In October 2013, the revised Broad-Based Black Economic Empowerment (Codes of Good Practice) Codes were gazetted by the Minister of Trade and Industry (DTI). These (new) BEE Codes of Good Practice came into operation on 30 April 2015 (“new codes”), thereby replacing the existing BEE Codes of Good Practice (“old codes”).
Priority items under the new codes are:
- Skills development
- Enterprise and Supplier Development
The Ownership Element
We have noted that creating employee or broad based share schemes have become very popular, but in many instances has regrettably proven to be ill-conceived and resulting in unforeseen adverse consequences for both the company and its employees.
On the flip side of the coin, where particularly it is appropriately structured, these are absolutely invaluable vehicles to not only comply with BBBEE but to motivate and retain valuable “black” staff. These, as with appropriately strategic management structures (including the board), may also serve a valuable purpose in grooming the next generation of owners and managers in businesses.
Some considerations in achieving the aforementioned objective:
1Ensure those who you really wish to benefit, do
An obvious benefit for the company / employer: compliance with the BBBEE Act and an increase in its BBBEE score, allowing it to participate in large contracts (e.g. with corporates), government contracts and tenders. The employees, on the other hand, will gain the right to share in the dividends of the company and have a say as shareholders of the company. It can be seen as a “win-win” for both parties.
However, the question remains as to how one can structure such an arrangement to benefit both parties and to ensure that the share scheme does not burden employees or the company with excessive tax liabilities?
One of the key considerations to bear in mind is the valuation formula for selling / transferring the shares into such a Trust.
We also recommend that the same formula for sale / transfer is applied when the company buys the Trust out / the shares back at a later stage.
It is important that the advice of a specialist attorney, financial expert and tax practitioner is obtained so as to avoid adverse and unforeseen tax or financial consequences for either or both parties.
2Ensuring employee expectations are met and not watered down by Income Tax for the Employee
Some complex tax regulations should be carefully considered and the structure appropriately aligned in order to ensure that the pay-outs beneficiaries receive from the trust are subject to dividends tax and not income tax in the hands of the employee
Accordingly, obtaining the appropriate specialist professional input and guidance is therefore non-negotiable.
3Protect yourself whilst benefitting current staff complement – deal with coming and going Employees
Another important consideration to bear in mind, is that BBBEE compliant employee share scheme benefits must vest in the employees. This principle becomes particularly challenging when we all know that employees come and go, and if said employee is a member of the BBBEE share scheme he or she will be entitled to a pay-out or distribution from the Trust which so vested, even when they are dismissed.
Although this cannot be completely avoided, one measure to mitigate this is to setup the trust in such a way that vesting to specific individuals happens periodically.