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Tax Law Update – Tax treatment of employee share schemes: Update on IRD proposals

Home Insights Tax Law Update – Tax treatment of employee share schemes: Update on IRD proposals

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Contributed by: Brendan Brown, Fred Ward and Shaun Connolly

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Published on: September 07, 2016

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Introduction

In May this year Inland Revenue released an Issues Paper Taxation of employee share schemes, which proposed significant changes to the tax treatment of arrangements under which employees acquire shares in their employer. In particular, the Issues Paper:

  • proposed changing the taxing point from the date of initial acquisition of the shares to the date on which any conditions are satisfied and the employee obtains unrestricted ownership of the shares;
  • as a consequence of the first point, proposed calculating the taxable income to the employee by reference to the value of the shares at the time the conditional period ends (meaning any increase in the value of the shares during that period would be subject to tax), with the employer being entitled to a deduction for the same amount; and
  • considered whether the current concessionary treatment for certain widely offered schemes (often referred to as “DC 12 schemes”) should be removed or amended.

Inland Revenue has now released an update on the proposals. Key points from the update are as follows:

  • The proposal to defer the taxing point, and therefore bring within the tax net any changes in value during the period before unrestricted and unconditional ownership of the shares vests in the employee, remains. That is despite the vast majority of submissions on the Issues paper being against this proposed change. Some further guidance on which contingencies will and will not defer the taxing point is provided, however a proposed statutory test has still not been articulated.
  • The proposal to allow a deduction to the employer equal to the taxable income to the employee (and have taxable income for the employer if the shares decline in value) also remains. The update paper also clarifies that certain deductions available to the employer under current law would no longer be allowed.
  • A simplified exemption for widely offered schemes is proposed whereby no taxable income would arise for the employee
    provided that:
    • the scheme is generally available to all employees;
    • the scheme has a vesting period of at least three years;
    • the cost of the shares to the employee is less than $5,000 pa and no more than $2,000 less than the market value; and
    • an interest free loan facility is made available to employees if there is a cost to the employee of acquiring the shares.
  • No deduction will be available to the employer in respect of widely offered schemes eligible for the exemption.
  • The transitional and grandfathering rules for existing schemes will be slightly more generous than originally proposed.

The updated proposals regarding widely offered schemes will likely be welcomed by employers as they will provide greater flexibility and less complexity than the current rules. However, the proposals for other share schemes look set to result in significant additional complexity and are likely to result in a number of companies modifying or terminating the share-based components of their remuneration packages.


This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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