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Tapestry
Alert: New Zealand - Tax updates
Guidance
for valuation of shares for tax reporting and
changes to
the tax treatment of employee share plans
June 2017
Dear Client
Over the last 18 months, the New
Zealand Inland Revenue Department (IRD) has focussed on various
issues affecting the taxation of employee share plans. In a
Tapestry newsletter last year (which can be found here), we discussed the introduction
of employer withholding for share plan income and the tax treatment
of certain types of share plans. In this newsletter we will
cover:
- new guidance on the
valuation of shares for tax reporting; and
- proposed changes to
the tax treatment of employee share plans.
Valuation
of shares for tax reporting
Background
From 1 April, employers have been able to elect to apply
withholding on income under an employee share plan. Under the
new rules, employers must report the taxable value of benefits that
employees receive under employee share plans. To support this
reporting obligation, the IRD recently released a Commissioner’s
Statement (CS17/01) which provides guidance to employers in
calculating the value of share benefits.
Why is the
guidance necessary?
The Statement recognises that although the new reporting rules
oblige employers to disclose the ‘value of the share benefit’
received under a share plan, tax legislation does not provide the
tools for calculating this value. The guidance aims to give
employers safe harbour valuation methods which will be accepted by
the IRD. The Statement also provides guidance with regard to
the information a company should retain to support a valuation.
Do
employers have to follow the IRD’s guidance?
Employers can use other valuation calculations so long as the
method used determines the value of the share benefit based on the
market value of the shares on the acquisition date. If the employer
chooses an alternative valuation method, it must retain all
supporting documentation in case the Commissioner queries the
valuation.
What share
plans are covered by the Statement?
Although the Statement refers to Share Purchase Agreements, this is
broadly defined to include any plan which involves the acquisition
of shares in a company at less than market value by an employee.
The share plan may involve the immediate transfer of shares, the
granting of share options or deferred share schemes where shares
vest or are transferred at a later date.
What does
the guidance say?
The Statement sets out several different valuation methods linked
to the type of shares to be delivered under a share plan (listed
shares, unlisted shares or shares in an unlisted start-up
company). Interestingly, the Statement accepts that absolute
accuracy is not expected in all cases, acknowledging that this may
be affected by the available data, but requires that a reasonable
process must be followed. The employer is required to keep the
documentation used to make the valuation.
What are
the valuation methods for listed shares?
For shares in a listed company, the valuation options are:
- volume weighted
average price (VWAP) over the last five trading days
(including the acquisition date) for the listed share. The VWAP
for a share is calculated by adding up the dollars traded for
every transaction relating to that share (price multiplied by
number of shares traded) and then dividing by the total shares
traded for the day; or
- the Closing Price
of listed shares on the acquisition date; or
- if the shares are
sold on the acquisition date, the actual proceeds of
sale.
For shares offered to employees in
a newly listed company as part of an IPO, the valuation is made
using the published offered price in the offer documentation.
What
exchange rate applies?
For shares in an offshore company, the value should be converted to
NZD using the closing exchange rate on the acquisition date.
What is
the timing for the application of the guidance?
The guidance applies to any shares acquired by employees from 1
April 2017.
Tapestry
comment
It is unusual
for a tax authority to provide this type of specific valuation
guidance. In our experience, in most jurisdictions there is
no specific method provided and any valuation is permitted so long
as it is it reflects the fair market value of shares on the
relevant date. The NZ IRD seems to be tying up what it sees
as loose ends - having imposed a reporting obligation on employers,
it is providing certainty as to how the to fulfil this obligation.
There is also flexibility as companies which already use a
different form of valuation will not be required to adopt the
options in the Statement.
Companies with
employees participating in share plans in NZ will already be
reporting share plan income in the employer monthly schedule.
Employers should consider which of the valuation options in the
Statement is applicable for their share plan, company and
employees. If none, the company should ensure that it is able
to demonstrate why the alternative valuation method is valid.
Employers will also need to keep any documentation used to make the
valuation. The valuation will be used to calculate the amount
of tax payable by the employee which will be recorded in the
employee’s summary of earnings which is used to complete the annual
tax return.
Taxation
changes – proposed changes to tax treatment of equity share plans
In the
newsletter referred to above, we also reported on the IRD’s
proposals for changes to the taxation of conditional and
‘option-like’ share plans. Following consultations on these
proposals, amendments to the taxation of share plans generally
forms part of the recently introduced omnibus legislation- the
Taxation (Annual Rates for 2017-18, Employment and Investment
Income, and Remedial Matters) Bill (the ‘Bill’).
What is
the aim of the legislation?
The Bill is a wide ranging piece of legislation which seeks to
modernise and simplify aspects of the NZ tax system. For share
plans, the stated aim of the Bill is to achieve neutral tax
treatment of employee share plan benefits. This reflects the
IRD’s concern that some share plans have been structured with the
intention of giving employees tax-free remuneration. Under the
new rules, the tax position of both the employer and the employee
is intended to be the same whether remuneration is paid in cash or
shares, so that there is no tax advantage to the employee receiving
shares rather than cash salary.
How are
share plans taxed now?
Under the current rules, share plan income is taxed when shares are
acquired, on the positive difference between the value of the
shares and the amount paid by the employee. The tax is due in the
year the shares are acquired. The IRD is concerned that some
plans are structured in such a way as
to artificially reduce the value of the shares on
acquisition, resulting in a lower taxable benefit. The new rules
aim to treat all share plans equally by deferring the moment of
tax.
How will
this work?
The Bill provides that 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 new rules, an
employee will be subject to tax on the “share scheme taxing
date”. This is the date when:
- there is no real
risk that the beneficial ownership will change, or that the
shares will be required to be transferred or cancelled;
- 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.
This means that employees will be
taxable on the value of their shares when they have done everything
they need to hold them like any other shareholder (for example,
there is no risk of forfeiture if the employee leaves the company
or the employee is not protected from incurring a loss if there is
any drop in share price).
Is there
anything else?
The Bill also proposes:
- employers will be
entitled to a corporate tax deduction of the amount that is
taxable to the employee (being the difference between the
market value of the shares and the price paid for them);
- simplified rules
for tax advantaged share plans (called ‘widely offered’ or
‘exempt’ share plans). The rules propose an increase in the
value of shares that can be issued to employees from NZD2,340
over a three year period to NZD5,000 a year and removal of the
deemed tax deduction now available for employers (with effect
from 6 April 2017).
A separate discussion paper has
been issued to address the treatment of taxation of share plans for
start-up companies.
Are there
transitional provisions?
Under the Bill, grandfathering rules apply so that the Bill will
not apply to shares granted or acquired before 12 May 2016 or,
generally, within six months of the enactment of the Bill where the
taxing point under the new rules would arise before 1 April 2022,
provided that the shares were not granted with a purpose of
avoiding the application of the Bill.
What is
the timeline?
The Bill is in the select committee stage and is open to
submissions from the public until 5 July 2017. It is likely that
the Bill will not come into effect until 2018.
Tapestry
comment
The change
to the taxation of share plans is part of an overall strategy by
the NZ Revenue to simplify and modernise its tax system - and to
raise more tax by removing any tax advantages currently available
to some complex share plans. This will impact companies with
existing share plans operating in NZ and proposals for new plans
where the plan structure is tax driven.
For
international companies with employees in NZ, this change will
affect when tax is due and, for some plans, may increase the amount
of tax employees are required to pay. The changes have been
under discussion for over a year so are not unexpected, but
employers may want to consider discussing the impact on affected
employees and reviewing whether, given the transitioning rules, it
would be appropriate to make grants in advance of the new
legislation taking effect.
If you have any questions concerning these updates, please do
contact a member of the team who will be happy to help.
Sharon
Sharon Thwaites
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