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Collection of tax on employee share schemes examined

Tax Alert - April 2015

On 31 March 2015, Revenue Minister Todd McClay welcomed the release of an Inland Revenue officials' issues paper that seeks feedback on options to simplify the way tax is collected from employees participating in employee share schemes.

"The options presented in the paper represent a small but important step in Inland Revenue's longer term business transformation programme to modernise the way the tax system is administered and make it easier for New Zealanders to get their tax right," Mr McClay said.

Employee share schemes, where employers offer shares in the company to employees, are often used to encourage staff retention and motivation. The value of the benefit from these schemes is treated as an income substitute under the current tax rules, but unlike most employment income, is not subject to PAYE. Instead, employees who receive share scheme benefits must file a tax return and account for the tax on the value of the benefit themselves.

This can be onerous for employees, many of whom do not realise they must file a return. Further, the inclusion of this income in the tax return can also flip employees into the provisional tax rules, causing added complication.

The issues paper, "Simplifying the collection of tax on employee share schemes", outlines the problem and presents options for taxing this income at source. Officials have a preliminary view that this income should be taxed at source, but the more difficult issue is how this might be achieved given it is not a cash benefit. For example, should the income be taxed at source through the PAYE or FBT rules? There are benefits and drawbacks in taxing the schemes through either route. Then there is the issue of whether taxing at source should be compulsory or elective.

Officials are also interested in hearing from employers that currently operate employee share schemes to find out how any possible changes to the rules might affect them with respect to arrangements they have already entered into with employees, with a view to minimising any related compliance costs or practical issues.

While there are wider tax issues with the taxation of employee share schemes and employee option schemes, the issues in this paper are confined to the collection of tax that arises under current rules.

Submissions close on Tuesday 5 May 2015. The issues paper can be found here. For more information, please contact your Deloitte advisor.