Accounting for deferred tax on employee share schemes
Tax Alert - October 2018
By Iain Bradley & Belinda Spreeuwenberg
New changes to the tax treatment of employee share schemes introduced in the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Act 2018 have recently become effective from 29 September 2018. Along with the changes to the tax treatment of employee share schemes, (which you can read about here) there are also deferred tax implications that are relevant to consider if you are a for-profit entity that reports under Tier 1 or Tier 2 (NZ IFRS).
The new tax treatment allows employers offering the employee share scheme a deduction from 29 September 2018 equal to the taxable amount calculated on the “share scheme taxing date” (i.e. the amount of the benefit that is taxable to the employee) at the same point in time the income arises for the employee. This deduction will apply to benefits provided under employee share schemes that are not taxed under the prior employee share scheme tax rules on or before 29 September 2018.
These tax deductions may give rise to a deductible temporary difference where the “share scheme taxing date” is in a future period. A deferred tax asset should be recognised if the recognition criteria in NZ IAS 12 Income Taxes (“NZ IAS 12”) are met.
Other deductions are now denied (e.g. employee share scheme recharge payments to parent entities) however costs associated with the establishment of or management of the scheme are allowable deductions, subject to the usual tests for deductibility being met.
Calculating deferred tax
The paragraphs in NZ IAS 12 in relation to share-based payments should be considered and applied for entities that offer employee share schemes.
The amount that is allowed as a deduction in future periods is unlikely to be known at balance date due to the amount being calculated with reference to a share price at the “share scheme taxing date”. NZ IAS 12 prescribes that the future deduction should be estimated based on information available at the end of the period. Therefore the probability of the share option reaching the “share scheme taxing date” and being exercised (if applicable), and the share price at balance date are normally the basis for calculating the estimated future deduction.
Assumptions made in respect of the vesting of share options should be consistent with expectations when calculating the expense under NZ IFRS 2 Share-based Payment. For example, in the first year of a vesting period of three years for a share option that is expected to vest and is currently ‘in the money’, the deductible temporary difference should only be calculated on one-third of the estimated future tax deduction. Where the estimated future tax deduction exceeds the cumulative amounts that have been recognised as an expense in the statement of financial performance, the amount of the tax benefit related to the excess future tax deduction should be recognised directly in equity. Entities will therefore need to track each tranche of share options separately for tax purposes.
When calculating the entity’s deductible temporary difference it should also be considered whether the shares granted are grandfathered and therefore no deduction is available or whether there have been any deductions that have previously been allowed in relation to the shares (e.g. a prior recharge made to the parent).
If you haven’t already considered how you will account for the future tax deductions of employee share schemes in the financial statements of your entity, you should start thinking about this now. If you would like assistance with this, please contact your Deloitte advisor.
October 2018 Tax Alert contents
- Government announces R&D tax incentive scheme details
- Shining a light on the Tax Working Group Interim Report
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- Accounting for deferred tax on employee share schemes
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- A Snapshot of Recent Developments