Employee share schemes

Overview

Simplifying the collection of tax on employee share schemes


OVERVIEW


Clauses 2(3), 52 to 54, 109, 204 and 222

Changes are proposed to the general PAYE collection rules in the Income Tax Act 2007 to improve the collection of tax on benefits received as employment income under an employee share purchase agreement. Share purchase agreements in this context are often referred to as “employee share schemes”.

The changes proposed in the Bill:

  • allow employers to choose to withhold tax using the PAYE rules on any employment income an employee receives under a share scheme; and
  • require employers to disclose the tax value of any benefits an employee receives under a share scheme using the employer monthly schedule. This requirement applies to employers who choose not to withhold tax using the PAYE rules.

Submitters support the first change, subject to some modifications regarding scope and the timing when income information is supplied to Inland Revenue.

Submitters do not support the requirement to disclose the tax value of any benefit an employee receives under an employee share scheme. Submissions note that the requirement to use the employer monthly schedule to disclose the value of employee share scheme benefits will generate additional and unnecessary reconciliation work for employers. They are concerned that Inland Revenue’s employer monthly schedule is not sufficiently sophisticated to deal with situations when amounts withheld under the PAYE rules do not reconcile with income. Submitters expect that Inland Revenue’s Business Transformation programme will result in better systems which can deal with these computation issues.

Submitters also made technical comments about the amendments and their interaction with the Accident Compensation Act 2001 and the Holidays Act 2003.

In response to submissions, officials are making the following recommendations that would modify the proposal in the Bill:

  • Large employers will for the most part be able to shift the recognition of benefits under an employee share scheme to the pay-period immediately following the purchase of shares or exercise of an option. The timing shift is to allow large employers sufficient time to compile information to support the required disclosures in the employer monthly schedule. A similar change is not required for other employers as they do not face the same time pressures to meet the statutory filing dates for the employer monthly schedule under the Tax Administration Act 1994.
  • The obligation on employers to disclose the value of employee share benefits (when a decision is made not to withhold tax under the PAYE rules) is scaled back. The obligation to disclose will not apply in the following circumstances:
    • when an employee or an associate of the employee sells share rights to a non-associated third party;
    • when the share benefit arises from a “Commissioner approved” employee share purchase scheme; and
    • when share benefits are provided to a former employee.
  • The decision to withhold tax under the PAYE rules will not be irrevocable. The decision to withhold tax can be exercised on a per employee basis. Officials note that in situations when tax is not withheld, Inland Revenue will still receive income information about the employee via the employer monthly schedule.

Minor changes and drafting clarifications are also proposed, including an amendment to the Accident Compensation Act 2001.

Effect of the recommendations

Under current law (the status quo), employees are responsible for disclosing the value of share benefits received under an employee share scheme and paying tax on those benefits. The Income Tax Act treats the employee as receiving employment income in the following situations:

  • when the employee acquires shares – section CE 2(2);
  • when the employee disposes of rights to acquire shares to non-associates – section CE 2(3);
  • when an associate of the employee acquires shares – section CE 2(4); and
  • when an associate disposes of rights to acquire shares to non-associates – section CE 2(5).

The proposal in the Bill shifts the obligation to disclose the value of employee share scheme benefits from the employee to the employer and allows the employer the option to withhold tax on benefits that are deemed to arise under section CE 2(2) and (4). Employees remain responsible for declaring and paying tax on income arising under sections CE 2(3) and (5) – the current treatment. The employee is also responsible for paying tax on income arising under section CE 2(2) and (4) if the employer chooses not to withhold tax (as under the current rules).

The range of outcomes is illustrated in the table below:

When income arises Current treatment Proposed outcome
When the employee acquires shares. Employee must declare income and pay tax.

(i) Employer declares income for current employees.

(ii) Employer may choose to withhold tax.

(iii) Employee must pay tax if (ii) does not apply.

(iv) Former employees must declare and pay tax unless (ii) applies.

When employee disposes of rights to acquire shares to non-associates. Employee must declare income and pay tax. Employee must declare income and pay tax.

When an associate of the employee acquires shares.
Employee must declare income and pay tax.

(i) Employer declares income for current employees.

(ii) Employer may choose to withhold tax.

(iii) Employee must pay tax if (ii) does not apply.

(iv) Former employees must declare and pay tax unless (ii) applies.

When an associate disposes of rights to acquire shares to non-associates. Employee must declare income and pay tax. Employee must declare income and pay tax.

SIMPLIFYING THE COLLECTION OF TAX ON EMPLOYEE SHARE SCHEMES


No clause

Issue: Wider review of the tax treatment of employee share schemes needed

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

A review of the substantive taxation of employee share schemes and the wider policy settings for employee share schemes and employee option schemes should be given priority.

Comment

A review of the taxation of benefits under an employee share/option scheme is on the Government’s tax policy work programme. A consultation document about the review is expected to be released in 2016.

Recommendation

That the submission be noted.


Issue: Support for proposed change

Clauses 2(3), 52 to 54, 109, 204 and 222

Submissions

(ANZ, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Covisory Partners, EY, New Zealand Law Society)

The submitters support the proposal to allow employers to choose to withhold tax using the PAYE system on any employment income employees receive under a share purchase agreement. (All submitters)

The submitter supports the requirement that employers disclose using the employer monthly schedule the value of the benefits employees receive under an employee share agreement. (Covisory Partners)

Recommendation

That the submissions be noted.


Issue: Alternative method of withholding should be considered

Submission

(KPMG)

The submitter supports the idea of withholding tax on employee share scheme benefits but considers a better approach is for tax to be withheld using the schedular withholding payments system.

Comment

Alternative methods of collecting tax, including a schedular withholding system, on employment income received in the form of an employee share benefit were considered during the policy development of the proposal in this Bill. Schedular withholding uses the same collection mechanics as the proposal in the Bill. The amount of tax collected is based on a flat rate, which can result in either under- or over-taxation. The proposal in the Bill ensures that the amount of tax withheld, if the employer chooses to do so, is at a rate that aligns with the employee’s marginal tax rate.

Submissions received on the officials’ issues paper Simplifying the collection of tax on employee share schemes were mostly of the view that the PAYE system should be used to withhold tax because any new withholding system would require new compliance systems. Other submitters on the issues paper did not see the case for duplicating compliance costs under a new withholding system when the PAYE system could be used.

Recommendation

That the submission be declined.


Issue: PAYE reporting and timeframes

Clauses 52 to 54 and 109

Submission

(Chartered Accountants Australia and New Zealand, EY, KPMG – verbal endorsement)

A longer time-period is needed for making the required disclosures than those allowed under the PAYE rules, especially for employers whose PAYE obligations exceed $500,000. (EY)

A longer time-period for making the required disclosures should be provided. In some circumstances it will be difficult for employers to meet the normal PAYE reporting dates because of delays in receiving the necessary information from overseas parent companies, share registry firms or former employees. (Chartered Accountants Australia and New Zealand)

Comment

Every month employers provide information to Inland Revenue in the employer monthly schedule about PAYE and related deductions made during the previous month. Large employers, that is, those with more than $500,000 a year of PAYE withholding (including employer superannuation contribution tax – ESCT) must provide the employer monthly schedule by the 5th of the month following that in which they withheld tax.

Large employers, in addition to the preparation of the employer monthly schedule by the 5th of the month, are also required to pay to Inland Revenue any tax withheld under the PAYE rules according to the following schedule:

  • For pay-periods between the 1st and the 15th of the month, amounts withheld must be paid on the 20th of the month.
  • For pay-periods between the 16th and the end of the month, amounts withheld must be paid by the 5th of the following month.

The payment information for the pay-periods in that month are reconciled in the employer monthly schedule filed with Inland Revenue on the 5th of the following month.

Employers with less than $500,000 in PAYE or ESCT must provide this information along with the payment of any withheld amounts by the 20th of the month following the month in which tax is withheld.

Submissions have noted that large employers are likely to find it very difficult to meet the statutory reporting timeframe of the 5th of the following month to provide Inland Revenue with an employer monthly schedule containing the necessary disclosures about any benefits an employee receives under an employee share scheme. Problems facing employers include:

  • receiving the necessary share information from third-party share registries;
  • obtaining the requisite information about the value of the share benefit vested in an employee;
  • if the employee is a member of a global share purchase agreement, dealing with the non-resident parent company or trustee responsible for managing the employee share scheme;
  • obtaining relevant information if the share benefit is received by a former employee that is still a party to the employee share scheme provided by the employer.

Submitters note these problems would be particularly acute for large employers if the share benefit accrues on the last few days of the preceding month when the employer monthly schedule is due on the 5th. A similar problem does not arise for other employers with PAYE obligations as the employer monthly schedule is required on a later date, being the 20th of the following month.

These filing dates are deeply embedded in Inland Revenue’s IT systems and drive a number of administrative processes and actions, including returns management, assessments, payment processing, penalties and filing reminders. Any change to the dates would therefore best be implemented following Inland Revenue’s transition to new technology and systems.

Currently, employment income arises in the income year when the employee purchases shares or exercises an option. This transaction would, in the absence of any change to the current proposal in the Bill, be disclosed by the employer in the pay-period when the transaction occurred and, if the employer elects, PAYE would be withheld.

To provide large employers with additional time to compile the necessary information, given system constraints, officials recommend a new rule that shifts (for the purposes of the proposal in this Bill only) the point in time when employment income is recognised under an employee share scheme. The timing rule would apply to employees of a large employer only. Under the new rule, this income would be shifted to the next payment return period, as illustrated in the diagram below:

Diagram: Shifting the recognition of ESS benefits to the next pay-period for large employers

INSERT GRAPHIC

Explanation of ESS transactions in the diagram above:

  • An employee share scheme benefit arising on 4 March would be attributed to the next pay-period. This means that if the employer chooses to withhold tax, it would be payable for the PAYE payment on 5 April and disclosed in the employer monthly schedule of the same date.
  • An employee share scheme benefit arising on 30 March would be attributed to the next pay-period. If the employer choses to withhold tax, it would be payable for the PAYE payment on 20 April and disclosed in the employer monthly schedule on 5 May.
  • An employee share scheme benefit arising on 13 April would be attributed to the next pay-period. If the employer chooses to withhold tax, it would payable for the PAYE payment on 5 May and disclosed in the employer monthly schedule of the same date.
  • An employee share scheme benefit arising on 18 April would be attributed to the next pay-period. If the employer choses to withhold tax, it would be payable for the PAYE payment on 20 May and disclosed in the employer monthly schedule on 5 June.

The implications of this new rule are as follows:

  • Income shifted from the first half of the month until the second half of the same month would be reported in the employer monthly schedule for that month.
  • Income shifted from the second half of the month to the first half of the following month would be reported in the employer monthly schedule for that following month.
  • In the year of introduction, a one-off and unquantifiable timing deferral may be created with some employee share benefits recognised in the next income year.

The trade-off with shifting the recognition of income covered by the proposal in this Bill is that in the year of application employee share benefits received between the 16th and 31 March 2017 would be assessed as income for the income year beginning 1 April 2017 and not the income year ending 31 March 2017. For some employees, this one-year income deferral could affect their child support or student loan obligations or Working for Families entitlements. Inland Revenue will investigate instances where employees seek to exploit for personal advantage the deferred recognition of income for share benefits provided between 16 and 31 March if those share benefits are provided out of pattern with previous years or the decision to acquire shares is out of step with market conditions.

Shifting the point when income is recognised would give large employers the benefit of additional time (minimum 20 days)[1] to compile the necessary information to be disclosed in the employer monthly schedule.

Recommendation

That the submissions be accepted, subject to officials’ comments. Section CE 2 of the Income Tax Act should be modified to allow large employers to disclose the value of an employee share scheme benefit received by an employee in the payment return period immediately following the pay-period in which the benefit vests in the employee.

The practical implications of this recommendation for large employers will be explained in the Tax Information Bulletin following enactment.


Issue: Ability to correct returns

Submission

(EY)

The current PAYE rules do not provide any flexibility to correct any income variations in later employer monthly schedule/PAYE returns. If adjustments are necessary, the employer must amend their previously filed employer monthly schedule/PAYE return.

Comment

Inland Revenue’s current technology platform cannot presently provide the flexibility recommended by the submitter. This issue is considered in policy proposals set out in Better Administration of PAYE and GST: a Government discussion document, which was released for public comment in November 2015.

Officials note, however, that the recommended change to shift the recognition of employee share scheme benefits to the next payment return period should go some way towards reducing the need to make adjustments to previously filed employer monthly schedules/PAYE returns.

Recommendation

That the submission be declined.


Issue: Scope of the proposals

Clauses 52 to 54 and 109

Submission

(Corporate Taxpayers Group, EY, Simpson Grierson)

A number of submitters have sought clarification about the scope of the proposal and in what situations the rules have application.

  • The proposal should apply to situations when the employer is not a direct party to the arrangement, for example, in the case of multinational groups with New Zealand subsidiaries or branches. (EY)
  • The proposal should apply to share option plans. (Corporate Taxpayers Group)
  • The proposal should not apply to situations where the employer cannot be reasonably expected to have knowledge of the transaction – such as the employee selling their rights to another person. (Simpson Grierson)

Comment

As drafted, the proposal in the Bill has application to employment income that is treated as arising in the situations described in section CE 2 of the Income Tax Act. Section CE 2 treats employees as receiving employment income from an employee share scheme in the following four situations:

  • when the employee acquires shares – section CE 2(2);
  • when the employee disposes of rights to acquire shares to non-associates – section CE 2(3);
  • when an associate of the employee acquires shares – section CE 2(4); and
  • when an associate disposes of rights to acquire shares to non-associates – section CE 2(5).

Sections CE 2(3) to (5) act as specific anti-avoidance rules to support the main rule in section CE 2(2) and ensure that employment income is attributed to the employee in situations when the employee sells the option to acquire shares to another person.

Share acquisition under sections CE 2(2) and (4) are on the basis of a contractual understanding between the employer (or, as noted by EY, the employer’s parent company or trust connected with the employer) and the employee. The rules also apply to schemes where the employee can exercise an option to acquire shares as noted by the Corporate Taxpayers Group. It is therefore reasonable to expect that the employer would have sufficient information to disclose the value of the share benefit and if the employer so chooses, to withhold tax on the benefit.

The submission from Simpson Grierson notes that employment income arises when an employee sells their rights to shares to a third party (section CE 2(3)) or an associate of the employee sells rights to a third party (section CE 2(5)). The employer would in all probability be unaware of the transaction and officials agree the appropriate outcome would be for the employee to remain liable to declare and pay tax on any income from the transaction.

Officials are also recommending in response to submissions other changes to clause 109 (new section 46(6B) of the Tax Administration Act) as previously discussed, which affect employers’ obligations to disclose information about employment income an employee or former employee receives under an employee share scheme.

Recommendation

That the submissions be accepted, subject to officials’ comments. The proposal in the Bill applies to employee share schemes where the employer is not a direct party to the arrangement and to share option plans. Section RD 6(1)(d) of the Income Tax Act and section 46(6) of the Tax Administration Act should also be amended to confirm that employment income arising from an employee disposing of their rights to shares under a share purchase agreement to a non-associated third party are outside the scope of the new rules. The employer remains obligated to disclose employee share benefits (and, if the employer chooses, withhold tax) received by the employee as a result of shares acquired by an associate (for example, in situations when section CE 2(4) applies).


Issue: Employees should be able to request their employer to withhold tax on any employment income

No clause

Submission

(Covisory Partners)

Employees should be able to request their employers to withhold tax on employment income received under an employee share scheme. This gives the employee and the employer the option of having PAYE deducted and provides good symmetry and fairness.

Comment

Submissions received on the officials’ issues paper Simplifying the collection of tax on employee share schemes noted that applying the PAYE rules to withhold tax on employment income benefits received by employees under a share purchase agreement imposes additional costs on employers. More importantly, submissions on the issues paper from employers strongly argued that not all share purchase agreements could accommodate a requirement to collect tax without substantial changes to the terms and conditions of the employee share scheme offer. In response to these arguments the Government agreed that the proposed rules should apply at the employer’s election.

Employees can request their employers withhold tax on employment income, but the employer should not be compelled to comply and should retain the final word as provided for under the Bill.

Recommendation

That the submission be declined.


Issue: Irrevocable election to withhold

Clause 54

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG)

The election should not be irrevocable. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

The election should be reflected in the amendments. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

An irrevocable election creates significant inflexibility for employers. (KPMG)

There need to be mechanisms in place to allow employers to “try out” new rules and apply the withholding rules to some employees and not others (such as former employees). (KPMG)

Comment

Officials expect that employers should only elect to withhold tax if, after proper consideration and appropriate tax advice, it makes sense for the employer to do so taking into account the features of the employee share scheme and the nature of the benefits provided. The irrevocable election is intended to provide certainty for employees and payroll intermediaries about the employer’s decision to use the new rules. It is also intended to prevent employers from “cherry picking” between income years or pay-periods.

However, recognising that the disclosure requirement that complements the employer’s choice about withholding tax under the PAYE rules and the comments in submissions about the impractical nature of making any choice irrevocable, officials agree the Bill should not specify that elections to withhold tax on employee share benefits be irrevocable.

Recommendation

That the submissions be accepted, subject to officials’ comments. The election should not be irrevocable. New section RD 7B should apply on a per employee basis.


Issue: Objection to the requirement to disclose information when employer chooses not to withhold

Clause 109

Submission

(ANZ, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY)

Submitters recognise there is a trade-off for choosing not to withhold tax at source on employee share benefits. Providing the information required will be onerous for some employers. (All submitters)

The disclosure requirements should be deferred until Inland Revenue’s technology systems are redesigned (under Inland Revenue’s Business Transformation programme). (All submitters)

Submitters have also raised the following additional specific concerns with the disclosure requirement:

  • The disclosure should not be made as part of the employer monthly schedule (ANZ) and the method of disclosure should be reconsidered. (Chartered Accountants Australia and New Zealand)
  • Employers should not be required to disclose the value of any benefit received by an employee. (Corporate Taxpayers Group)
  • The disclosure should be on an annual basis. (ANZ, Corporate Taxpayers Group)
  • Internationally mobile employees should not be included in the disclosure. (ANZ)

Comment

The trade-off for allowing employers to choose whether to withhold tax on employment income employees receive under a share purchase plan is a requirement that employers that choose not to withhold declare the value of such benefits in their employer monthly schedule. Disclosing this information in this format allows Inland Revenue to capture information about employees’ income and assists with prepopulating relevant employees’ statement of earnings. The submission from Covisory Partners supported the disclosure requirement.

Information collected through the employer monthly schedule assists Inland Revenue with determining an employee’s tax compliance and correct social policy obligations, such as child support and student loans, and Working for Families entitlements.

The disclosure is intended to improve Inland Revenue’s knowledge about the amount of employment income derived from employee share schemes, and improve taxpayer compliance generally. The proposed means of obtaining this information, using existing data points in the employer monthly schedule, will provide Inland Revenue with the information needed to administer the collection of tax on employee share scheme benefits. The information can be captured in a timely and administratively effective manner without any impact on Inland Revenue’s existing technology platform. Alternative methods of collecting information about employee share scheme benefits, such as annual returns or a letter from the employer setting out the names and tax file of employees receiving a share benefit do not provide the same efficiencies.

Currently, the responsibility for compliance is borne by the employee, and this can affect voluntary compliance.

Officials recognise that for the majority of employers, the allotment of benefits under an employee share scheme will sit outside the employer’s payroll system. Such benefits are, however, either a feature of the employee’s remuneration agreement or other benefit available to the employee through their employment. The employer should therefore have existing systems in place to ensure they meet any contractual obligations under the employee share scheme, including making adequate enquiries if associates are able to acquire shares under the employee share scheme. New tax compliance systems will need to be developed to capture any necessary information such as the employee’s name, tax file number and the tax value of any share scheme benefit to ensure that it can be included when the employer’s payroll is compiled.

The application date of 1 April 2017 for the proposed changes was set recognising that employers and payroll intermediaries would have to develop new compliance systems to meet the new disclosure requirements.

International employees have the same tax obligations as resident employees if their income is subject to New Zealand income tax.

Recommendation

That the submission be declined.


Issue: Employers should not be responsible for disclosing employee share benefits arising from Commissioner-approved share purchase schemes

Clause 109

Submission

(ANZ)

Benefits received under a share purchase scheme that is approved by the Commissioner of Inland Revenue should be excluded from the disclosure requirements.

Comment

The tax value of any share benefits an employee accrues under a share purchase scheme that is approved by the Commissioner of Inland Revenue is specified to be zero under section CE 2(7) of the Income Tax Act. This rule relates to schemes meeting the requirements of sections DC 13 and DC 14. As the benefit from these schemes under the Income Tax Act is zero, requiring employers to disclose the value of benefits received under a Commissioner of Inland Revenue-approved scheme is arguably of little benefit. The employer monthly schedule would not yield any meaningful information about the participants in these share purchase schemes.

Recommendation

That the submission be accepted subject to officials’ comments. Employee share benefits received under a Commissioner of Inland Revenue-approved share purchase scheme meeting the requirements of sections DC 13 and DC 14 are not required to be reported in the employer’s employer monthly schedule.


Issue: Employers should not be responsible for disclosing information about employee share benefits received by former employees

Clause 109

Submission

(ANZ)

Employers should not be obligated to disclose information about employee share benefits received by former employees.

Comments

Unless the employer chooses to withhold tax on any employee share benefit received by a former employee and has appropriate compliance systems in place, the obligation to disclose employee share benefits received by a former employee should not apply. Officials recognise that with former employees, employers would likely incur higher costs to access and maintain the necessary information needed to meet any disclosure requirement as the employment relationship has ended. It would also be practically more difficult for employers to make adequate enquiries about the acquisition of shares by an associate of the former employer under the employee share scheme.

If the employer chooses not to withhold tax, former employees would remain liable to declare and pay tax on any income from employment income from an employee share scheme.

Recommendation

That the submissions be accepted, subject to officials’ comments. New section 46(6B) should not apply to employers in connection with employee share benefits received by former employees.


Issue: Interaction with the Accident Compensation Act

Clause 222

Submission

(Corporate Taxpayers Group, EY, Matters raised by officials)

The consequential change to the Accident Compensation Act 2001 does not appear to be effective in excluding employee share benefits from “earnings as an employee”.

Comment

Changing the method of collecting tax on employee share benefits using the PAYE rules is not intended to alter employees’ current obligations under the Accident Compensation Act. The amendment as contained in the Bill is not effective in achieving this outcome.

The amendment to the Accident Compensation Act is intended to preserve the status quo in that employee share benefits are not considered as PAYE income payments when determining an employee’s earner’s levy liability.

Following discussions with the Ministry of Business, Innovation and Employment and the Accident Compensation Corporation, officials recommend the consequential change in the Bill to the Accident Compensation Act be replaced by a new provision that ensures that any employee share benefit arising under the Income Tax Act is not counted as “earnings of any employee”.

A further change is also recommended by officials so that earnings of an employee-shareholder, as defined in the Accident Compensation Act, exclude amounts of benefits received under an employee share scheme that are subject to withholding under the PAYE rules.

Recommendation

That the submission be accepted. The Accident Compensation Act 2001 should be consequentially amended so that employment income arising under section CE 2 of the Income Tax Act and has tax withheld under section RD 7B is not included in “earnings of any employee” or “earnings as a shareholder employee”.


Issue: Interaction with the Holidays Act

Submission

(Corporate Taxpayers Group, KPMG)

It should be confirmed that employee share scheme benefits are excluded from holiday pay calculations under the Holidays Act 2003.

Comment

Shifting the tax collection point to the source of a benefit received under an employee share scheme does not directly impact on the employee entitlements under the Holidays Act. Entitlements under the Holidays Act are based on the employee’s agreed remuneration package (in accordance with the Holidays Act), not the tax treatment of such benefits. The decision by employers to treat a benefit under an employee share scheme as an “extra pay” does not change whether this is gross earnings or ordinary earnings/average weekly earnings for the purposes of the Holidays Act.

Recommendation

That the submission be declined.


Issue: Drafting matters

Clauses 52 to 54 and 109

Submission

(EY, New Zealand Law Society, Russell McVeagh)

Given that the proposed amendments relate to the PAYE treatment of employee benefits, it is more appropriate to refer to the rules applying to “tax years” rather than “income years”. (EY)

An amendment is required to make it clear that only an employee share scheme for which employers choose to withhold and pay tax on the employees’ behalf is treated as an “extra pay” under the Income Tax Act. As drafted, the rules are circular in effect and this should be removed to give taxpayer certainty. (All submitters)

Comment

Officials consider the reference to “income year” is the better term as it covers a wider set of financial year circumstances. It also aligns with recognition and timing of income in section CE 2 of the Income Tax Act.

Officials will take into account submitters’ useful comments and suggestions on the circular operation of the new rules, and where appropriate, they have been incorporated into the proposed amendments to the Bill arising from the changes recommended in this report.

Recommendations

That the submission on using the term “tax year” be declined.

That the submissions on circularity be accepted, subject to officials’ comments.


Issue: Application date – validation of earlier tax positions

Clauses 2(3), 52 to 54, 109, 204 and 222

Submission

(Chartered Accountants Australia and New Zealand)

Cases where PAYE has been deducted by employers in earlier income years should be retrospectively validated, or alternatively, a “savings” clause should be included.

Comment

The genesis for the proposals in this Bill was an approach from some employers to use the PAYE system to return tax on their employees’ behalf.

Recommendation

That the submission be accepted. Clause 54 should apply for earlier income years to employers that have taken a tax position on the assumption that tax on an employee’s share benefit can be withheld under the PAYE system.


Issue: Amnesty for past non-compliance

Submission

(KPMG)

An amnesty is recommended to allow benefits from an employee share scheme in earlier income years to be returned as income in either the 2016 or 2017 income year’s tax returns without incurring penalties or use-of-money interest.

Comment

Taxpayers have an obligation to comply with the tax rules for benefits received under an employee share scheme. The treatment of such benefits as employment income has been a longstanding feature of the tax system. Anecdotally, documentation associated with the scheme usually describes an employee’s tax obligations in respect of the benefit provided. For these schemes, employees are aware of their tax obligations, although this may not directly transfer to tax compliance.

An amnesty would be unfair on those employees who have to date complied, and filed and paid tax on employment income received under an employee share scheme.

Officials note that penalties are generally reduced for voluntary disclosures.

Recommendation

That the submission be declined.


Issue: Consequential matters

Submission

(KPMG)

The submitter seeks clarity on the following matters:

  • Existing share purchase agreements may not legally allow the employer to reduce the share benefit for the employee’s tax liability. This would result in the employer needing to fund the tax through a “gross-up”, effectively increasing the value of the benefit.
  • The recipient of shares provided under an employee share scheme may be subject to a “blackout” period in which they are not able to dispose of the shares to cover the tax liability. The time when income is earned under the Income Tax Act should be deferred in these circumstances.

Comment

Officials agree with the submitter that taxation at source requires the employer to fund the tax liability arising on the employee share scheme benefit. The simplest way to do this is for the employer to sell a portion of the employee’s shares to cover the tax. Alternatively, the employer may gross up the payment using cash to meet the employee’s tax liability. This alternative would increase the cost on the employer for providing the employee share scheme benefit.

The submitter seeks an amendment that would treat the payment of tax as meeting the employer’s obligations under the scheme.

The voluntary nature of the rules means that officials consider it is a matter that is best left for the employer and employee to agree as to the impact the collection of tax has on the quantum of employee share benefits. The submitter’s comparison with compulsory employer superannuation contribution tax is not valid because the substantive taxation rules for employee share schemes are not being changed. Officials recognise that our view may limit the initial take up of the PAYE rules as a means of ensuring employees meet their tax obligations to new schemes or existing schemes that permit the employer to sell shares on the employee’s behalf.

The second matter relating to “blackout” periods is an example of when taxation at source is problematic for non-cash employment income. Blackout periods would prevent the employer from selling shares to meet the employee’s tax liability. Again, the voluntary nature of the rules would suggest that if blackout periods are likely to be a practical compliance problem for the employer, they should not elect to withhold tax on the employee’s behalf.

Recommendation

That the submission be declined.


Issue: Does the sale of shares to meet tax obligations mean that all the shares vested in the employee are held on revenue account?

Submission

(KPMG)

Selling shares to meet tax obligations could be considered trading and the remaining shares could be treated as revenue account property. A specific legislative exclusion is needed to eliminate this outcome.

Comment

The sale of shares to meet employees’ tax obligations under the PAYE rules should not create a different outcome from the situation if the employee was to sell the shares themselves to meet a tax obligation. If the shares vested in the employee were held on capital account, then officials agree, in principle, that any share disposal to meet tax obligations (independent of whether tax is withheld under PAYE) should not “taint” the remaining shares.

Given the possible matrix of facts that could apply to an employee and their intentions about the shares received under an employee share scheme, officials consider that a specific legislative exclusion is not appropriate. Instead, officials will provide guidance on this question as part of the Tax Information Bulletin item explaining these changes following enactment of the Bill.

Recommendation

That the submission be declined.

 

1 Assumes a benefit vesting on the 15th of the month is not reported in the employer monthly schedule for the 5th of the following month and included in the payment return period of the same date. A longer period (up to 35 days) exists for benefits that vest on the last day of a month, which would not be reported in the employer monthly schedule of the 5th of the second following month. That benefit would, however, be included in the payment return period of the 20th of the following month.