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Employee share schemes? New PAYE rules will impact you

Tax Alert - August 2016

By Liz Nelson and Belinda Hagstrom

This month Inland Revenue released some early guidance on the practical application of the new tax rules affecting the collection of information and tax on benefits under employee share schemes.

The new tax rules apply from 1 April 2017 and require employers to report share benefits under an employee share scheme in the PAYE system, with the ability to withhold PAYE on such benefits (at the employer's option).

At the moment, it is up to the employee to report and pay tax on any income they receive under an employee share scheme.  This creates an additional burden for the employee as they may be required to pay provisional tax during the year (exposing them to interest and possible penalties if they fail to do so), and file a personal income tax return including the employee share scheme income.

Inland Revenue was concerned that not all income was being captured, as there was no transparency around when employee share scheme benefits were received by employees.

The purpose of the new rules is to reduce the need for employees to pay tax and file a personal income tax return, as well as identify employees that should be paying tax.

From 1 April 2017, when an employee or an associate acquires shares under an employee share scheme the employer must report the benefit as employment income in the PAYE return.  The employer can also opt to withhold PAYE on the benefit.

As an example, for an employer who files a monthly PAYE return, if a share benefit is received in April 2017, it would be included in the employer monthly schedule (EMS) for the period ending 30 April (due 20 May 2017).

For large employers (who file twice monthly), there is a special rule to defer the timing of the benefit:

  • Where a share benefit is received in the first half of the month, it is shifted to the second half of the same month;
  • Where a share benefit is received in the second half of the month, it is shifted to the first half of the following month.

This has the potential to defer the income to the employee.  For example, where a share benefit is received in the second half of March 2018, the income is shifted to April 2018 (the following tax year).  Inland Revenue has noted in their guidance that they may investigate cases where the deferral is exploited for personal advantage.

The new rules do not apply to Commissioner-approved schemes (employee share schemes approved under DC 12 and DC 13 of the Income Tax Act 2007).

If you have an employee share scheme, we recommend you prepare your payroll systems for the changes, and let employees know whether you will be withholding PAYE on employee share scheme benefits (this is the employer's choice, not the employee's).  If you do not withhold PAYE, employees should be made aware of their tax payment and filing obligations, as Inland Revenue will have up-to-date information on when these benefits have been received.

Please contact your usual tax advisor for further information on these changes.

Tax Alert August 2016 Contents:

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