tax on vested but not yet sold stock

[WAslayer]

So, this is the deal..

I hold X amount of stock in an American Company which is given to me as a company benefit. The stock will vest in Y portions of X every Z months over a period of 4 years until the full X amount is vested..

My question is as follows, when am I supposed to pay SARS..? Only when I sell whatever amount of stock that has been vested or do I pay SARS every time a Y portion vests even if I dont sell..? And then, how much do I pay SARS..?

Ideally I would like to let the 4 year period pass and sell once all stock is vested.. This way I stand a good chance of paying off a significant amount of my bond or paying it off completely.. While, if I have to pay SARS every time a Y portion vests, I would need to do some saving up or sell some of the stock to pay SARS..

I have been on Google, and 99% chance that I have just been Googling the wrong stuff to find this answer for myself..

 

[WellSpent]

You're going to have to be a lot more specific around your use of the word "vest". Is someone gifting you the shares? What is the legal mechanism whereby you acquired beneficial ownership? I take it you didn't pay for them.

Give me a little more detail and I'll help.

 

[Mr.Jax]

Once stock options vest, you may exercise them. meaning you may purchase them at the stock price at which it was given to you (say R1). Only once you exercise ( you purchase the vested options at the share price at which it was granted, and sell if you want at the current stock price), does tax come into play.

So, you can let them all vest and there wont be any tax implications/requirements. Well, that's my understanding of it.
The tax implications when you exercise, sorry, I don't know exactly how that works.

 

[Arthur]

Agreed. No tax due until you exercise.

 

[Jehosefat]

For us, vesting and exercising is almost the same. Once the portion of the share option vests, you have the choice to take all the shares or sell all the shares and get the cash. If you don't choose within 3 months of the vesting date, all the shares are sold and you get the cash. Either way, the value on the date of exercise is considered income (zero strike options) and you are liable for tax on it. If you choose to take the shares and sell them at a later date, you would also be liable for CGT or income tax on the return as per normal SARS rules.

As far as I understand, most share schemes work similarly and you can't leave the vested options un-exercised indefinitely. So you will probably end up being liable for income tax on Y every Z months. From a tax perspective, unless all the share "income" is in the 45% bucket, you are actually better off paying tax each year rather than in one lump sum payment at the end.

 

[WAslayer]

You're going to have to be a lot more specific around your use of the word "vest". Is someone gifting you the shares? What is the legal mechanism whereby you acquired beneficial ownership? I take it you didn't pay for them.

Give me a little more detail and I'll help.

I have updated my original post.. The stock is given to me as part of company benefit..

 

[WAslayer]

For us, vesting and exercising is almost the same. Once the portion of the share option vests, you have the choice to take all the shares or sell all the shares and get the cash. If you don't choose within 3 months of the vesting date, all the shares are sold and you get the cash. Either way, the value on the date of exercise is considered income (zero strike options) and you are liable for tax on it. If you choose to take the shares and sell them at a later date, you would also be liable for CGT or income tax on the return as per normal SARS rules.

As far as I understand, most share schemes work similarly and you can't leave the vested options un-exercised indefinitely. So you will probably end up being liable for income tax on Y every Z months. From a tax perspective, unless all the share "income" is in the 45% bucket, you are actually better off paying tax each year rather than in one lump sum payment at the end.

What is the 45% bucket..?

 

[Polly101]

For us, vesting and exercising is almost the same. Once the portion of the share option vests, you have the choice to take all the shares or sell all the shares and get the cash. If you don't choose within 3 months of the vesting date, all the shares are sold and you get the cash. Either way, the value on the date of exercise is considered income (zero strike options) and you are liable for tax on it. If you choose to take the shares and sell them at a later date, you would also be liable for CGT or income tax on the return as per normal SARS rules.

As far as I understand, most share schemes work similarly and you can't leave the vested options un-exercised indefinitely. So you will probably end up being liable for income tax on Y every Z months. From a tax perspective, unless all the share "income" is in the 45% bucket, you are actually better off paying tax each year rather than in one lump sum payment at the end.

this is what happens at our office - tax is paid on vesting date (the date you 'own' them) however they don't transfer until you pay them for the tax or authorise sale of shares to cover tax due

 

[Jehosefat]

What is the 45% bucket..?

If your taxable income for that tax year is over R1.5m.

 

[WellSpent]

Is your employer South African?

 

[WAslayer]

Is your employer South African?

American Company with a branch in Cape Town where I work..

 

[WellSpent]

Ya, this is where it gets tricky. It is likely that the shares that vest in you, or that you become eligible to acquire at nominal (zero) value, would fall within section 8C of the Income Tax Act. This deals with restricted equity instruments. If its not restricted, i.e. they give it to you and you can do with it what you want, then not 8C, but could still be remuneration as defined in the 7th Schedule or it is taxable in terms of paragraph (c) of the definition of gross income.

I know this sounds confusing and it is, but the bottom line is that the responsibility to pay tax over to SARS, based on teh value of these shares, likely rests with your employer.

In essence, South African tax does not really differentiate between getting cash for the work you do for an employer, vs. the employer giving you assets, shares, a car, etc....otherwise we'd all be paid in kind with new cars, cellphones - and never pay PAYE.

I am assuming you are South African.

If my analysis above is correct, you would become liable for PAYE/Tax on the market value of the shares as they are given to you by your employer.

There are still many unknowns, but this is where I'm leaning given what I know

 

[cguy]

I'm not sure what the SA rules are, but when describing the issue you should be clear whether or not you are talking about options or restricted stock units. My guess is that you have the latter, since stock options are fairly rare these days. This takes the "exercising" complexity out of the process.