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6 Tips For Understanding Share Scheme Taxation for Employees

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An employee share scheme is an increasingly popular way for businesses to attract and retain talent. This is particularly true for start-ups, who often compete with larger, more established companies with significantly more capital to spare on hiring staff. 

In New Zealand, these schemes often involve the issuance of company shares to employees as part of their remuneration package. Despite the benefits of such schemes, it is crucial to understand their tax implications. This article will take you through six tips for understanding the tax implications of share schemes on employees in New Zealand.

1 – Understanding the Types of Share Schemes

First, it is important to understand the various share schemes. The most common types of share schemes in New Zealand include those within the below table:

Employee Share Purchase Plans (ESPPs)ESPPs allow employees to purchase company shares at a discounted price. This often occurs through payroll deductions. The discount provided is a benefit that can be subject to taxation.
Restricted Share Units (RSUs)RSUs grant an employee the right to receive company shares at a future date. The taxation of RSUs is usually triggered when the shares vest and are accessible to the employee.
Share Option PlansShare options allow employees to buy company shares at a predetermined price within a specified period. Taxation is generally triggered when the options are exercised (i.e., when they are sold)

2 – Considering Taxation at Acquisition

One of the critical points for employees participating in share schemes is understanding the taxation at the point of acquisition.

For ESPPs, the discount provided on the shares is subject to income tax. Therefore, employees must understand the calculation of this benefit, as it directly influences tax liabilities. 

On the other hand, RSUs are taxed at the time of vesting. The value of the vested shares is treated as income and, therefore, subject to income tax. Participating employees must be careful of the timing of vesting events to plan for potential tax obligations.

Finally, when employees exercise share options, the difference between the exercise price and the market value of the shares is considered income and subject to taxation.  

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3 – Understanding Deferral Strategies

In some cases, employees can defer the taxation of benefits received through share schemes. This provides for a degree of financial flexibility. However, they should consider the potential downsides. 

For example, participants in ESPPs might have the option to defer the taxation of the discount until the sale of the shares. However, market fluctuations will impact the tax liability and should be treated cautiously.

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On the other hand, RSU holders may be able to defer the receipt of shares upon vesting. However, this means delaying taxation, which again needs to be treated with caution, given the impact on the employee’s overall tax position. 

4 – Capital Gains Tax Considerations

Currently, New Zealand does not have a comprehensive capital gains tax. This means that capital gains are part of the regular profit for the year and subject to standard Companies Income Tax.

However, the proceeds from a sale of shares acquired through an employee share scheme may still be subject to tax. This is more likely to be the case if the shares are sold within a short acquisition period.

As such, employees may need to hold the shares for a certain period to qualify for tax-free gains.

5 – Knowing Your Compliance and Reporting Obligations

Compliance with tax laws is paramount for employees participating in share schemes. Failure to meet these obligations may result in penalties and further tax liabilities. For example, those who exercise share options must report this to the Inland Revenue Department (IRD) for compliance purposes. 

This means keeping detailed records of all acquisitions and sales is essential for taxation reporting. 

6 – Seeking Professional Advice on Share Schemes

Share scheme taxation is a complex area. As such, seeking advice from a professional is highly recommended. This might include engaging a tax advisor, accountant or expert lawyer who can help you understand the legal implications of tax considerations.

Given the complexities of share scheme taxation, seeking professional advice is strongly recommended.

Key Takeaways

Employee share schemes are an increasingly popular way for businesses to attract and retain talent. Despite the benefits of such schemes, it is crucial to understand their tax implications. Some key tips for understanding share scheme taxation in New Zealand include understanding the types of share schemes, considering taxation at acquisition, understanding deferral strategies, considering capital gains tax and knowing compliance and reporting obligations.  Naturally, it can also pay off to obtain professional legal advice.

If you need assistance understanding the complex area of taxation for employee share scheme participants in New Zealand, you can contact LegalVision’s experienced business lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page

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