Expert Commentary:

New Tax Proposal - Employee Share schemes

17 May 2016

The Government has announced proposals in respect of the taxation of employee share schemes in New Zealand. 

The proposals are designed to align the tax treatment of employee share scheme incentives with cash-bonus payments. 

The new proposals consider changes to the tax treatment of conditional employee share schemes and option-like employee share schemes. Unconditional employee schemes are not under review.

Closely Held Companies

Important changes to the tax treatment of closely held companies include:

  • Relaxation of the “tainted capital gain” barrier to commercially driven business re-organisations and succession planning transactions. The legislation currently seeks to tax certain gains made by companies from transactions with associated persons.  This rule is often a surprise to taxpayers and, in our view, can add unnecessary complexity and is a barrier to commercially driven transactions
  • An ability to opt out of the requirement to account for resident withholding tax on dividends to corporate shareholders
  • Greater flexibility on the treatment of shareholder-employee salaries.

A closely held company is broadly one with five or fewer persons holding more than 50% of the voting rights (i.e. the changes target companies that form the backbone of the New Zealand economy).

Conditional and Option-like Employee Share Schemes

  • Currently an employee is taxed when shares are first acquired. If gains are made following acquisition date and the date conditions are satisfied or options are exercised, such gains may not be subject to income tax.
  • The proposed changes will alter the timing of when tax arises and the amount of tax payable.
  • Conditional share schemes will be taxed at the date all substantive conditions are met by reference to the value of the shares at that date.
  • Option-like share schemes where downward risk protection (put option) exist will be tax at the time the employee receives all the risks and rewards associated with ownership. That point being where the put option can no longer be exercised or, in other words, where all substantial conditions are met.
  • In option-like share schemes where a put option is exercised, no taxable gain or losses should arise.

Other Matters

Proposed changes also include:

  • A transitional (grandfathering) period to the proposed new rules if they are enacted, which may endue for up to 3 years. 
  • Employers will be able to claim a deduction for costs related to employee share schemes to ensure tax neutrality.
  • Start-up companies and employees of start-up companies may receive special treatment to avoid cashflow implications associated with the timing of tax obligations.
  • Increasing reporting requirements of employee share schemes and filing an employee register with Inland Revenue.

Submissions on the proposals can be made to Inland Revenue by 22 June 2016.

Speak to your BDO adviser or refer here for more information: