Contributions to employee share incentive trusts

​​​The contributions that companies make to employee share trusts should be tax deductible if they are made to incentivis​e employees but, if there are other benefits, there may be a capital gains liability.

Last year two decisions were delivered by the SCA on contributions to employee share trusts, both of which went against the taxpayer, namely, Massmart Holdings (Ltd v C: SARS and C: SARS 1 v Spur Group (Pty) Ltd 2.

Both involved structures which resulted in the contributions not being deductible by the contributing company under section 11(a) because the amounts were held to be not incurred in the production of income. In the Massmart case, the contributions were incurred by the holding company and, since the employees were in the operating subsidiaries, the expenditure was not incurred in the production of income. The appellant was unsuccessful in claiming the expenditure as capital losses. In the Spur case the SCA held that the contribution was not incurred directly in the production of income. The contribution facilitated the acquisition of shares by the employees but was ultimately distributed to the company’s holding company. News reports indicate that Spur intends to appeal to the Constitutional Court.

But even with vanilla structures there are tax pitfalls and uncertainties.

The company

In the typical structure, a company makes a non-refundable cash contribution to an employee share trust to enable it to acquire its shares on the open market, to award them to deserving employees of the company.

Applying the principle established in Provider v COT,3 such a contribution would be in the production of income on the basis that it was designed to encourage settled conditions of employment and promote a motivated workforce.

In BPR 050, dated 16 October 2009, a listed company made cash contributions to employee share trusts that the trusts would use to acquire shares in the company, either by issue or on the open market, which it would award to the qualifying employees. SARS ruled that the contributions were deductible under section 11(a) but the deduction had to be spread under section 23H. A similar ruling was given in BPR 354, dated 29 September 2020, once again with the contributions being deductible but spread under section 23H.

Section 23H

The relevance of Section 23H in the present context is that it applies when:

  • a person has incurred expenditure during a year of assessment on services rendered under section 11(a); and
  • all those services will not be rendered to that person in that year of assessment.

Under these circumstances, the expenditure to be allowed in a year of assessment is equal to the expenditure incurred multiplied by the number of months in that year in which services were rendered, divided by the total number of months over which those services will be rendered. No apportionment is required if all the services will be rendered within six months of the end of the year of assessment or if all the expenditure does not exceed ZAR 100 000.

Employees acquiring shares under a share incentive scheme are normally restricted from disposing of them for a number of years. During this period, the employer would derive a benefit because the employees would be incentivized to remain in employment. Once the restriction comes to an end, the employee would be subject to tax on any gain under section 8C. Spreading the deduction over the period in which the employees are restricted seems a fair way of determining the period over which the services will be rendered, but the facts and circumstances of each situation will determine the period over which the deduction is spread. For example, sometimes the shares will be awarded in tranches over a period and this will need to be taken into account.

Expenditure of a capital nature

SARS seems to accept that the expenditure on the contribution is of a revenue nature when it relates to incentivising employees. There is no guarantee that individual employees will remain in the company’s employ, which points to the absence of an enduring benefit. However, there are circumstances when such a contribution can be of a capital nature.

In BCR 072, dated 7 August 2020 the contributions to the trust were said to have a dual purpose, namely, to promote the B-BBEE status of the operating companies while incentivizing the employees. SARS ruled that the portion of the contributions that related to the B-BBEE status were of a capital nature, presumably on the basis that they created an enduring benefit. Authority for the apportionment of expenditure or income between its capital and revenue elements can be found in a variety of cases. For example, in Tuck v CIR 4 the court approved a 50% apportionment between a salary (income) and a payment for restraint of trade (capital at the time).5

The employee share incentive trust

A question arises whether the trust will have a capital gain when it receives the cash contribution. In this regard, the argument in favour of such a gain is that the trust acquires a personal right to claim the contribution once it has been approved by the board of directors and that right has a base cost of nil. When the contribution is deposited into its bank account, the trust disposes of the right in return for the amount of the contribution, resulting in proceeds and a capital gain of the same amount. The base cost of the amount deposited into its bank account is equal to the amount by which it has been impoverished in giving up the personal right.6 Some have contended that there is no such personal right because acceptance is not required but, if that is so, how does the trust’s bank account acquire base cost?

This problem has wider implications than employee share trusts, and applies, for example, to cash donations. In such a case acceptance of the donation is definitely required under common law7 and there can be no doubt that the personal right to claim the amount is an asset acquired for no consideration. An outcome that results in a capital gain every time funds are donated would clearly be absurd because CGT is not intended to be a capital transfer tax. So what is the solution to this enigma?

There seems to be an unwritten rule that, when the Act specifies how the base cost of an asset is to be determined, no regard is had to any underlying exchanges of personal rights. For example, the expenditure on a capitalisation share is deemed to be nil under section 40C and an heir is treated as having acquired an asset for the expenditure incurred by the deceased estate under section 25(3)(b). It would be absurd if the receipt of a capitalisation share or an inheritance were to give rise to a capital gain.

The answer may lie in paragraph 38 of the Eighth Schedule, which treats disposals of assets by donation, or for a consideration not measurable in money or for a non-arm’s length price between connected persons, to be acquired for expenditure equal to market value.

If it can be shown that paragraph 38 applies, the focus will be on the end asset and any exchanges of rights will be disregarded.

The benefits to a company from making a contribution to an employee share trust are not measurable in money because there would be no way of quantifying the exact impact individual employees had on increasing the company’s profits as a result of experiencing settled conditions of employment and being motivated. But a difficulty arises under paragraph 38 because the asset disposed of by the transferor must be the same asset that is acquired by the transferee. The reduction in the company’s bank account results in an increase in the trust’s bank account but the two bank accounts are not the same asset.

In Trustees, Estate Whitehead v Dumas & another,8 the court stated the following in relation to a bank transfer:

‘Where, as in this case, A causes the transfer of money from his bank account to the account of B, no personal rights are transferred from A to B; what occurs is that A's personal claim to the funds that he held against his bank is extinguished upon the transfer and a new personal right is created between B and his bank. Ownership of the money – in so far as money in specie is involved – is transferred from the transferring bank to the collecting bank, which must account to B in accordance with their bank-customer contractual relationship.’

The definition of ‘asset’ in paragraph 1 excludes currency but the preamble to the definitions states ‘unless the context otherwise indicates’. There are examples of the use of ‘cash or assets in specie’ in paragraphs 76, 76B and 77. The word ‘cash’ in these provisions probably refers to a transfer of funds by electronic transfer. It might be possible to read this meaning into the word ‘asset’ in paragraph 38.

If the funds are regarded as the asset, the amount deposited into the trust’s bank account will have base cost equal to the amount deposited under paragraph 38 and the underlying exchanges of rights can be disregarded.

The same interpretation would need to be applied to donations effected by bank transfer.

From the company’s perspective, the proceeds on the part-disposal of its bank account would be equal to the amount withdrawn, resulting in neither a capital gain nor a loss. It could be argued that the company has a liability to make the contribution, and, when it is discharged, there are proceeds equal to the debt discharged under paragraph 35(1)(a), but in the circumstances paragraph 38 should be regarded as taking precedence in order to ensure a sensible outcome for the trust.

SARS accepts this approach in its Comprehensive Guide to Capital Gains Tax (Issue 9) in 24.13, Example 4.


A cash contribution to a share incentive trust should be deductible under section 11(a) if it is made to incentivise the company’s own employees. When the services to be rendered as a result of the contribution extend beyond six months after the end of the year of assessment, they will have to be spread over the period in which the services will be rendered under section 23H. When there are long-term benefits other than those derived from incentivising employees, part of the contribution may be of a capital nature, requiring its apportionment between the capital and revenue elements.

Fortunately, SARS does seem to have accepted that the receipt of a capital contribution by the trust does not give rise to a capital gain, though this is a complex issue of some uncertainty, deserving legislative intervention.

This article was first published in ASA February 2022.

1 (2021) 83 SATC 333 (SCA).

2 Case 320/20 [2021] ZASCA 145 (15 October 2021).

3 1950 (4) SA 289 (SR), 17 SATC 40.

4 1988 (3) SA 819 (A), 50 SATC 98.

5The definition of ‘gross income’ now includes restraint of trade payments in paras (cA) and (cB).

6On the need for expenditure to involve the diminution or movement of assets, see C: SARS v Labat Africa Ltd 2013 (2) SA 33 (SCA), 74 SATC 1 at 6.

7GB Bradfield The Law of Contract in South Africa 7 ed (2016) [online] (My LexisNexis: 31 December 2015) in para 2.3.

8 2013 (3) SA 331 (SCA at 335.


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