Employee Share Schemes – It’s time to act
Tax Alert - May 2018
By Patrick McCalman and Jayesh Dahya
Changes to the tax treatment of employee share schemes have now become law. It is important for employers who offer these schemes and for employees who are enrolled in them to understand the way the rules will affect them, and how the transitional rules work. The Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Act 2018 (the “Act”) received Royal Assent on 29 March 2018.
We wrote about these changes in our Tax Alert of May 2017, and the rules haven’t changed significantly since then.
As employee share schemes are long-term arrangements that may have vesting periods of three years or more, there are transitional rules that will preserve the existing treatment for certain employee share schemes.
The new employee share scheme rules do not apply to:
- Shares granted or acquired before 12 May 2016.
- Shares granted before 29 September 2018 (six months after enactment of the new rules) provided the shares were not granted with a purpose of avoiding the application of the new law; and the share scheme’s taxing date under the new law is before 1 April 2022.
Now is the time to act
It is now time for employers with established schemes to consider how their existing schemes operate under the new rules and make decisions on the future of these schemes.
Some things to reflect on include:
- Can we make a further issue / award of shares given the six-month transitional rule?
- Can we simplify our scheme to become a more traditional option scheme given the new rules effectively tax all employee share schemes on the same basis as options.
- The tax accounting treatment for those that report in accordance with NZ IFRS - as employee share benefits (including options) will be deductible to the employer under the new rules.
Given the greater alignment of the tax treatment of a number of existing schemes with the tax treatment of options, we believe that there will be a number of schemes which could benefit from simplifying their structures.
Overview of the new rules
The following is an overview of the new rules. For more detail refer to our May 2017 Tax Alert. The new rules apply to benefits received under an “employee share scheme”.
This covers all arrangements involving the provision of shares in a company to past, present or future employees (or their associates) if the arrangement is in connection with a person’s employment or service. This covers types of arrangements such as loans to buy shares, bonuses, put and call options and transfers to employee trusts. There are some exceptions to this.
Calculating the taxable benefit
The taxable benefit is broadly the difference between the market value of the shares at the “share scheme taxing date” less the amount paid for them by the employee.
The Inland Revenue has previously issued guidance on methods that can be used to value the shares received under an employee share scheme in CS 17/01 - valuation of employee share schemes There has been no change to this.
Despite submissions seeking an allowance for ‘black out periods’ where employees are restricted from disposing of shares no allowances have been made on the basis that schemes can be designed so that the shares vest outside the period and that blackout periods are generally short.
Deductions for employers
Employers will no longer need to structure their employee share arrangements to obtain a deduction for the cost of the shares, for example by acquiring shares on market or by arranging for the purchase of shares from another group entity.
Employers will be allowed a deduction from 29 September 2018 ( six months after enactment of the new rules) for:
- Benefits provided under an employee share scheme that is equal to the amount calculated on the “share scheme taxing date” (i.e. the amount of the benefit that is taxable to the employee).
- Costs associated with the administration and managing the scheme, subject to the usual capital/revenue tests.
Employers who report under NZ IFRS will also need to review the shares or options on issue and consider whether a deferred tax asset will need to be recognised for financial reporting purposes. This will pose some challenges, as it will be necessary to identify the share tranches that are grandfathered, the options that are likely to be exercised before 29 September 2018 (not deductible) and options that will be exercised after this date (deductible).
There are no significant changes to the proposals regarding exempt schemes.
From 29 March 2018, an employer can provide to their employees up to $5,000 worth of shares to their employees per annum at a discount of up to $2,000 per annum. The benefit is not taxable to the employee. However, no deductions will be available to employers other than for the costs associated with the administration and running of the scheme.
Broadly to be eligible as an exempt scheme:
- 90% or more of full-time permanent employees must be eligible to participate in the scheme. If part-time (or seasonal) employees are also eligible to participate all part-time employees (or seasonal employees) must be eligible to participate on the same basis
- If the scheme requires an employee to buy a minimum amount of shares before they can participate, the minimum amount payable can be no more than $1,000 per annum.
- If the employee is required to pay for the shares, an interest free loan must be made available to the employee or there must be an ability for the employee to be able to purchase the shares by way of regular instalments.
- Any minimum period of service required before an employee can participate cannot exceed three years for full time employees.
- Generally, shares have to be held for three years (either by the employee or by a trustee of a trust on behalf of the employee)
It is no longer necessary for employers to obtain Inland Revenue approval to be treated as an exempt scheme. Employers will now need to notify the Inland Revenue of the existence of an exempt scheme using form IR1211 and by 31 May of each year notify the Inland Revenue on form IR1212 details of the grants made to the employees. Existing schemes that have previously been approved by the Inland Revenue will also need to complete form IR1212.
If you have any questions or comments, please contact your usual Deloitte advisor.
May 2018 Tax Alert contents
- New Zealand GST on low value imported goods announced
- Buyer beware: ring fencing may be here
- Australia’s GST on low value goods - what you need to know
- Research & development tax incentive
- Employee Share Schemes – It’s time to act
- Are you ready to file your final FBT return?
- Post-BEPS transfer pricing legislation refresh requires taxpayer action
- How non-residents can get an IRD number without a bank account
- Have your say on taxing short-term accommodation
- Recent Developments