Tax and SARS knowledge base
How are share options and restricted shares taxed when they vest?
How are share options and restricted shares taxed when they vest?
Last reviewed:
Direct answer
An employment-related restricted equity instrument can create an income gain or loss when it vests. SARS says vesting can occur when restrictions cease, immediately before certain disposals, after an option terminates, or on a specified disposal, release, abandonment or lapse event. Where a gain arises on section 8C vesting, SARS says the employer must apply for an IRP3(a) directive and report it under code 3718.
Grant, exercise, vesting and sale are not automatically the same tax event. Read the plan terms before deciding when a tax result arose.
What this means in practice
Share plans are often administered outside ordinary payroll, but the vesting gain can still need PAYE treatment. The employer needs the actual plan rules, grant documentation, restriction conditions, vesting date and value information. A generic payroll label such as "share bonus" is not enough.
SARS describes a restricted equity instrument acquired through employment or office. It says an unrestricted instrument vests when acquired. A restricted instrument has later possible vesting points, including when restrictions end. It can also vest around disposal or option events. The relevant time matters because it affects the market value and the gain or loss calculation.
If you see a code 3718 entry or a tax directive on your certificate, compare it with the employer's vesting notice and plan records. A certificate can be prepopulated on the ITR12, but it must still be checked. Ask the employer to correct a source-data error rather than recoding its entry yourself.
Step-by-step
- Collect the share-plan file.
Keep plan rules, grant or option agreement, restriction schedule, exercise notices, vesting communications and amendments. Identify the employer and associated company involved.
- Identify the instrument and event.
Confirm whether the instrument was restricted and record the date restrictions ceased, an option terminated, a lapse occurred or a disposal was signed. Do not choose a date only because funds were paid then.
- Gather the valuation evidence.
Retain market-value support, number and class of shares, consideration paid and sale proceeds where applicable. Unlisted shares often need specialist valuation evidence.
- Request the directive information.
SARS says the employer applies for an IRP3(a) directive for a section 8C vesting gain. Ask payroll or the plan administrator for the directive and calculation.
- Check payroll reporting.
Compare the directive, payslip and IRP5 or IT3(a), including code 3718 where applicable. Raise discrepancies with the employer before filing.
- Keep a complete tax record.
Keep the ITR12, assessment and correspondence. These documents help separate the employment-income result from any later investment or capital-gains question.
Documents and records to keep
- Plan rules, grant and restriction schedule.
- Option exercise, vesting, lapse or disposal notices.
- Valuation and consideration records.
- Directive, payslip and IRP5 or IT3(a).
- ITR12 and assessment.
Important limits and exceptions
This article does not calculate a vesting gain or loss. SARS's rules include special outcomes for non-arm's-length and connected-person disposals, replacement instruments and other plan events. A sale after vesting can have separate capital-gains implications.
Do not rely on an employer's informal estimate of share value where the plan and market evidence say otherwise. The legal terms and actual event sequence are essential.
When to get tailored advice
Get specialist advice before a vesting, exercise, lapse or sale involving unlisted shares, overseas plans, trusts, corporate transactions or an employer departure.
TaxProof can help organise the plan, directive and certificate file for review. We cannot value an instrument or interpret share-plan legal rights.
Related TaxProof guides
- Employer IRP5 and EMP501 guide
- Can I claim a loss on employee shares that vested below their tax value? (B04-IND-005)