Efforts to simplify taxation of Employee Share Schemes commendable – with reservations

​Efforts to reduce the complexity of the tax treatment of employee share schemes (ESS) are commendable but current proposals by Inland Revenue (IR) go too far, says Chapman Tripp.

Chapman Tripp is commenting on the Issues Paper - “Taxation of employee share schemes” – released in May this year and which Chapman Tripp has submitted on.

“While we broadly support the approach the Issues Paper takes in respect of tax-neutrality for arrangements providing similar economic outcomes, we consider that it is simplistic to assume that cash remuneration and ESS should be taxed in a consistent manner in all cases,” said Chapman Tripp special counsel Bevan Miles who, in collaboration with partners David Patterson and Roger Wallis, prepared Chapman Tripp’s submission.

“The Issues Paper appears to assume that ESS are simply a form of employee remuneration and substitutable for cash remuneration.  This does not recognise that ESS can, and often do, have the further purpose of enabling employees to participate as shareholders in the business,” he said.

“Share ownership can promote wider employee engagement in the success of the business, greater interest in the company’s share price and more interest generally in financial matters, the operation of financial markets and deepening financial literacy.

“None of these benefits can be provided by a cash bonus scheme.”

Further consideration needed to be given to the question of whether gains on shares were a benefit arising from employment (and should be taxed as employment income) or a gain made in a capacity of shareholder. 

“We understand that IR takes the view that no employment income would arise where shares are issued to an employee for market value and the employee is required to dispose of those shares (at market value and for a gain) on leaving employment.

“A different tax outcome would arise where shares vest in three years’ time even if the only condition to vesting is that the employee remains in employment at that time.  The proposals in the Issues Paper would tax the employee on any increase in the market value of the shares to the date of vesting. 

“In the absence of any other features providing downside protection to the employee, we do not see this second example as materially different from the first and don’t see a justification for taxing the two differently,” Bevan Miles said.

The full submission can be accessed here.

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Chapman Tripp submission on Taxation of Employee Share Scheme  

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