Chapter 4 - Transitional and consequential matters

4.1 While the changes suggested in this officials’ issues paper are designed to affect only the collection of tax, rather than the substantive tax treatment of employee share scheme benefits, there are some important transitional and consequential matters that must be considered.

Transitional issues

4.2 Officials are aware there are many employee share schemes currently in existence. We want to ensure that any change to the tax collection mechanism (in particular, if source taxation is made compulsory) is not a burden to taxpayers.

4.3 Accordingly, officials seek feedback on:

  • the range of employee share schemes currently on offer and whether employers would like the ability to “grandparent” the existing tax treatment for employees currently participating in these employee share schemes; and
  • whether a phase-in of the new rules over several years would be an acceptable alternative to grandparenting.

Consequential issues

4.4 There are likely to be some consequential implications of the changes suggested in this issues paper for the rest of the Income Tax Act 2007.

4.5 Officials seek feedback on any consequential issues readers may be aware of.

4.6 Three issues officials have considered are how to ensure that the suggested changes to collection do not alter:

  • employer deductions for the provision of employee share scheme benefits;
  • the substantive tax treatment when the employee provides services in New Zealand and overseas; and
  • entitlements and obligations for social assistance (Working for Families, student loans, child support and KiwiSaver, collectively referred to as “social policy”).

Employee deductions for the provision of employee share scheme benefits

4.7 As discussed earlier, this issues paper does not intend to alter the substantive tax treatment of employee share schemes. Therefore, any legislative amendment would seek to ensure that any deductions available to an employer in relation to employee share scheme benefits would not change.

Tax treatment of employee share scheme benefits that have a cross-border element

4.8 Similarly, any legislative amendment would seek to ensure that changing the collection of tax on employee share scheme benefits would not alter the substantive tax treatment where the employee provides services in New Zealand and overseas.

Treatment of employee share scheme income for ACC and social policy purposes

4.9 Officials would seek to ensure that, as far as possible, including employee share scheme benefits in either the definition of “PAYE income payment” or the definition of “fringe benefit” (thus changing the way tax is collected) would not alter the effect the receipt of an employee share scheme benefit currently has on social policy entitlements or obligations. That is, officials do not intend the suggested changes in this issues paper to make anyone better or worse off from a social policy perspective.

4.10 We propose that employee share scheme benefits should continue to be either included or excluded in the relevant measures of income for ACC and social policy purposes as follows:

  • ACC earners’ levy – excluded
  • Working for Families tax credits – included
  • Student loans – included
  • Child support – included (from 1 April 2016)
  • KiwiSaver – excluded.

4.11 A more detailed analysis of these recommendations is included in the Appendix to this issues paper.

4.12 Officials note that the Income Tax Act definitions of “taxable/net income” and “family scheme income” are also used by other agencies to determine other social entitlements (for example, community services cards and student allowances). This issues paper does not consider the implications of any changes for these other agencies.

Officials seek feedback on:

  • whether there are other consequential issues that have not been identified; and
  • whether there are practical difficulties in achieving the neutral treatment proposed – for example, would using the current FBT system make it difficult to identify the specific employee share scheme benefit provided to the employee for social policy purposes