Employee share schemes – new reporting and withholding obligations. Are you ready?
Tax Alert - March 2017
By Mike Williams and Bo Hsiao
As previously reported in our August 2016 Tax Alert, employer reporting obligations in respect of employee share schemes (ESS) are changing. Under New Zealand law, a benefit derived from receiving shares for less than market value is considered taxable income. Previously there has been no requirement for an employer to report any ESS benefits to Inland Revenue and it has always been the responsibility of the employee to report and pay tax on any income they receive from an ESS through their personal tax return.
However, from 1 April 2017, employers will have a statutory obligation to report this income, with an option to voluntarily withhold tax. As an employer, are you ready to take on this responsibility?
Requirement to report share income
With the enactment of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016, employers will be required to report ESS income to Inland Revenue by disclosing the amount of income from shares in the Employer Monthly Schedule (EMS) Pay As You Earn withholding report from 1 April 2017 onwards.
Whilst reporting is mandatory, withholding tax is voluntary.
ESS benefits are classified as an “extra pay” and therefore the benefit is income for the purposes of student loan deductions, child support payments and working for family tax credits. ESS benefits are not liable for KiwiSaver or ACC earner’s levy.
Where to Report?
Employers will use the current employer monthly schedule (IR348) to report ESS benefits. The benefits will be reported as gross earnings not subject to ACC. The EMS form will not change and there will be no separate field where ESS benefits are to be recorded. Rather bizarrely, we understand from discussions with the Inland Revenue that this mechanism of reporting is likely to automatically create an error report in the Inland Revenue system as the gross pay and tax ratios will not match the PAYE tables where no tax is withheld from the ESS income. Where this is the case, Inland Revenue representatives are recommending that employers contact Inland Revenue before filing an EMS containing ESS income, to notify Inland Revenue of the name and IRD number of those employees affected.
We understand that this is a temporary issue until Inland Revenue migrates to the new “START” computer system, at which point the ESS forms can be redesigned.
When to Report?
For employers who pay monthly, this means that reporting will be included in the relevant EMS for which the share benefit accrues to the employee (i.e. if an ESS event occurs on 7 March 2018, it would be included in the employer’s EMS for the period ending 31 March 2018, due by 20 April 2018.
For employers that are considered to be a “large employer” due to having an annual gross Pay As You Earn (PAYE) including Employer Superannuation Contribution Tax (ESCT) exceeding $500,000, the event is deemed to arise in the pay period following that in which the taxable event occurs.
This therefore means that if an event occurs say before 15 March 2018, reporting must be made in the EMS due to be submitted by 5 April 2018 but if an event occurs after 15 March 2018 reporting is made in the EMS to be submitted by 20 April 2018. This is intended to give employers more time to collate relevant information if they are intending to withhold tax.
Whilst this is a concessionary measure, timing is still extremely tight. This is going to be particularly troublesome where employees may be a member of a parent company’s overseas ESS scheme or where employees have flexibility around the timing of ESS exercise events. In such cases, New Zealand employers need to ensure they are aware of when such events occur and have access to necessary information from either the overseas parent or the employees themselves. Employers who have regular monthly “share match” schemes are also going to need to be able to report on a regular monthly basis.
Electing to withhold
As mentioned above, electing to withhold PAYE on the share income is voluntary. Employers are able to make the election by calculating and withholding PAYE and disclosing this amount through the EMS when declaring the income.
Voluntary withholding can be applied on an employee by employee basis and would generally be with the agreement of each relevant employee. If the employer decides to withhold on all equity events this should be notified to relevant employees and agreement sought as to how withholding would be funded (such as automatic share sales etc.). It is important to relay to the employee that the tax will be deducted from their salary and they may not actually receive income in the form of cash from the investment.
In most scenarios, withholding PAYE would reduce the likelihood that employees would have exposure to prepayments of provisional tax and the requirement to file an income tax return, provided they have no other income sources that do not have tax withheld at source.
When no election to withhold made
Should the employer choose not to withhold on ESS income, employees will be required to file a New Zealand income tax return and will have an obligation to pay any tax due on the income reported in the return.
Our experience so far
Deloitte has worked with a number of New Zealand employers following the announcement of these legislative changes and it is not uncommon for employees to have overlooked their reporting and tax payment requirements in the past.
As a result of these changes, employees need to be aware that Inland Revenue will have far greater oversight over income earned from ESS schemes and will be able to identify discrepancies if employees do not report the appropriate income in their annual income tax returns.
Employers may wish to undertake a communication exercise to advise employees that from 1 April 2017 benefits will now be reported to the Inland Revenue and that employees who may be used to declaring this income separately in their income tax returns, no longer need to separately disclose this amount as it will be included in their gross earnings.
Where ESS income has not been reported in the past employees may need to make a voluntary disclosure of any unpaid taxes.
Please contact your usual Deloitte tax advisor for further information on these changes.
March 2017 Tax Alert contents