IRD proposal could mean tax on employee shares

May 16, 2016, 5:46 AM
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A Dunedin tax expert is warning Inland Revenue is proposing a new rule which may mean the introduction of a capital gains tax on shares granted to employees.

Dunedin Deloitte tax partner Peter Truman said Inland Revenue put taxpayers on notice there were “certain share schemes” it felt were bordering on tax avoidance.
Inland Revenue was proposing to remove that tax avoidance uncertainty by taking a new approach: The tax treatment of employment income paid in shares should be consistent with the taxation of employment incomes in cash, he said.
“This seems like the ultimate example of ‘be careful what you wish for’, as officials are meeting taxpayers’ complaints about uncertainty – which was caused by Inland Revenue – with a hammer.”
The Inland Revenue paper talked about employment income being treated as a tax-free capital gain.
But the only portion of shares not taxed was the capital gain element, and New Zealand did not tax capital gains, Mr Truman said.
Neither the employer nor the employee could determine the market value of shares.
That was a function of the capital markets.
If shares grew in value, like any other investor an employee should be able to take it as a capital gain.
Officials were of the view if there was any conditional element to a share scheme, then it represented a reward for future work and should be taxed when conditions were fulfilled.
Inland Revenue compared it to a conditional bonus but neglected to recognise the monetary remuneration was taxed on a cash basis.
If a bonus was paid upfront, with an associated bonding period, it was all taxed upfront as a lump sum.
Shares were offered to employees to align interest for growth in the company, he said.
The issues paper did not include any significant comparisons.
It was the understanding of Mr Truman the contingent share schemes officials took offence with were taxed in the exact same way in Australia as they now were in New Zealand.
“Any change to those tax rules will put us out of step with Australia – in a bad way. Having a misalignment in treatments between the two countries is frustrating for employers with employees on both sides of the Tasman.”
The issues paper also noted there was currently an antiquated widely-offered share scheme concession contained within the Income Tax Act.
While not conclusive, the issues paper indicated there was a preference among officials to do away with those schemes rather than trying to modernise the rules to reflect current circumstances.
“It would have been great to see the tax system supporting greater employee participation in companies, given not only the productivity gains such can produce, but also the wider benefits such as increased financial literacy and understanding of capital gains by employees,” Mr Truman said.

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