New Zealand – Legislation introduces tax change for share plans
New Zealand has recently passed legislation affecting the taxation of employee share plans. The Taxation (Annual Rates for 2017-18, Employment and Investment Income and Remedial Matters) Act 2018 (the Act) became law on 29 March. The legislation was discussed in our June 2017 newsletter (here) and in our newsletter in January 2018 (here).
Why has the tax treatment changed?
The New Zealand tax authorities (the IRD) first raised a concern about the tax treatment of certain types of share plans in 2016 (see our newsletters here and here). The IRD considered that some share plans were structured so as to reduce the value of the shares on acquisition, resulting in what otherwise would be taxable income being treated as tax-free capital gains. The New rules seek to achieve neutral tax treatment of employee share plan benefits so that the tax treatment for the employees and employers is the same, regardless of whether remuneration is paid in cash or shares.
What has changed?
The main change is the introduction of new rules for the timing of tax payable by an employee under a share plan. Under the Act, the tax point is deferred from when the shares are acquired to the ‘share scheme taxing date’. This is essentially when the employee holds the shares on the same terms as other shareholders so that:
- there is no material risk that the beneficial ownership will change or that the shares will be required to be transferred or cancelled (note that the test in the original Bill was ‘no real risk’ of change of ownership but this test was considered too broad and the test was changed to ‘material’ in the Act);
- the employee is not compensated for a fall in share value; and
- there is no real risk that there will be a change in the terms of the shares affecting their value.
If the shares or rights are cancelled or transferred earlier, the ‘share scheme taxing date’ will be the earlier date of cancellation or transfer.
What is the taxable value?
The taxable amount of the benefit will be the difference between the market value of the shares at the ‘share scheme taxing date’, less any amount paid by the employee. If the amount paid is more than the value of the shares, the difference is deductible to the employee. Under the previous regime, shares were taxed at acquisition, so any increase in value between the acquisition date and the date when the shares were unconditionally held by the employee, was not taxable. Under the new rules, any increase in value during the vesting period will be taxed.
What share plans are covered?
The Act introduces a new definition of ‘employee share scheme’ which covers share benefit awards made by a company to past, present and future employees or shareholder-employees. The definition specifically excludes (i) share purchase plans; (ii) plans where the employee is required to pay market value for the shares on the taxing date; and (iii) arrangements that put shares, acquired by the employee for market value, at risk where the scheme provides no protection against a fall in the share price. Following submissions during the consultation process, the definition was clarified to specifically exclude share transfers that are gifts and to confirm that it only applies if the arrangement is connected to a person’s employment or service.
Corporate tax deduction
For employers, the Act changes when and what costs can be deducted for corporate tax purposes. Under the Act, the employer is able to take a tax deduction for deemed expenditure equal to the amount that is taxable to the employee (being the difference between the market value of the shares and the price paid for them). The deduction is available at the same time that the employee is liable for tax on the shares. The treatment aligns the tax treatment for shares with the treatment of cash remuneration. Note that the employer will not be able to claim a deduction for all the actual costs of the plan (for example, a recharge) although administration or management costs are deductible. If the employee qualifies for a deduction (if the price paid exceeds the value of the shares), the employer is required to treat the amount of the deduction as income.
The Act also:
- introduces simplified rules for tax-advantaged share plans (now called ‘exempt employee share plans’);
- provides that an employee share scheme trust will be treated as a nominee of the company whose shares are being granted to the employee, so the trust is not required to file a separate tax return; and
- makes provision for the employer company to increase its available subscribed capital by the full market value of the shares (as opposed to the amount that is actually paid by the employee).
What is the timing?
Under grandfathering provisions, the new rules will not apply to benefits arising from shares which were:
- granted or acquired before 12 May 2016 (this is the date when the new rules were first proposed); or
- granted within six months of the enactment of the Act (i.e. the end of September 2018), where the taxing point under the new rules would arise before 1 April 2022, provided the shares were not granted with a purpose of avoiding the application of the Act.
Reporting by employers
We have previously reported on the new rules regarding withholding and reporting which came into force on 1 April 2017 (here). Employers may now elect to withhold PAYE on share-related income. If this election is not made, the employer must report any share-related income in the monthly reporting schedule.
Although introduced as part of an overall policy to simplify the tax treatment, the rules affecting share plans are detailed and complicated, and employers will need to consider how they impact both on the benefits for employees under share plans and also the potential administrative costs for employers.
If you have any questions concerning these updates, please do contact a member of the team who will be happy to help.
Bob and Sharon