This GMS Flash Alert discusses the mechanics of paying tax on, and disclosing information about, Employee Share Scheme (ESS) benefits in New Zealand, which will change from 1 April 2017.
There are two important issues concerning changes to the taxation of employee share schemes (ESS) in New Zealand, which employers need to be aware of:
If you have employees who are members of an ESS, and have spent any of the vesting period performing employment services in New Zealand, the changes described in this newsletter could impact you.
From 1 April next year, employers can elect to use the Pay As You Earn (PAYE) withholding system to deduct tax on ESS benefits (similar to other forms of employee remuneration).1 This is aimed at removing the tax compliance obligations on employees, but also, for Revenue’s benefit, to make sure these amounts are being correctly taxed.
From 2017, there will be mandatory disclosure of ESS benefits to the New Zealand Inland Revenue.2 This means your organization’s systems and processes for handling ESS tax compliance obligations may need to change.
Appropriate processes and policies will need to be developed to enable the compensation team and the payroll team to understand what information is needed, and by when, to comply with New Zealand tax reporting (and potential withholding) obligations for ESS.
In New Zealand, ESS benefits represent taxable income to employees. Currently, employees are responsible for disclosing any ESS benefits received in their annual income tax returns and for paying tax on these amounts.
This requires employees to estimate the amount of ESS benefits likely to be received for purposes of calculating their provisional tax payable (if any). If the value of ESS benefits is under-estimated, resulting in under-payments of provisional tax, this can result in interest charges and end-of-year tax liabilities for employees.
At the same time, there is no separate disclosure obligation on employers in relation to ESS benefits paid to the New Zealand Inland Revenue (e.g., to enable it to determine whether employees are in fact declaring these amounts as income and paying tax thereon).
The government has introduced new rules to improve the collection of tax on, and information in relation to, ESS benefits. The key focus is shifting the burden of reporting (and collecting tax) on ESS benefits from employees to employers.
From 1 April next year, employers will have the option to elect to use the Pay As You Earn (PAYE) withholding system to deduct tax on ESS benefits (similar to other forms of employee remuneration). This is designed to remove the tax compliance obligations on employees and also to make sure that these amounts are being correctly taxed.
There is also a new requirement for employers to disclose the value of ESS benefits an employee receives to Inland Revenue. Reporting will be via the PAYE system (the employer monthly schedule). This disclosure obligation is mandatory for employers that offer ESSs, regardless of whether the employer has elected to withhold PAYE.
Any ESS benefit that vests or is exercised on or after 1 April 2017 will be captured by the new mandatory disclosure requirements (and optional PAYE withholding mechanism).
Wrinkles and Glitches May Be Anticipated
Due to the way the disclosures will need to be made (particularly if an employer does not elect to withhold PAYE on ESS benefits), it is anticipated by Inland Revenue that there will be reconciliation errors in employer monthly schedules. Inland Revenue is currently undergoing a transformation of its business processes and technology platforms. This includes the processes and technology underlying the current PAYE system. In the medium term, it is anticipated that changes to the PAYE system should address these reporting issues.
However, in the short term, employers will need to be prepared to deal with tax authority inquiries in relation to reconciliation errors and mismatches.
Next Steps for Employers: Payroll, Disclosing, and Withholding
Your payroll team and systems will need to be geared-up:
The payroll team responsible for New Zealand employees will need to be abreast of the following:
1 See: Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016.
In addition, readers may also refer to “Employee Share Schemes: Simplifying the Collection of Tax on Employee Share Schemes,” from Inland Revenue, Tax Policy.
For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in New Zealand:
Tel. +64 9 367 5926
Tel. +64 4 816 4518
Tel. +64 9 367 5940
The information contained in this newsletter was submitted by the KPMG International member firm in New Zealand.
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