Tax Benefits of BEE – What Sars is doing to make BEE more attractive
31st October 2006
Moneyweb have written an article on our tax incentives for BEE deals workshop presented by Cathy Bryant.
Published on http://www.moneyweb.co.za/economy/tax/348510.htm.
Written by Monique Vanek
Most small businesses find compliance with black economic empowerment (BEE) difficult but those which comply will receive tax benefits.
Small to medium enterprises (SMEs) which have more than five employees and an annual turnover exceeding R300 000 have to comply with BEE. Without a BEE partner or employment equity SMEs are less likely to win government contracts or be awarded licences.
According to the second phase of the draft broad-based BEE (BBBEE) codes of good practice SMEs have to meet five of the seven requirements of the scorecard, for which they will earn points. These include: ownership, preferential procurement, enterprise development, management control, employment equity, skills development, and residual contributions.
The South African Revenue Service (Sars) tax incentive comes into play for companies introducing a BBBEE employee share plan.
Attorney Cathy Bryant gives the example of Mandy’s Hardware to explain how it works:
Mandy’s Hardware secures a black investor to purchase 20% of the equity in the company in partial fulfillment of the ownership requirement of the codes. It then sells 6% of the equity to a share trust established for the purpose of giving shares to workers in the company, none of whom have previously participated in any kind of share incentive scheme.
Mandy’s Hardware determines that the market value of 6% of its issued equity falls within the limitation of R9 000 per employee over a three-year period as laid down by the Department of Trade and Industry. The salient details of the transaction are as follows:
- the shares will be made available to the trust at par value;
- the trust will have no discretion with regard to whom it may offer the shares and it will receive its instructions in this regard from the directors of the company;
- offers will be made to all the staff who are permanently employed;
- the shares will carry full voting and dividend rights; and
- Mandy’s Hardware will make interest free loans available to staff who require assistance to purchase the shares (this is allowed in terms of s38 of the Companies Act).
Bryant outlines the consequences of this transaction:
- For the employees
- There is no fringe benefits tax on the interest free loan to acquire the shares or on the grant of shares at a price below market value.
- Should a staff member sell his shares within five years, the company will be required to withhold PAYE on the amount accruing to him. The idea is to encourage the worker to stay involved with the company for at least five years.
- The only other tax exposure then is capital gains tax which will be paid when the shares are sold after the five year initial period, but the values are small and there may be no exposure at all.
- Should the employee die, the death taxes provided for in s25 of the Income Tax Act will not apply on the sale of the shares.
- For the employer
- Mandy’s Hardware can claim a deduction equal to the market value of the shares made available to the trust. The deduction is limited to R3 000 per employee per year, but the balance can be rolled over to successive years.
- It secures additional ownership points on the scorecard for the 26% black ownership in its business.