Tax reform of employee share schemes Overview of the proposed new - - PowerPoint PPT Presentation

Tax reform of employee share schemes

August 2017

Overview of the proposed new rules

Andrew Ryan Sacha Oudyn Tax Partner Tax Special Counsel

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New rules proposed

Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill

• Framework: employee income and employer deductions
• Unconditional share schemes
• Unconditional option schemes
• Conditional share schemes and option-like arrangements
• Transitional rules
• Valuing the share benefit
• Start-up companies, widely offered schemes and other matters
• Timeframes

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Framework: employee income and employer deductions

• Under the new rules:
• An employee will be treated as receiving a taxable benefit under a

share scheme when they have economic ownership of the shares (referred to as the “share scheme taxing date”)

• The taxable benefit received by the employee is the value of shares

at the share scheme taxing date less any amount paid for that benefit

• The employee will be entitled to a deduction matching (in timing and

amount) the employee’s taxable income

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Unconditional share schemes

• Taxed at issue on difference between market value of shares

and amount paid

• No changes proposed

Tax-free capital gains

Market Value

Shares issued

Time

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Unconditional option schemes

• Taxed at exercise on difference between market value of shares

and amount paid

• No changes proposed

Tax-free capital gains Taxable Options issued Shares issued on exercise

Market Value Time

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Conditional share schemes and option-like arrangements – currently

• Taxed at issue on difference between market value of shares

and amount paid

• Changes proposed

Conditions satisfied

Market Value Time

Shares issued Tax-free capital gains

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Conditional share schemes and option-like arrangements – proposed

• Taxed at point of economic ownership, on difference between

market value of shares and amount paid

Market Value Time

Economic ownership Shares issued Taxable Tax-free capital gains

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Economic ownership

• Exists where the employee’s ownership or retention of the shares

is no longer subject to any conditions or contingencies

• The employee’s shareholding should be on substantially the

same basis as non-employee shareholders

• Conditions and contingencies can include:
• possible loss of the shares if the person does not remain employed

for a future period, of it the company’s performance does not meet certain benchmarks

• downside price protection
• provision of a limited-recourse loan to finance purchase of the

shares

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Transitional rules

• New rules will not apply to:
• shares granted or acquired before 12 May 2016; or
• shares granted or acquired within six months of the changes being

enacted (provided that the shares are not granted with a purpose of avoiding the new rules and that the employee acquires economic

• wnership before 1 April 2022)

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Valuing the share benefit

• Under the new rules, the value of the share benefit will need to

be determined at the appropriate time

• Valuing shares may be difficult where the company is not listed
• Inland Revenue has released an operational statement setting
• ut acceptable valuation methodologies
• Options for unlisted shares:
• Arms’ length value, independently determined
• Recent valuation that has been adjusted
• Other appropriate valuation method applied by appropriate person in

the company

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Start-up companies, widely offered schemes and other matters

• An Officials’ Issues Paper on the taxation of employee share

schemes for start-up companies has been released

• Proposal to allow start-up companies to defer share scheme taxing

point

• Current exemption for certain widely offered schemes will be

amended and existing 10% notional interest deduction for employers will be repealed

• Other matters considered in new rules:
• Available Subscribed Capital consequences of an employee share

scheme

• Relevance of treasury stock rules
• Interaction with Foreign Investment Fund rules

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Timeframes

• Draft legislation
• Currently before Select Committee
• Report due 24 November 2017
• Enactment expected before 31 March 2018
• Officials’ Issues Paper on taxation of employee share schemes

for start-up companies

• Released in May 2017
• Submissions closed on 12 July 2017

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Further information

If you would like to discuss the these tax reforms in further detail, please contact one of our experts. ANR SXO