The Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill was introduced in New Zealand’s Parliament on 6 April 2017. The Bill proposes amendments to New Zealand’s tax laws relating to the collection of employment and investment income information, reforms to the taxation of employee share schemes, and includes numerous other policy and remedial changes to New Zealand’s tax legislation.
The proposals relating to the taxation of employee share schemes follow Inland Revenue’s “Revenue Alert” on 13 November 2015 and two rounds of public consultation in May and September 2016.
Under existing law, the taxation of schemes in which employees acquire shares in their employer is straightforward. In short, the amount of taxable income arising for an employee equals the market value of the shares acquired by the employee, less the amount paid or payable by the employee for those shares. That income is subject to tax at the employee’s marginal tax rate in the income year in which the shares are acquired.
In recent years, Inland Revenue has challenged a number of share schemes, including on tax avoidance grounds, resulting in a degree of uncertainty regarding their tax treatment. Inland Revenue was concerned that Parliament’s intention, that the taxable value of shares be determined at the time they are acquired, was being avoided due to the operation of some conditional reclassification schemes or the use of arrangements that were structured as share acquisitions but commercially and economically had features more akin to options.
Two key proposals relating to employee share schemes in the Bill are:
- deferring the point of taxation for employees until the “share scheme taxing date” rather than the time of acquisition; and
- allowing employers a deduction for the provision of shares under a share scheme (limited to the extent to which the provision of shares gives rise to income for the employee).
The “share scheme taxing date” is defined to be the first date when under the scheme:
- 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 (generally this will be at the end of any lock-up or vesting period);
- the employee is not compensated for a fall in the value of the shares; and
- there is no real risk that there will be a change in the terms of the shares affecting their value,
but if the benefits are cancelled or transferred to a non-associate before those events occur, then the “share scheme taxing date” is at the time of the cancellation or transfer.
The deferral of the taxing point will result in changes in value of the shares between their acquisition date and the share scheme taxing date being brought to tax in the hands of the employee. The employer will in most cases be entitled to a deduction for an equivalent amount.
The changes to the rules relating to employee share schemes (if enacted) will take effect from the date of enactment. However, Inland Revenue has acknowledged that share schemes are often long-term arrangements. Accordingly, the Bill contains transitional provisions for existing and contemplated employee shares schemes. Generally, the new rules will apply to benefits under employee share schemes where the taxing point under the current rules (ie, the acquisition of shares) has not occurred before the day six months after enactment of the Bill.
Multi-national corporations operating in New Zealand often offer participation in global share schemes to their New Zealand based employees. The terms of such global schemes are often not designed with New Zealand tax law in mind. The proposed changes (if enacted) will likely require the documentation disclosed to New Zealand based employees in respect of such global schemes to be updated to reflect the changes.
This article first appeared in the International Tax Review here.
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