Employee share schemes (ESS) are a popular way for companies to incentivise and reward their employees. These schemes can include benefits paid in cash, which come with specific obligations for employers. Understanding these obligations is crucial to ensure compliance with tax laws and to avoid potential penalties.
Inland Revenue has issued an interpretation statement on Employer obligations for employee share scheme benefits paid in cash. The statement considers the following questions:
What is a cash-settled ESS benefit?
Is an employer required to withhold tax from a cash-settled ESS benefit?
Is an employer required to deduct student loan repayments from a cash-settled ESS benefit?
What are an employer’s KiwiSaver obligations for a cash-settled ESS benefit?
1. Tax Treatment of ESS Benefits
Any benefit received under an employee share scheme in connection with a person’s employment is considered income. This includes cash benefits paid as part of the scheme. Employers must ensure that these benefits are correctly reported and taxed.
2. Payday Reporting Requirements
The payday for an employee share scheme benefit is the 20th day after the taxing point for the benefit received by the employee. This is crucial for determining the due date for providing employment income information to Inland Revenue.
3. Disclosure Obligations
From 1 April 2017, employers are required to disclose the value of share benefits employees receive under employee share schemes, including any tax withheld under the PAYE rules. This information must be captured on the employer’s employment income information returns.
4. Information to be Provided
Employers must provide specific details to Inland Revenue, including:
The value of the benefit to the employee.
Any tax withheld from the benefit if the employer has chosen to do so under section RD 7B of the Income Tax Act 2007.
5. Exemptions
There are certain exemptions to these reporting requirements:
Benefits received by former employees if the employer has not chosen to withhold tax.
Benefits arising under tax-exempt, widely offered employee share schemes.
6. Calculation of ESS Benefits
The benefit received by an employee under an ESS is calculated using the formula provided in section CE 2(1) of the Income Tax Act 2007:
Share Value - Consideration Paid + Consideration Received - Previous Income
Employers must ensure that this calculation is accurate to determine the correct amount of income to be reported and taxed.
7. Withholding Tax
Employers have the option to withhold tax on ESS benefits. If they choose to do so, they must report the amount of tax withheld along with the value of the benefit. This helps in ensuring that the correct amount of tax is paid on these benefits.
8. Record Keeping
Employers must maintain accurate records of all ESS benefits provided to employees, including the value of the benefits and any tax withheld. These records are essential for compliance and for providing accurate information to Inland Revenue.
9. Penalties for Non-Compliance
Failure to comply with the reporting and withholding requirements can result in penalties for employers. It is crucial to stay updated with the latest regulations and ensure that all obligations are met to avoid any legal or financial repercussions.
Conclusion
Employee share schemes are an effective tool for motivating and retaining employees, but they come with specific obligations for employers, especially when benefits are paid in cash. By understanding and adhering to these obligations, employers can ensure compliance with tax laws, avoid penalties, and maintain a transparent and fair compensation system for their employees. Regularly reviewing and updating your processes in line with the latest regulations, such as those outlined in IS 24/05, is essential for smooth and compliant operation of employee share schemes.
Given the issue of the Interpretation Statement, if you haven’t had a recent review of your Employee Share Scheme get in touch with us.
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