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Tax Benefits of BEE - What Sars is doing to make BEE more attractive |
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Tuesday, 31 October 2006 04:04 |
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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.
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Last Updated ( Friday, 20 April 2007 12:58 )
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