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Simplifying the collection of tax on employee share schemes

Chapter 1 - Introduction

1.1 Officials have been advised of difficulties faced by employers and employees in accounting for tax on benefits provided under “share purchase agreements” – otherwise known as “employee share schemes”.[1]

1.2 Benefits[2] provided to an employee under an employee share scheme are “employment income” under section CE 1(1)(d) of the Income Tax Act 2007, but unlike most employment income, these benefits are not currently subject to tax at source under either the pay as you earn (PAYE) or fringe benefit tax (FBT) rules. This means employee recipients of employee share scheme benefits must file an IR 3 returning the employee share scheme benefit as income and account for the tax on that benefit themselves.[3]

1.3 This treatment has not been well understood to date. Accordingly, an Inland Revenue Large Enterprises Update in November 2013 stated:

Employee share scheme income isn’t subject to either PAYE or FBT, so shouldn’t be included in the Employer Monthly Schedule (IR 348/EMS) or FBT return you send to us. Instead any employee with this type of income must file an IR 3 tax return for the income year they receive the income in.

1.4 Following this Large Enterprises Update, officials have been asked to consider, as a simplification and compliance cost reduction measure, an amendment to the Income Tax Act 2007 to permit employers to account for tax on employee share scheme benefits at source, preferably through the PAYE system.

1.5 This issues paper outlines the concerns with the current system in more detail and suggests some possible solutions to deal with these concerns.

Request for feedback

1.6 Officials are aware that taxpayers will have different views about this issue and different preferred solutions.

1.7 Therefore, this paper asks for feedback on:

  • officials’ understanding of the problems with the current tax collection system and how widespread these problems are;
  • possible solutions to the problem and which solution would be preferred – in particular, whether PAYE or FBT is the preferred source taxation system and whether taxation at source should be elective or compulsory; and
  • if a legislative amendment is made, what transitional measures would be needed to ensure existing employee share schemes are not adversely affected and what timeframe would taxpayers need to make any necessary changes to their systems.

Scope of issues paper

1.8 Officials are aware that there are some wider issues with the taxation of employee share schemes and employee option schemes. This issues paper does not consider these substantive tax issues; it is solely confined to the collection of the tax that arises under the current tax rules. The paper has been prepared in response to taxpayer concerns over compliance costs associated with employee share schemes and a tax collection mechanism that is seen as a barrier to the uptake of these schemes.

1.9 Officials are currently considering the wider issues with employee share schemes and intend to commence consultation on these issues later this year.

1.10 None of the suggestions in this issues paper are intended to alter the quantification or timing of the taxation of benefits under an employee share scheme.

1.11 Feedback received will help to shape recommendations we make to the Government on the final form of any amendments to be included in a future tax bill.

How to make a submission

1.12 You are invited to make a submission on the suggested reforms to the collection of tax on benefits provided under employee share schemes. Submissions should be addressed to:

Simplifying the collection of tax on employee share schemes
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140

1.13 Or email [email protected] with “Simplifying the collection of tax on employee share schemes” in the subject line.

1.14 Electronic submissions are encouraged. The closing date for submissions is 5 May 2015.

1.15 Submissions should include a brief summary of major points and recommendations. They should also indicate whether the authors would be happy to be contacted by officials to discuss the points raised, if required.

1.16 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.

 

1 This paper does not cover approved employee share purchase schemes (commonly referred to as “DC 12 schemes”) as the benefit to employees under these schemes is deemed to be nil; thus the tax collection problem does not arise.

2 The “benefit” under an employee share scheme is, in the case of an acquisition of shares, the amount by which the value of the shares when they were acquired is more than the amount paid or payable for them. Share options provided to employees are generally not taxed until they are exercised, at which time the tax treatment in the previous sentence applies.

3 Officials are aware that employee share schemes can be structured using an employee share loan which is used to purchase shares, where the loan is ultimately repaid using a cash bonus (subject to ordinary PAYE). This “self-fix” results, economically, in tax at source on employee share scheme benefits. This issues paper therefore relates only to non-monetary employee share scheme benefits.