Tapestry Alert: New Zealand – Tax updates

Introduction of withholding tax on share plan income and
Changes to the tax treatment of employee share plans

 
June 2016

Dear Client,

In this Tapestry alert on recent New Zealand tax changes, we will cover:

• The introduction of employer withholding for tax on employee share plan income
• Proposed changes to the tax treatment of employee share plans

The introduction of PAYE withholding for tax on employee share plan income

Legislation to permit employer withholding of tax on income under an employee share plan has recently been adopted in New Zealand.  The new provisions form a small part of the omnibus Taxation (Transformation: First Phase Simplification and Other Measures) Bill referred to in our October newsletter (see here).  

How is tax on income under share plans paid now?

Currently, income under an employee share plan is treated as an income substitute but, unlike most employment income, it is not subject to taxation at source via the PAYE system.  Instead, employees who receive benefits under share plans must file a tax return and account for the tax due on the share income themselves. This can be complicated for employees who would not otherwise need to make a tax filing. Some employers choose to withhold although technically this was not permitted by New Zealand tax legislation.

What is the new procedure?

Under the new rules, employers may elect to withhold tax on employment income received by employees under share plans through the PAYE system. The employer can chose which employees it will apply withholding to and the election is revocable.  The employer will also be subject to new reporting obligations.

What reporting obligations apply to the employer?

Under the previous rules, there were no employer disclosure requirements for share plan income.  The new rules will require employers to disclose the taxable value of benefits that employees receive under employee share plans in their Employer Monthly Schedule.  The disclosure obligation will apply whether or not the employer elects to withhold income tax, putting the Inland Revenue (the tax authority) on notice to check that the employee has included the share income in his/ her individual tax return.

When will the new rules come into effect?

The new rules will apply from 1 April 2017. If an employer has already been operating a PAYE system with regards to income under share plans, the rules have retrospective effect back to 1 April 2008.  In addition to validating prior withholding, this means that employers can elect to opt into the new system immediately.

Are there any exclusions?

The new rules do not apply to share benefits delivered under an employee share plan specifically approved by the Commissioner of Inland Revenue; share benefits delivered to former employees (this would include mobile employees who are not in New Zealand at the time of taxation); and, the disposal of an award by an employee (or associated person) to a non-associated person prior to vesting.

Tapestry comment:
The withholding changes were introduced following a consultation process and it is interesting to note that employers tended to favour the idea of applying the PAYE withholding system to share plan income but only on the basis that employers could decide whether to apply the new system to their own employees. As some employers were already applying withholding, even though technically not permitted to do so under NZ tax law, the change could be viewed as a pragmatic nod to reality.  For the Inland Revenue, it creates greater transparency as employers are required to report all share plan details even if they do not opt to withhold. 

Some commentators have suggested that most employers will not elect to withhold and that compliance with the additional reporting obligations will impose an unnecessary additional administrative burden on employers.  However, as withholding is standard in most countries, this change is seen by others as simply bringing the NZ system into line with global practice.  As share plans become more popular in NZ, following recent changes to the securities laws, it could also be the case that simplifying the tax procedure for employees may make share plan membership more attractive.  In any event, companies with employees in NZ, should consider whether to make provision for withholding in future share plan documentation (or by amending current plans) and put in place systems for reporting share plan details to the Inland Revenue ahead of the 1 April 2017deadline.

Taxation changes – Proposed changes to tax treatment of equity share plans

In our February newsletter (see here) we reported on an alert issued by the New Zealand Inland Revenue addressing concerns over the taxation of conditional and “option-like” arrangements. As outlined in our previous newsletter, the Inland Revenue was concerned that such plans allowed what otherwise would be taxable income to be treated as tax-free capital gains.

What has happened since the Alert was issued?

The Inland Revenue has now released an Issues Paper which addresses the concerns raised in the Alert.  The Issues Paper sets out the Inland Revenue’s proposals for the taxation of share plans and is open for public comment. The full text of the Issues Paper can be found here.

What is the proposed change?

At present, tax on share benefits is payable on the difference between the amount an employee pays to purchase the shares and the market value of the shares on acquisition.  The Inland Revenue considers that some plans are structured in such a way as artificially to reduce the value of the shares on acquisition, resulting in a lower taxable benefit.  The proposed change will calculate the taxable benefit at the point when the employee holds the shares free of any substantive conditions, rather than when the shares are acquired.  The taxable value of the benefit to the employee would be calculated on the basis of the market value of the shares at this point, less the amount that the employee pays for the shares.  As a result, the shares will be valued at a later date (for example, after any conditions have been satisfied) and, if the shares have a higher value at that date, there will be a larger taxable benefit. Shares which are not subject to any conditions will continue to be valued on the date of acquisition.

Are there any other changes in the Issues Paper?

The Issues Paper proposes a three year transitional period for existing employee share plans; a tax deduction for the employer equal to the employee’s taxable income under the plan; special arrangements for employee share plans offered by start-up companies; an additional reporting obligations for employers.

What is the timeline?

The closing date for submissions on the Issues Paper is 22 June 2016.

Tapestry comment:
It is likely that the changes proposed in the Issues Paper will be introduced in draft legislation in the second half of this year.  Employers with existing or new share plans, which are due to vest in three or more years, should consider whether the proposals in the issues paper could impact adversely on the expected tax treatment of participants in their plans.

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
 
      
 Bob Grayson            Sharon Thwaites