Collecting tax on employee share schemes using the PAYE system – technical clarifications

(Clauses 57, 84, 85 and 92(7))

Summary of proposed amendments

Two technical changes are proposed to the rules for employers to report and withhold tax on benefits received under an employee share scheme. The changes are intended to ensure the new rules operate effectively.

Application date

The proposed changes will come into force on 1 April 2017 and will apply to employment income received after that date.

Key features

The term “pay period” is replaced with “PAYE payment period” to avoid confusion between an employer’s payroll system and the timing of PAYE payments set out in section RD 22(2) of the Income Tax Act 2007.

To assist employers calculating tax on extra pays in section RD 17 for a benefit under an employee share scheme, the proposed amendment to section RD 6(3) will provide certainty about the date when the benefit is treated as paid.

Background

The Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 simplified the collection of tax on employment income in the form of benefits under an employee share purchase agreement. From 1 April 2017, the general PAYE collection rules in the Income Tax Act and disclosure rules in the Tax Administration Act have been changed to:

• allow employers to choose to use the PAYE system and withhold tax on any employment income an employee receives under a share purchase agreement; and
• require employers to report the value of any benefits an employee receives under a share purchase agreement via the employer monthly schedule (EMS).

The changes should remove the obligation for most employees to include this form of employment income in a tax return.

The changes in this bill provide additional clarity on how tax is withheld under the new rules.