ARTICLE · 19 APRIL 2022

How Should Phantom Share Plans Be Taxed?

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Should phantom shares be taxed in terms of section 8C of the South African Income Tax Act, 1962, or should they be regarded as a bonus, to which section 7B of the Act applies?

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Should phantom shares be taxed in terms of section 8C of the South African Income Tax Act, 1962, or should they be regarded as a bonus, to which section 7B of the Act applies?

This question is important firstly, because the timing of when the tax event occurs may differ depending on which provision is applicable and secondly, employers have certain compliance obligations with regard to section 8C gains, including the requirement to obtain a tax directive from the South African Revenue Service, which do not apply to bonuses.

In a typical phantom share plan, the participating employees are awarded "phantom shares" (or notional units) as an incentive arrangement, in terms of which they may receive cash payments based on dividends and/or growth in the share price of the employer company's shares.

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