Employee share schemes and PAYE

Submission

(Corporate Taxpayers Group)

Reforms should be included in the bill that would allow employers to elect to treat benefits under share purchase agreements (commonly referred to as “employee share schemes” (ESS)) as subject to PAYE, when it is practical to do so.

Inland Revenue’s recent published position is that employee share scheme income is not subject to PAYE, and employees with such income must file IR 3 income tax returns.

Employee share schemes have a productivity benefit to New Zealand by providing employees with a stake in the companies that they work for. When there is a tax consequence, the compliance obligations for employees should be minimised.

Requiring employees to file IR 3 returns is not the most desirable outcome from a policy perspective as employees will often have no other tax filing requirement. The current law therefore brings more taxpayers into the filing system despite Inland Revenue actively trying to remove the need for individuals to file tax returns in many circumstances.

Further, overall compliance with tax laws is likely to be reduced if employees are required to file IR 3 returns, as many are likely to be unaware of their tax obligations (and others may simply not comply). Greater compliance is assured when employers are able to deduct PAYE in relation to employee share scheme awards and the Government is assured of receiving the correct amount of tax.

The Group is happy to work with officials to develop a policy response to this issue, noting that any such response should also ensure that past positions adopted by taxpayers are protected.

Comment

Officials agree in principle with the concerns raised by the Corporate Taxpayers Group. However, given the large number of taxpayers potentially affected by this change, it is more appropriate for any reforms to be included in a future tax bill to ensure the proposed solution is subject to full consultation in accordance with the generic tax policy process. If the suggested amendment was included in the bill at this stage, some taxpayers would not have the opportunity to consider the proposed solution and comment on it.

Accordingly, officials recommend that the submission be declined for this tax bill, but that work commence on a solution for a future tax bill.

Officials have discussed this approach with the submitter who is comfortable with it.

Recommendation

That the submission be declined.