In a bill introduced last year, New Zealand’s government introduced new, and compulsory, tax reporting obligations for employers who offer their employees the opportunity to participate in employee share schemes (ESS). The bill, which came into effect on 1 April 2017, also includes provisions for the withholding of taxable income at source - meaning employers must decide whether, and how, to implement these rules as part of their standard pay process.
What is an Employee Share Scheme?
ESS (Employee Share Scheme) is essentially a way to provide remuneration in a manner which both benefits employees, and aligns their interests with those of their company. Given their long-term potential, ESS is designed to incentivise loyalty, and help cash-poor businesses attract talented personnel. ESS represents a popular benefit to employees in territories all over the world, and may be offered under salary sacrifice arrangements, or paid for upfront, sometimes even at a discount.
In New Zealand, ESS schemes have become an important part of the business landscape. However, while the ESS themselves have evolved and expanded over time, the tax legislation originally introduced to manage them has become out-dated, resulting in over and under-taxation. The new legislation seeks to address that problem.
Changes to ESS Reporting
Under previous legislation, ESS benefits were not taxed at source under the pay-as-you-earn (PAYE) system. Employees who were part of an ESS were required to report their income to the Inland Revenue themselves, and pay any associated tax due. From 1 April 2017, new disclosure and withholding regulations have been implemented - with the following effects:
- Employers must now report ESS share benefits as part of the PAYE system.
- Employers may now elect to withhold PAYE on any taxable income as part of their standard payroll process, and remit that tax to the Inland Revenue.
- For the purposes of PAYE returns and the Employer Monthly Schedule (EMS), the value of ESS benefits are to be reported as employment income.
It’s important to note that the decision to withhold PAYE on ESS benefits is optional - but may only be taken by the employer, not the employee. Employers who do elect to withhold will essentially remove the employee obligation to report and pay tax on their share income - if they elect not to withhold, that obligation will, of course, remain. An employer’s decision will depend on a variety of factors, including the rules of the ESS plan itself, and the capabilities of the employer’s payroll system to integrate the withholding mechanism.
Worth noting is an exception for large employers who file PAYE twice a month. In these cases, employees are treated as having derived their ESS income in the period following the one in which they received the benefit - so disclosure of the benefit to the Inland Revenue is therefore also deferred to the period following that in which it is received.
Whether they choose to withhold or not, employers must inform employees of their decision so that appropriate tax obligations can be fulfilled by every party.
ESS reporting involves a range of practical issues and the process can represent a significant administrative burden if handled inefficiently or incorrectly. New Zealand’s Inland Revenue is making an on-going effort to scrutinise ESS schemes more closely, concerned at a lack of transparency in the process, and the frequency of underpayment by employees. With all that in mind, employers must look closely at the details of both their ESS and their payroll process within this new legislative environment to ensure they meet compliance requirements.
While the new rules carry mandatory reporting regulations, the flexibility of the withholding mechanism means that employers can and should find a solution, which works with their existing infrastructure. ESS withholding isn’t designed to be a chore: by integrating it into your existing payroll you may be able to streamline the entire process, ensuring you meet your tax obligations more efficiently, and even reduce the time and costs associated with payroll administration.
If your business is unsure about withholding ESS income, or need advice on any aspect of New Zealand’s tax and payroll landscape, check out our dedicated Insight Guide today or contact us at firstname.lastname@example.org.