1. Mobility: tax alert
June 2016
New Zealand
Executive summary
Legislation has recently been enacted which will allow
employers to choose to withhold tax under the PAYE
rules on employee share scheme (ESS) benefits. In
addition, employers will be required to disclose details
of ESS benefits to the Inland Revenue Department (IRD)
in their monthly payroll reporting, irrespective of
whether the PAYE rules have been applied.
The changes apply from 1 April 2017, however they will
have retrospective effect from 1 April 2008, and as
such employers could elect to withhold PAYE now.
Background
Currently, ESS benefits provided to employees are not
subject to tax at source under the PAYE rules. As a
result, employees receiving ESS benefits must file an
individual tax return to declare the income and pay the
associated tax. Additionally, in the absence of a
withholding mechanism, employees may also be subject
to the provisional tax rules whereby they are required to
remit provisional taxes on an instalment basis
throughout the year.
Key features
The new rules will apply to ESS benefits received on or
after 1 April 2017, however they will have retrospective
effect from 1 April 2008, and as such employers could
elect to withhold PAYE now.
The rules are based on the legislative definition of a
"share purchase agreement", which encompasses a
range of share schemes such as restricted shares,
performance rights and share options.
The key features of the PAYE withholding are:
► Employers will be able to elect to treat ESS
benefits as an "extra pay" for New Zealand tax
Disclosure and withholding on share scheme benefits
purposes, which will be subject to a flat PAYE rate of
up to 33%.
► The election can only be made by an employer,
rather than an employee.
► It is intended that the decision to withhold tax can
be exercised on a per employee basis.
► The election is revocable.
An election may be made simply by including the ESS
benefits in the employer's monthly payroll reporting and
remitting the tax to the IRD.
ESS benefits will continue to not be subject to the ACC
earner's levy or KiwiSaver superannuation contributions
even if PAYE withholding is applied.
New withholding mechanism
Implications for employees
If PAYE is withheld correctly at the extra pay tax rate, an
employee should have no further tax to pay on the ESS
benefit. The employee would prima facie be treated as a
non-filing taxpayer (i.e. a taxpayer who has received only
income on which adequate PAYE has been withheld),
although their other income and personal circumstances
would also need to be considered when determining if a
filing requirement arises.
If an employer election is not made, the current rules
would continue to apply. The employee would need to file
a tax return to report the ESS benefit, and should pay the
tax liability either in instalments during the year or in one
lump sum after year-end.
2. 2
Implications for employers
As the application of the PAYE rules will be optional, employers will need to assess whether this would be
appropriate in their circumstances.
► How PAYE withholding will be applied in practice, e.g whether only the net value of shares will be distributed
to an employee rather than the gross value.
► Whether the ESS benefit will be "grossed up" for the PAYE, i.e. the employer will bear the cost of the tax.
► Considering funding and cash flow, including whether shares can be sold to pay the tax and how this may
operate during a restriction period or for private companies.
Employers wishing to apply the PAYE rules to existing schemes should review their scheme rules and processes,
and may need to modify the terms of the scheme and/or trust deed depending on the practical approach adopted.
Consultation with employees should be undertaken prior to adopting any changes.
Employers seeking to introduce a new scheme should consider the possible PAYE implications in the scheme
design. This should help ensure the scheme is practical and cost-effective while still delivering the desired benefits
to employees.
The 1 April 2017 application date gives employers some time should scheme or process changes be required to
implement PAYE withholding.
New disclosure requirements
Employers will be required to disclose to the IRD any ESS benefits received by employees. The requirement will
apply to most ESS from 1 April 2017 irrespective of whether PAYE is withheld. This is a significant change to the
current system under which no tax disclosures need to be made by the employer.
The disclosure requirements do not apply to approved IRD share schemes.
Disclosure must be made in the payroll filing for the period in which an employee is treated as acquiring the shares.
Employers should monitor when ESS benefits are received and may need to obtain information from employees
(e.g. on the exercise of options), or share providers, to ensure correct disclosures are made in a timely manner.
There is an exception available for large employers who are required to pay PAYE bi-monthly whereby the
employee is treated as having derived the income in relation to the benefit in the pay period following the period in
which they receive the benefit. Disclosure of the benefit received by the employee is therefore deferred to the
period following the month the employee is deemed to have derived the benefit.
As part of the disclosure, an employer must state the value of the ESS benefit along with the employee's name and
tax registration IRD number.
Next Steps
Companies should start consultation with their employees in order to establish their withholding position from 1
April 2017. Companies should also review the relevant ESS documentation to help anticipate any amendments
required prior to the execution of tax withholding.
Please contact your usual EY tax advisor for assistance if you have any queries about the possible tax withholding
or reporting obligations.
