Widely held share schemes – proposed changes announced

Tax Alert - May 2017

By Jayesh Dahya and Blake Hawes

Outdated and inflexible rules governing widely held share schemes are about to get an overhaul, under changes announced in April 2017 as part of the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill (the Bill). 

The Bill outlines new rules for the taxation of widely held employee share schemes (known as Inland Revenue approved exempt share schemes) that are in line with those proposed last year.  Separate rules for other employee share schemes (ESS) are covered in a separate article in this edition of Tax Alert. 

Benefits under the current regime

Broadly under the current regime, the concessions for widely held schemes allow:

  • Employees to receive benefits from an employee share scheme tax free.
  • Employers, a notional 10% interest deduction on loans made to employees to acquire shares (in addition to actual interest incurred on money borrowed), and no FBT is payable on loans provided to employees to acquire shares.

Despite these benefits, the current regime is seen as outdated and inflexible.  The low limits imposed on the cost of the shares that could be purchased by an employee are seen as a barrier to employers offering these schemes given the costs to set up and administer a scheme.  Further, concerns have also been raised that under the current regime, there is no limit to the discount that can be offered to employees.

What are the proposed changes?

The changes retain many of the features of the current regime and are framed around two policy objectives: first, to ensure that the scheme is available to all employees (not just executives or senior management); and second, to ensure that employees can afford to participate in a scheme (not just those employees on high salaries).

A share purchase scheme will be one that:

  • Has been approved by the Inland Revenue under section DC 12, which means that existing schemes should be able to continue under the proposed regime; and
  • Meets the specified criteria, and has been notified to the Inland Revenue.

The table summarises the key requirements to qualify a share purchase scheme.


Purchase of shares

  • The cost of the shares must not exceed their market value (but may be less).
  • The maximum value of shares that can be provided to an employee is $5,000 per annum.
  • The maximum discount that can be offered to an employee is $2,000 per annum.


Who is eligible to participate?


  • 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.



Employee contributions



  • If the scheme requires an employee to buy a minimum amount of shares before they can participate, the amount can be no more than $1,000 per annum.



Minimum Period of service


  • Any minimum period of service required before an employee can participate cannot exceed three years for full time employees



Loan requirements

  • If employees are required to pay for shares, a loan must be made available to the employee or the employee may pay for the shares in instalments.
  • Loans must be interest free.
  • Loans are to have a minimum term of 36 months and a maximum term of 60 months.
  • Employees will repay loans by regular equal instalments at intervals of not more than one month


Restrictive period


  • 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)



The not so good

It comes as no surprise that no deductions will be available to employers other than for the costs associated with the administration and running of the scheme (subject to all the other limitations, e.g. capital/revenue).

This means from the date of enactment employers will no longer be entitled to claim the notional 10% interest deduction. 

What is surprising is that from the date of the introduction of the Bill (6 April 2017), employers who have been claiming deductions for the cost of acquiring shares provided under an exempt scheme will no longer be able to claim a deduction for these costs. These deductions are seen as contrary to policy and were never intended.  It seems that the Inland Revenue did not appreciate that employers may have been claiming these costs under general principles.

A lost opportunity?

The proposed changes provide an ability for employers to deliver up to $5,000 worth of shares at a discount of up to $2,000, potentially for no cash cost if shares are issued by an employer.  However, the removal of the employer deduction has ‘soured’ these proposals in Inland Revenue’s strive for perfect symmetry. The question we have to ask is whether we have lost an opportunity? 

ESS can be used as a tool to recruit, grow and retain talent and are commonly used by multinational companies overseas.

ESS also facilitate employee engagement, inspire loyalty and provide an opportunity for employees to invest in shares.  While concessional schemes may offer tax benefits, there are also other non-tax benefits. 

Widely held ESS can assist employees better understand the markets and increase financial literacy, and internationally employee share acquisition schemes are a common feature of many organisations remuneration and retention strategies.  Participation also encourages employees to save.

It remains to be seen whether the proposals are enough to encourage employers to set up and establish widely held ESS in the New Zealand market.  ESS can be expensive to set up and administer and it is disappointing to see the Inland Revenue removing incentives for employers to offer these schemes

Have we lost an opportunity, only time will tell?

If you have any questions or comments, please contact your usual Deloitte advisor.


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