Binding Private Ruling 429 (BPR 429), issued by the South African Revenue Service on 14 August 2026, addresses the income tax and capital gains tax consequences arising from a forfeitable share award scheme. The ruling covers three distinct but related events: the cash grant by an employer to an employee share incentive trust, the receipt of that grant by the trust, and the subsequent vesting of shares in qualifying employees.
Background
The Applicant, a South African resident company, settled a discretionary trust in 2014 to administer a long-term forfeitable share award scheme. Eight resident subsidiaries of the Applicant participate as Co-Applicants. Under the scheme, the trust holds shares on behalf of senior management employees from the grant date until the relevant vesting date. Awards are subject to forfeiture if the company and individual performance targets are not met over the predetermined vesting periods.
The proposed transaction, which will run from 2026 to 2031 for awards and from 2029 to 2034 for vestings, involves the following steps. The Applicant will make an annual cash grant to the trust in respect of qualifying employees of both the Applicant and its subsidiaries. The subsidiaries will reimburse the Applicant for the portions of the cash grant that relate to their own qualifying employees. The trust will use the cash received to purchase Applicant shares on the open market, or the Applicant will issue new shares to the trust at current market value. The trust will then make annual share awards to qualifying employees, transferring the shares on the respective vesting dates for nil consideration.
Deductibility of the cash grant
SARS ruled that the Applicant may deduct, under section 11(a) of the Income Tax Act 58 of 1962 (the Act), the portion of the cash grant that relates to its own qualifying employees. Each of Co-Applicants 1 to 8 may likewise deduct the portion of the grant that relates to their respective qualifying employees, also under section 11(a). In both cases, section 23H applies to the timing of those deductions. Section 23H defers a deduction to the extent that the expenditure has not yet been incurred for the purposes of trade by the end of the year of assessment, meaning the deductions will be spread to align with the periods to which the expenditure relates.
Treatment at the level of the trust
The cash grant received by the trust does not form part of the trust's gross income. This is consistent with the understanding that the trust receives the funds as a conduit for the purpose of acquiring shares on behalf of qualifying employees, rather than deriving an amount accruing to the trust in its own right.
When the trust grants shares to qualifying employees, that grant constitutes a disposal for capital gains tax purposes under paragraph 11(1)(d) of the Eighth Schedule to the Act. The time of disposal is not the grant date but the vesting date, being the moment when the shares vest in the qualifying employees as contemplated in section 8C. The section 8C framework, which governs restricted equity instruments, therefore determines the timing of the capital event rather than the moment of initial award.
The ruling further confirms that paragraph 20(3)(b), which would otherwise limit the base cost available to a trust on certain disposals, will not apply to the expenditure the trust incurred to acquire the shares. This means the trust's base cost in the shares is not restricted, and the full acquisition cost is available for capital gains purposes.
Anti-avoidance provisions
Two anti-avoidance provisions were considered and found not to apply.
Paragraph 38(1) deems a disposal made for no consideration between connected persons to have been made at market value. SARS confirmed that paragraph 38(1) does not apply to the disposal of the shares by the trust to qualifying employees. The effect is that the trust is not deemed to receive market value proceeds on the vesting; it disposes of the shares at nil consideration, as the scheme rules provide.
Paragraph 39(1) disallows capital losses arising from certain disposals between connected persons. SARS confirmed that any capital losses determined by the trust will not be subject to paragraph 39(1), because paragraph 39(4) exempts those losses from its reach.
Validity period
The ruling is valid until 31 July 2034, which corresponds with the final vesting dates under the scheme.
BPR 429 provides useful confirmation for companies operating forfeitable share award schemes through discretionary trusts. The key practical points are that employer contributions to the trust are deductible under section 11(a) subject to section 23H timing; the trust does not recognise gross income on receipt; the base cost of shares is not restricted by paragraph 20(3)(b); the vesting event (not the grant date) triggers the capital disposal; and neither the market-value deemed proceeds rule in paragraph 38(1) nor the connected-person capital loss restriction in paragraph 39(1) applies to the trust's disposal of shares to employees.
Primary sources
- Binding Private Ruling 429 (BPR 429) – SARS, 14 August 2026