Lynda Loxton
The Katz Commission was slated last week for not going far enough in recommending a special tax dispensation for employee share ownership programmes (ESOPs). Msele Corporate and Merchant Bank joint managing director Litha Nyhonyha told the parliamentary joint standing committee on finance that the commission had missed a unique opportunity to promote ESOPs, and do something about the highly skewed distribution of wealth in South Africa. He was surprised that the report had recommended that no special tax incentives be provided, especially exemption from fringe benefits tax. `The commission’s recommendations do not go far enough to create incentives for the establishment of ESOPs and will not effectively promote the creation of ESOPs by South African companies,’ Nyhonyha said. The commission justified its stand by saying that tax incentives for ESOPs would be a disadvantage to self-employed people, which Nyhonyha said he found `difficult to understand. `While the South African economy is premised on a free market system, people can choose to be employed or self-employed, there still remain certain structural imbalances [which] must be addressed by fiscal policies, among others,’ he said. The commission’s objection to special tax incentives was it would go against the principle of discouraging the use of non-cash remuneration. Nyhonyha agreed that the commission should be encouraged in its efforts to curb tax avoidance. `In doing so, though, it should not frustrate attempts to redress past imbalances,’ he said. ESOPs were first introduced in South Africa in the mid-1980s, when many foreign companies withdrew from South Africa because of anti-apartheid sanctions. White South African managers jumped at the chance to take the companies over and, using various loopholes in the tax legislation as it existed then, took them over with little or no injection of cash and were soon very wealthy. Legislation has been tightened up since then and employees who participate in ESOPs have to pay fringe benefits tax.
Nyhonyha recommended that fringe benefit tax should not apply to financing provided to employees to participate in ESOPs or to shares given away to employees. Further incentives, such as making payments made by employers for ESOPs tax deductible, should also be considered. But, as an earlier submission by Cosatu highlighted, ESOPs are not yet a major priority for many
`Given the low wages for the majority of Cosatu-affiliated members, the conversion of wage increases into shares does not appear to be a viable option,’ Cosatu said. `In addition, the extension of employee capital ownership and control can be more effective through pension fund
Such schemes, it felt, would be more effective in providing collective ownership of blocks of capital thus providing some degree of effective control.