Chapter 9 - Administration, record keeping and reporting
9.1 There are currently no specific reporting requirements for employers offering, or employees participating in, employee share schemes. While employers offering the concessionary schemes discussed in Chapter 7 must apply to the Commissioner initially for approval, there are no on-going reporting requirements with respect to these schemes.
9.2 Similarly, there are no requirements for employers to provide employees with a share scheme statement containing the necessary information to complete their tax return (for example, the market value of their employee share scheme interests). Some employers may voluntarily provide their employees with such a statement.
9.3 The PAYE measures contained in the Taxation (Transformation: First Stage Simplification and Other Measures) Bill require employers to include employees’ employee share scheme benefits in the employer monthly schedule (EMS) (whether they elect to withhold PAYE or not). However, this amendment does not require the employer to provide specific details of the share scheme benefits provided.
9.4 This lack of reporting raises a number of issues:
- it is difficult to know whether employers and employees understand and are complying with their share scheme tax obligations;
- employees may not have sufficient information to complete their tax return; and
- there are no comprehensive statistics on how widespread employee share schemes are and what form they take. This type of information is particularly important to collect in respect of the Commissioner-approved concessionary schemes. This is because it is important for the Government to know how much the tax concession costs and whether it is being appropriately targeted.
9.5 There are a number of measures that could be considered to address these issues. For example, New Zealand could adopt a reporting system similar to Australia’s. This would require employers to provide:
- employees with an employee share scheme statement in the year in which they should be returning income from the share scheme (for example, when no substantial contingencies exist with respect to their interest); and
- Inland Revenue with an annual employee share schemes report listing which employees participated in a particular employee share scheme, what taxable benefits they received during the year and the value of those benefits. The report would need to provide information about any amount the employee had paid for the share scheme benefit to enable the discount to market value to be determined.
9.6 We understand that Australia has seen a significant improvement in compliance as a result of implementing such a reporting regime.
9.7 However, because of the recent changes to the collection of tax on employee share schemes, the Australian approach may not be appropriate for New Zealand. This is because in New Zealand employers will soon be required to include employee share scheme benefits in the EMS for the month in which the benefit is received, even if PAYE is not paid. Because employers are reporting the employee share scheme benefits in (close to) real time, it may make more sense to align more detailed reporting requirements with the monthly EMS filing, rather than requiring employers to provide an annual return.
9.8 Introducing specific employee share scheme reporting requirements involves a trade-off between better compliance and targeting of tax benefits, and increased compliance and administrative costs. It is also important to consider who the compliance costs will fall on.
9.9 Employers will soon be required to generate much of the required information to include their employees’ employee share scheme benefits in the EMS. Under the proposal, employers will also need to collect the information to determine their own deduction.
9.10 Accordingly, it makes the most sense for employers to provide the required information to Inland Revenue and employees. This is generally in line with the reporting requirements in other jurisdictions. It is also generally more efficient for the reporting requirement to fall on the employer (who is managing the employee share scheme for a number of employees), rather than individual employees. Employees are also less likely to be familiar with filing returns and therefore compliance is likely to be lower. However we are interested to hear whether this obligation would impose particularly high compliance costs and whether there are ways these costs could be minimised.
9.11 Another option would be to simply require employers to keep a record of employee share scheme information, which could be requested by Inland Revenue as part of an audit.
9.12 However, one of the aims of the review of the tax treatment of employee share schemes is to move these schemes out of audit and into routine compliance – an actual filing requirement is more likely to achieve this aim.
9.13 We are interested in readers’ views as to whether filing a monthly (real time) or annual employee share schemes report would impose significantly greater compliance costs on employers than simply being required to hold the information. We are also interested in whether readers would support a requirement to provide an employee share scheme statement to participating employees at the time the share scheme benefit is included in the EMS.
9.14 It would also be possible to require employers to register their schemes with Inland Revenue when they are implemented, in a similar way to the current concessionary Commissioner-approved employee share schemes. This, in addition to the reporting described above, would help address the current lack of information on share schemes. However, this measure may impose additional compliance costs on businesses and the other reporting may provide sufficient information for these purposes.
9.15 Whichever approach is adopted, the employee share scheme reporting/record keeping requirements should be implemented in a way that reduces compliance costs as much as possible and potentially capitalises on information already recorded by employers for other purposes (for example, through payroll systems, for financial reporting purposes or for the administration of their employee share schemes generally). The chosen approach should also be consistent with Inland Revenue’s wider Business Transformation framework, both conceptually and in terms of timing of implementation.
Provisional tax for employees
9.16 As discussed in the officials’ issues paper Simplifying the collection of tax on employee share schemes (April 2015), subjecting employee share scheme benefits to provisional tax can increase compliance costs for employees and potentially result in the imposition of UOMI. With many employers electing to pay PAYE on employee share scheme benefits, the number of employees subject to provisional tax due to the receipt of a share scheme benefit should reduce. However, if employers do not elect to pay PAYE, it is still possible for some employees to fall into provisional tax.
9.17 We are interested in readers’ views as to whether the application of provisional tax to employee share schemes is problematic in practice, or is likely to become so. If so, are there changes that could be made to reduce the practical difficulties associated with provisional tax?
We are interested to hear from readers:
- whether they think the current lack of employee share schemes reporting contributes to misunderstanding of tax obligations and non-compliance;
- whether specific employee share schemes reporting (to Inland Revenue and employees) would impose significant compliance costs on employers;
- whether there are ways these compliance costs could be minimised;
- whether monthly (real time) or annual reporting would be preferable;
- whether it would be preferable for employers to simply be required to hold the relevant employee share scheme information, which could be requested by Inland Revenue if required;
- the extent to which the information needed to report on employee share schemes is already held by employers;
- whether registration of employee share schemes with Inland Revenue would impose significant compliance costs;
- whether applying provisional tax to employee share schemes is problematic in practice;
- whether changes could be made to reduce the practical difficulties associated with provisional tax.