ACCA Advanced Taxation (ATX) Practice Exam

How can employees in a Share Incentive Plan (SIP) utilize dividends received from their plan shares?

1. To withdraw the dividends in cash

2. To reinvest in further plan shares

3. To transfer them to a savings account

4. To donate to charity

The correct answer is: To reinvest in further plan shares

Employees participating in a Share Incentive Plan (SIP) have specific options for handling dividends received from their plan shares, and the correct choice highlights a key benefit of the SIP structure. In a SIP, dividends paid on shares held in the plan can be reinvested into acquiring additional shares of the company, facilitating further investment and potential growth without the immediate tax implications that would accompany taking dividends in cash. This reinvestment option is designed to encourage employees to increase their stake in the company and align their financial interests with that of the organization. By reinvesting dividends, employees can benefit from potential compound growth over time, enhancing their overall investment in the company. Dividends taken as cash directly reduces the funds invested in the company's shares, and transferring them to a savings account or donating to charity falls outside the specific uses permitted under SIP rules that emphasize reinvestment. Thus, the option to reinvest dividends into further plan shares is the most beneficial and aligns perfectly with the objectives of a Share Incentive Plan, promoting long-term employee engagement and ownership in the company.