Taxation of employee share schemes
A benefit an employer provides to an employee under a share purchase agreement is “employment income” for income tax purposes. A benefit arises under a share purchase agreement when the amount the employee is required to pay for the shares is less than the market value of the shares. For example, if an employer were to offer 50,000 shares to an employee at a $1 per share discount on their current market value, the employee would have a $50,000 benefit due to paying less than the market value of the shares acquired. This $50,000 benefit is taxable income of the employee. From 1 April 2017, new rules will apply that will permit employers to elect to have this income taxed under the PAYE rules.
Most employment income or benefits (such as salary and wages or the use of a company car) are subject to tax at source under either the PAYE or the FBT rules. Under the old rules, a benefit received from a share purchase agreement was subject to neither PAYE nor FBT. The employee had to file a tax return including and pay the tax on the benefit. Employees could face issues meeting the tax liability, especially when they had received shares where there was no or limited ability to sell some of the shares to meet the tax liability. Inland Revenue had compliance concerns with this approach, as it was concerned many employees were unused to filing returns and paying tax directly to Inland Revenue, meaning the obligations that resulted from the receipt of the share purchase benefit were not always well understood. Inland Revenue was also concerned that it lacked the necessary information to ensure employees were correctly meeting their obligations.
Under the new rules, an employer can choose to use the PAYE system and withhold tax on any employment income an employee receives under a share purchase agreement using the PAYE system. Further, an employer will be required to report to Inland Revenue the value of any benefits an employee receives under a share purchase agreement via the employer monthly schedule (EMS). The requirement to disclose the share purchase agreement benefit via the EMS exists even when the employer elects not to account for the tax on the resulting income through the PAYE system. Where the employer elects not to subject the benefit to PAYE, the employee will remain liable to file a tax return to disclose the benefit and pay tax on it.
If you have any questions regarding how these changes will affect your current employee share schemes or a proposed scheme, please contact your local Findex tax adviser.