotten or overlooked until there is a disposal or the restrictions are lifted, triggering tax at the higher rate.” Michael Rudnicki, Executive: Tax, Bowmans
More than 800 000 homes powered by renewable energy. Reducing total carbon emissions by 3 052 638 tons (equal to greenhouse gases from 587 963 cars driven for a year).
119872L
Invest for a future that matters. Read more at oldmutualinvest.com INVESTMENT GROUP DO GREAT THINGS EVERY DAY
The following entities are licensed Financial Services Providers (FSPs) within Old Mutual Investment Group (Pty) Ltd Holdings approved by the Financial Sector Conduct Authority (www.fsca.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are members of the Old Mutual Investment Group. Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No:604. | Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No:45255. | African Infrastructure Investment Managers (Pty) Ltd (Reg No 2005/028675/07), FSP No:4307. | Futuregrowth Asset Management (Pty) Ltd (Reg No 1996/18222/07), FSP No:520. Figures as at 31 December 2018 unless otherwise stated. Sources: Old Mutual Alternative Investments; African Infrastructure Investment Managers (AIIM); Old Mutual Specialised Finance; Futuregrowth Asset Management.
WWW.MONEYMARKETING.CO.ZA 5
