Government to revisit tax on employee shares

Dinesh Naik

Government to revisit-Dinesh NaikKPMG welcomes the proposal to simplify tax for employee share schemes.

Inland Revenue Department (IRD) has released an Issues Paper on ways to simplify the collection of tax on employee share schemes.

The aim is to reduce tax compliance cost barriers relating to these schemes.

The problem

Employees who receive shares as part of a remuneration package are required to pay tax on this ‘income’ in their own tax return. Income in this context is the value of the shares less any payment by the employee for the shares.

This contrasts with normal salary, wages and fringe benefits, which are subject to PAYE and Fringe Benefit Tax (FBT). The employee does not typically have end-of-year-tax liability for these amounts, whereas they can face a hefty tax bill on employee share scheme income and may have to manage provisional tax and use of money interest as a result.

The Proposal

The Issues Paper proposes to change the way tax is collected from employee share scheme income. The options are to apply either the PAYE or FBT rules.

The Issues Paper asks for feedback on a number of issues, including whether employers should be able to apply the existing rules to employee share scheme income and whether there should be choice between FBT and PAYE to account for the tax.

It also asks (a) if the cash flow impacts employees and whether PAYE applies to the scheme. As shares are a non-monetary benefit, there is no cash from which PAYE can be deducted and paid (b) if the impact on employers if FBT is the preferred option (c) if all employers pay PAYE, not all will pay FBT; thus, some employers will not be in the FBT system.

Other Issues

The Issues Paper will also discuss transitional matters, including whether there should be the ability to preserve the existing tax treatment for employees in current schemes. The idea is to ensure that there is no adverse impact on non-tax obligations and entitlements.

Who should take note of these proposals?

All employers should take note that business for which employee share schemes form an important part of their remuneration structure, or may do so in future, should pay particular attention. This includes start-ups and those businesses looking to innovate in their remuneration policies.

A bugbear

We welcome the Issues Paper.

The current tax collection mechanism has been a bugbear for business, and employees, for some time. It imposes compliance costs on employees, making these schemes burdensome from a tax perspective.

The proposal is a move in the right direction. However, much will depend on getting the detailed design right.

Compliance obligations

The proposal will impose additional compliance obligations on employers.

This is unavoidable if the compliance burden and risk is to be shifted away from the employee. However, some residual employee obligations may remain.

For example, if cash salary is insufficient to fund PAYE on employee share scheme income, there may still need to be an employee square up at year-end.

Of particular concern, therefore, is who bears the tax.

Government to revisit- KPMG LogoUnder the current rules, the employee must fund the tax and the tax cost is clearly theirs. Under either PAYE or FBT, the employer will need to fund the tax payment and recover this from the employee.

Our experience with overseas employee share plans, where a withholding tax applies, is they will typically allow the employer to sell shares to fund the tax.

The employee bears the tax cost and receives a net after tax value of shares.

The need

New Zealand employee share plans will not necessarily operate in a similar manner.

As New Zealand employers have not had an obligation to withhold tax to date there has been no need for such a rule.

The need for a legislative override and other detailed design issues must be carefully assessed. In considering the proposal, employers must ensure that benefits provided under existing schemes have the expected outcome for the employer and the employee.

Other matters

Importantly, this Issues Paper is limited to the tax collection and compliance costs aspects. Consultation on the tax treatment of employee shares schemes is targeted for later this year. This should consider what is taxable, and when, to bring further clarity to the treatment of employee share schemes.

Employee share schemes are popular, well established, and tax incentivised overseas, but is less entrenched in New Zealand.

The current tax barriers can detract from the otherwise attractiveness of employee share schemes, which offer employees an ownership stake in the business,

Such schemes should be encouraged and the tax barriers removed to fuel an innovative and prosperous economy.

Dinesh Naik is Tax Partner at KPMG, New Zealand, which is the Sponsor of the ‘Best Accountant of the Year’ category of the Indian Newslink Indian Business Awards 2015. Email: dnaik@kpmg.co.nz

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