New tax bill to reform taxation of employee share schemes

New tax bill to reform taxation of employee share schemes

Corpoate News Alert

Friday 7 April 2017

A new tax bill, introduced into Parliament yesterday, contains a draft of changes designed to modernise aspects of the current tax regime. Included within these changes are reforms to the taxation of employee share schemes – a recent focus for Inland Revenue following two rounds of public consultation last year.

The Bill also proposes changes to simplify and reduce the compliance costs associated with PAYE.

Links to the Taxation (Annual Rates for 2017 – 18, Employment and Investment Income, and Remedial Matters) Bill and its commentary are available here.

Employee share schemes – what is changing?

Some of the more significant changes proposed by the Bill relate to employee share schemes (ESS). These changes are based on two rounds of public consultation undertaken in May and September last year (discussed in our earlier news alerts, here and here).

By way of a brief summary:

• New timing rules will result in the taxing point for certain ESS being delayed (meaning that capital gains not currently subject to tax may be brought within the tax net). Under the new rules, a share scheme benefit will generally only become taxable when:

o There is no real risk that beneficial ownership of the shares will change, or that the shares will be required to be transferred or cancelled;

o The employee is not compensated or protected against a fall in the value of the shares; and

o There is no real risk that there will be a change in the terms of the shares affecting their value.

• Employers that provide share benefits to employees will be entitled to a deduction equal in amount and timing to the income derived by the employee under the new rules.

• The exemption for certain widely-held share purchase schemes will be revised.

• Under transitional rules included in the Bill, share awards will be excluded from the new rules if they were granted or acquired under an ESS before 12 May 2016 or were granted or acquired under an ESS prior to the date that is 6 months after the Bill receives Royal Assent (provided that the relevant taxing date is before 1 April 2022 and that the grant or acquisition of shares was not for a purpose of avoiding the future application of the new rules).

Next steps

We will provide further analysis on the ESS reforms in a later news alert and at seminars in Auckland and Wellington (dates to be advised). In the meantime, if you have any questions about the Bill or your ESS, please contact one of our experts.

Authors: Andrew Ryan, Mark Forman, Rodney Craig, Cameron Taylor, Jeremy Muir, Gillian Service, Megan Richards, Sacha Oudyn, Mark Stuart

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