Chapter 8 - Administration and compliance
8.1 A statutory deferral option for start-up companies presents design issues which will need to be addressed in order to ensure compliance without imposing undue costs for employers, employees and Inland Revenue.
8.2 There is a range of options that could be implemented, with varying levels of compliance burden for taxpayers. For example, at one end of the spectrum, the regime could require Inland Revenue to hold the shares subject to the employee share scheme, and these would only be released to the employee (and the employer would only be entitled to a deduction) once the tax was paid.
8.3 At the other end of the spectrum, the regime could be entirely self-assessed by employers and employees.
8.4 A middle ground would be a regime which is self-assessed but with obligations on employers and/or employees to provide certain information to Inland Revenue about employee share scheme benefits subject to the deferral regime.
8.5 Prior to 1 April 2017, there were no specific reporting requirements for employers offering, or employees participating in, ESS. From 1 April 2017 as a result of amendments in the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016, employers have an obligation to determine the amount of their employees’ ESS income and report it monthly as part of the EMS.
8.6 However employers are not required to provide specific details of the share scheme benefits provided.
8.7 The administration of the statutory deferral regime would be aided greatly by taxpayers providing Inland Revenue with information in relation to the scheme. For example:
- What is the structure of the ESS that has been offered to employees (is it an option scheme, shares scheme, loan-funded share schemes)?
- Which shares are subject to the deferral regime (if more than one scheme is operated if on a scheme-by-scheme basis or the election is on an employee-by-employee basis)?
- Which shares subject to the deferral regime are still to reach a taxing point?
- Which shares have reached a taxing point and, for these shares, the assessable income arising to the employee at that time (if any) (recognising that this information should already be included in the EMS – albeit as part of an aggregate figure)?
8.8 If an additional level of reporting were required for a start-up deferral scheme, this could be reconciled with the EMS reporting so there is not a duplicate reporting obligation.
8.9 The obligation to report this information to Inland Revenue could fall on either employers or employees. Alternatively, the obligation to report could be imposed on someone who has no financial interest in the ESS, such as a scheme trustee. However, a requirement for a trustee does not sit well with the concept that deferral would be used primarily by start-up companies, which will generally wish to minimise overhead costs and thus would be less likely to employ the services of a professional trustee.
Requiring employers to report
8.10 Some submitters have previously suggested that if a deferral scheme is adopted, then employers should have the obligation to report to Inland Revenue in relation to the scheme.
8.11 This is because employers are better placed to design the scheme terms and conditions to ensure they can control when the deferred taxing point occurs and that they have the necessary information to fulfil reporting obligations. Employers are also likely to have greater resources at their disposal to manage the collection of the relevant information.
8.12 Further, it would be more efficient to impose compliance cost on one employer who can provide employee share scheme information for a number of employees, than to impose those compliance costs on each individual employee. As employers will already have to report some employee share scheme information as part of the EMS under the new rules on the collection of tax on ESS, it would make sense for employers to have all of the reporting obligations.
Requiring employees to report
8.13 Employees themselves could personally be responsible for reporting certain ESS information to Inland Revenue, and be required to notify Inland Revenue when certain events have occurred (for example, when they have elected to defer, or when they have sold or transferred their shares).
8.14 However, as noted above, generally employers are more able to efficiently bear compliance costs than employees. Filing returns and paying tax directly to Inland Revenue imposes compliance costs on employees, more so if they are unused to the process. These compliance costs could affect voluntary compliance and perceptions about the integrity of the tax system. From Inland Revenue’s perspective, if an individual employee does not return the income from an ESS, the Commissioner has to expend resources to collect a potentially small amount of tax from that individual.
We are interested to hear from readers:
- What kind of reporting and record keeping requirements would be necessary and appropriate to ensure that income and deductions from tax deferred share schemes is appropriately returned, and tax is paid?