New Zealand - Proposed Employee Share Scheme Changes
1. Mobility: tax alert
May 2016
New Zealand
Executive summary
On 12 May 2016, the New Zealand Inland Revenue
Department (IRD) released an issues paper which sets
out a number of proposals for taxing employee share
schemes (ESS).
ESS have been under the spotlight in New Zealand as
the IRD identified that some benefits derived from ESS
are not bought to taxation, and are therefore being
treated as a tax free capital gain.
The issues paper broadly seeks to align the tax
treatment of ESS with cash payments, and has
addressed the IRD’s concerns by proposing the
introduction of a new tax framework which would
distinguish between conditional and unconditional ESS.
In addition, a number of reforms have been proposed
including the potential removal of the approved Inland
Revenue Scheme (known as DC 12 schemes), and the
addition of rules aimed at “start-up” companies.
Background
There has been considerable uncertainty regarding the
taxation of ESS over the last year which is ultimately
being driven by IRD’s focus on the tax treatment of ESS
as part of their policy work programme.
The IRD released a Revenue Alert in November which
outlined its initial concerns in respect of ESS.
The issues paper addresses a number of concerns that
were identified by the IRD. In particular, the IRD has
suggested the introduction of a tax framework that
distinguishes between conditional and unconditional
share schemes.
Employee share scheme proposals set to change current
framework
The introduction of this framework may result in a change
of tax treatment for a number of ESS, and in particular,
would affect employers operating conditional share
schemes, which under the current framework may be
taxable at an earlier date when employees are deemed to
have acquired shares.
Other main proposals in the issues paper include:
► Special rules aimed at start-up companies;
► Permitting employer deductions for shares
issued under ESS; and
► Potential removal of the approved Inland
Revenue Scheme.
Following the release of the issues paper and
consultation, it is likely that the Government will
introduce draft legislation to address these concerns.
Conditional ESS
Under the current ESS framework, employees are taxable
on share benefits when they “acquire” shares. The
taxable income arising to the employee is the difference
between the value of the shares at the time the shares
are acquired and the price the employee pays for them.
The IRD has proposed a new framework which would
distinguish between conditional share schemes, such as
those schemes where employees are subject to a
continued employment requirement, and unconditional
share schemes, which provide shares to employees free
from any further conditions.
2. 2
Where the ESS is considered a conditional share scheme, the IRD has proposed that the taxing point would occur
when an employee holds the shares free from “substantive conditions”. The IRD has outlined that substantive
conditions might include; employment-related conditions that need to be satisfied or a right to protection against
losses arising from a decline in share price. The IRD’s minimal guidance on what may constitute a substantive
condition may bring some level of uncertainty to taxpayers which we anticipate will be clarified through the
submission process.
The IRD has expressed in the issues paper that adopting such an approach would align the tax treatment of ESS
with similar remuneration, such as cash bonuses.
The issues paper proposes a three year transitional period during which the current ESS rules would continue to
apply. Following the end of this transitional period the proposed rules would trigger taxation once substantive
conditions have been satisfied. In the event existing grants are subject to both regimes a tax credit would be made
available to the taxpayer equal to taxes paid under the current rules
Introduction of rules aimed at start-up companies
The IRD has proposed new rules aimed at start-up companies in New Zealand. The changes have been proposed as
the IRD has expressed a concern that start-up companies may have difficulty in valuing shares provided under ESS
and paying tax at the time the shares are deemed acquired.
The IRD has proposed a range of options to help resolve this and other related problems, including the adoption of
provisions similar to those in Australia which would defer taxation until the employee sells their shares or the
company becomes listed.
The proposed new timing of taxation may not be welcomed by taxpayers as it may see a higher level of income
being taxable to the participants than the current tax framework provides.
Employer deduction for shares provided under ESS
The issues paper recommends allowing an automatic deduction to employers for issuing shares provided to
employees under an ESS. The IRD has stated the cost of issuing shares is generally not deductible as issued shares
do not give rise to a cost to the employer.
It is proposed that employers would be allowed a deduction to the extent that the provision of shares under an ESS
gives rise to employment income in the hands of employees. This would align the treatment of benefits under ESS
with the provision of an equivalent cash benefit.
Approved Inland Revenue Schemes
Substantial problems have been identified with the legislative provisions which provide concessions for approved
Inland Revenue Schemes. Currently benefits provided under an approved Inland Revenue Scheme are tax free in
the hands of employees.
The IRD has indicated that substantial amendments could be made to the current regime, including removing the
regime, and has invited tax payers to make submissions on whether there are good reasons for retaining this
regime.
Next steps
While the proposed changes may provide certainty to taxpayers, they may also result in the tax treatment of a
number of schemes changing. We expect that a large number of employers will be affected by these proposals, and
should they be enacted, we encourage employers to undertake a thorough review of their current schemes.
Furthermore, Companies with an approved Inland Revenue Scheme may also need to consider their options in light
of IRD’s proposals.
The IRD has requested feedback on the proposed changes with the final due date for submissions being 22 June
2016. EY will be making a submission detailing our feedback on the proposed changes and welcomes any feedback
from you in this regard.
Please contact your EY tax advisor if you would like to discuss any of the measures proposed in the issues paper or
if you would like to talk about making an independent submission.
