QUESTION
The 56-year-old Mr Executive, a South African resident at all times, was the financial director of Top Notch Ltd ('Top Notch'). He held the position for 13 years. Based on his excellent work performance, he was offered the position of financial director of Superior Ltd ('Superior'), the holding company of Top Notch.
Mr Executive resigned from Top Notch on 31 August 2005 and took up his new position as financial director of Superior on 1 September 2005. Superior offered Mr Executive the following remuneration package:
• A cash salary of R100 000 per month.
• Provident fund contributions at 10% of his cash salary.
Mr Executive must become a member of the provident fund and in terms of the rules of the fund he must make monthly contributions amounting to 10% of his cash salary. Superior will contribute R1 for each R1 contributed by Mr Executive. Mr Executive will only be entitled to receive Superior's contributions when he retires at the age of 65.
• The option to acquire 100 000 shares in Superior at par value, which is R5 per share. In terms of the rules of Superior's share option scheme, all senior management personnel may participate in the scheme, but they are not allowed to sell the shares within four years from the date of exercising the option. Mr Executive exercised his right on 30 September 2005 when the market value was R25 per share. The share option scheme is not open to at least 90% of all permanent employees.
• The right to use two company cars, or a travel allowance of R20 000 per month.
o The two company cars that Superior will provide are a new BMW One series 120Di (cost price R230 000, inclusive of VAT) and a new LandRover Discovery V6 DiHSE (cost price R570 000, inclusive of VAT). Superior will pay for all the fuel, licence, maintenance and insurance costs. Ownership of these vehicles will never be transferred to Mr Executive.
o If Superior pays Mr Executive a travel allowance, he will purchase the two vehicles mentioned above for cash, and be able to treat the actual business expenditure as amounts expensed against the travel allowance for tax purposes. Superior will not pay any costs other than the travel allowance. Mr Executive will keep a logbook.
o The following is expected for any given tax year per vehicle:
- Total distance traveled 23 000 km
- Distance traveled for business use 12 000 km
- Fuel R7 000
- Insurance, licence fees, services and tyres R20 000
Shortly before Mr Executive left Top Notch a farewell party was arranged for him, at which he received the following:
• A cash cheque for R200 000 from Top Notch for the relinquishment of his office.
• A Panasonic Flatron television set as a long service award. Top Notch acquired the television set specifically for Mr Executive on a sale at an independent retailer. The sale price was R15 000 while these television sets normally retail at R25 000 each.
Mr Executive also participated in a share option scheme at Top Notch that was available to all staff employed in a managerial position for one year or longer. Mr Executive acquired the right to purchase 50 000 shares on 15 October 2004. The market value at that time was R10 per share. In terms of the rules of the share option scheme, Mr Executive could purchase the shares at par value, being R3 per share. He is, however, not entitled to sell the shares for three years from the date on which he exercised his option.
Mr Executive exercised his option on 31 August 2005 when the market value was R20 per share. Mr Executive does not intend to sell his 50 000 Top Notch shares when the restriction is lifted, but to keep them until his retirement at the age of 65.
REQUIRED Marks
(a) Advise Mr Executive on the current income tax implications arising from the cash salary and employer provident fund contributions paid by Superior.
(b) Advise Mr Executive on the income tax implications arising from the exercise of the share options granted to him by Superior and the subsequent vesting of these options.
Ignore any tax implications arising after the date of vesting.
(c) Advise Mr Executive, from an income tax perspective only (i.e. taxable income), whether he should opt for the two company cars or for the travel allowance from Superior. Base your advice on the implications for a full tax year and provide reasons for your answer. Do not use the deemed travel allowance tables in assessing these two options.
(d) Advise Mr Executive on the current income tax implications that will arise as a result of the receipts and accruals received from Top Notch at the farewell party.
(e) Advise Mr Executive on the current and future income tax implications of the shares he acquired in Top Notch. Assume Mr Executive will hold the shares acquired as an investment.