Skip to main content
Inland Revenue
Inland Revenue
Inland Revenue

Tax Policy

Search tips
Taxation KiwiSaver Student Loans and Remedial Matters Bill

Other policy and remedial changes

EMPLOYEE SHARE SCHEMES – DEFINITION OF MARKET VALUE

(Clauses 69 and 71)

Summary of proposed amendment

The proposed amendment expands the definition of “market value” in the Income Tax Act 2007 (ITA) for the purposes of the employee share scheme (ESS) rules to include a 5-day “volume weighted average price” or an equivalent, and other methods accepted by the Commissioner of Inland Revenue. This will make it easier for companies to value their shares, reducing compliance costs and improving accuracy of valuations.

Application date

The proposed amendment would apply retrospectively from 29 September 2018 for the purposes of the general ESS rules, the date from which the reforms to the general ESS rules came into effect. For the purposes of the exempt ESS rules, the proposed amendment would apply from 29 March 2018, being the date the amendments to those rules came into effect.

Key features

Currently, the definition of “market value” in the ITA is the “middle market quotation”. For the purposes of valuing a share benefit received by an employee under the ESS rules, the definition will be expanded to include:

  • the 5-day volume weighted average price or a comparable measure; or
  • any other measure accepted by the Commissioner of Inland Revenue (for example, one of the methods set out in the Commissioner’s statement Valuation of employee share schemes (CS 17/01)).

Background

For the purposes of valuing listed shares, “market value” is currently defined in section YA 1 of the ITA as being the “middle market quotation”. This is the average of the best buying and selling prices quoted by market makers, taken at the close of the market each day. Obtaining this middle market quotation is reported to be difficult in practice, and a much more common and practical measure is a “volume weighted average price”. This is equal to the total value of the shares traded divided by the number of shares traded over a particular time period. In her operational statement CS 17/01, the Commissioner accepts a 5-day volume weighted average price (among other methods) for valuing shares obtained under an ESS.

Expanding the definition of “market value” for the purposes of the ESS rules to include these methods will make it easier for companies to value their shares and reduce compliance costs.

TAKEOVERS AND SIMILAR REORGANISATIONS UNDER EXEMPT EMPLOYEE SHARE SCHEMES

(Clause 70)

Summary of proposed amendment

The proposed amendment adds an exception to the “restricted period” in the exempt employee share scheme (ESS) rules in the Income Tax Act 2007 (ITA) for takeovers and similar reorganisations.

Application date

The proposed amendment would apply retrospectively from 29 March 2018, being the date the exempt ESS rules came into effect.

Key features

Section CW 26C(7) of the ITA is amended to add an exception to the restricted period for the case of takeovers or other similar share reorganisations that are outside the control of the employee and apply equally to all shares.

Background

In order for an exempt ESS to qualify as such, the terms of the scheme must provide that shares are held by the employer (or a trustee) for a period of time – generally three years – before they can be released to employees.

Exempt ESS trust deeds and similar constituting documents often provide for takeovers and other corporate reorganisations. There is concern that if an exception to the restricted period for takeovers or similar share reorganisations is included in the constituting document, the scheme may fail to meet the exempt ESS criteria. There is also a concern that if a takeover does occur, which can include the shares of minority interests being compulsorily acquired, this could breach the restricted period and mean the scheme fails to meet the statutory criteria; the shares may then become taxable at that time. This is despite these events being outside the control of the employee.

Adding an exception for takeovers and similar reorganisations to section CW 26C(7) of the ITA will ensure that companies and participating employees are not penalised for such uncontrollable events.

EMPLOYEE SHARE SCHEMES – FLEXIBILITY TO ALLOW EMPLOYEES TO KEEP SHARES IF THEY LEAVE EMPLOYMENT

(Clause 70)

Summary of proposed amendment

The proposed amendment to the exempt employee share scheme (ESS) rules in the Income Tax Act 2007 (ITA) will allow companies to choose whether employees who leave the company voluntarily are permitted to keep their shares, or whether they must have their shares purchased back by the company for the lesser of cost or market value. This amendment broadly aligns the treatment of these so-called “bad leavers” under the New Zealand exempt scheme rules with Australian exempt scheme rules, which will make it easier for trans-Tasman companies to offer the same scheme in both countries.

Application date

The proposed amendment would apply retrospectively from 29 March 2018, being the date the exempt ESS rules came into effect.

Key features

It is proposed that section CW 26C(8) of the ITA be amended to allow companies to choose, in the case of bad leavers, whether their trust deed or similar constituting documentation provides that either:

  • employees can choose whether to keep the shares or have them bought back for the lesser of cost or market value; or
  • the trustee/company must buy the shares back for the lesser of cost or market value.

Background

Currently, upon expiry of the “restricted period” in section CW 26C(7), “good leavers” – employees whose employment ends due to their death, accident, sickness, redundancy, or retirement at normal retiring age – or their estate, can choose whether to keep their shares in the company or have the trustee buy them back for the lesser of cost or market value. “Bad leavers” – employees who leave for other reasons (for example, going to work for a competitor) – must have their shares bought back for the lesser of cost or market value. There is no option for the company to allow bad leavers to keep their shares. Therefore, there is less flexibility in the case of bad leavers.

One objective of the 2018 amendments to the ESS rules was to allow trans-Tasman companies to offer Australian exempt schemes to their New Zealand employees. However, the Australian exempt scheme requires that bad leavers must be able to keep their shares. Since this conflicts with New Zealand’s rule for bad leavers, it is difficult for trans-Tasman companies to offer the same scheme in both countries.

While Australian schemes can be amended for New Zealand employees, so as to comply with the New Zealand rules, this carries compliance costs and means New Zealand employees have a commercially less favourable ESS than their Australian counterparts. Aligning New Zealand’s exempt scheme rules with Australia’s rules by allowing companies to choose whether bad leavers can keep their shares will make it significantly easier for trans-Tasman companies to offer their schemes in both countries.

SCHEDULE 32 OVERSEAS DONEE STATUS

(Clause 114)

Summary of proposed amendment

The Bill proposes to amend the Income Tax Act 2007 by adding four charities to the list of donee organisations in schedule 32 of the Income Tax Act 2007.

Application date

The proposed amendments would apply from 1 April 2019.

Key features

It is proposed to add four charitable organisations to schedule 32 of the Income Tax Act 2007. Donors to these charities will be eligible for tax benefits on their donations.

Background

Donors to organisations listed in schedule 32 are entitled as individual taxpayers, to a tax credit of 33⅓% of the monetary amount donated, up to the amount of their taxable income. Companies and Māori authorities may claim a deduction for donations up to the level of their net income. Charities that apply funds towards purposes that are mostly outside New Zealand must be listed in schedule 32 of the Income Tax Act 2007 before donors become eligible for these tax benefits.

Detailed analysis

The four charitable organisations being added to schedule 32 are engaged in the following activities:

Little Brothers and Sisters International

Little Brothers and Sisters International has been set up to support and work in partnership with Alongsiders International, the latter has a mentorship programme in 15 Asian and African countries which is directed at keeping potentially at-risk children in established education programmes.

Partners Relief and Development – New Zealand

Partners Relief and Development – New Zealand was established in 2017 and works in association with a wider Partners Relief and Development network carrying out emergency relief and community development work in the developing world. It is active in South East Asia (Myanmar and Thailand) and the Middle East (Yemen and Syria).

Project Moroto

Project Moroto was established in 2011 with the purpose of providing safe housing, upbringing, education and advancement of life to vulnerable or orphaned children in Uganda or other impoverished regions of Africa.

UN Women National Committee Aotearoa New Zealand Incorporated

The UN Women National Committee Aotearoa New Zealand supports the work of the United Nations Entity for Gender Equality and the Empowerment of Women through contributing funds raised in New Zealand for UN Women projects in developing countries worldwide, but particularly those in the Pacific region.

WIDENING THE COMMISSIONER’S POWER TO PUT INVESTORS ON THE CORRECT PRESCRIBED INVESTOR RATE

(Clause 99)

Summary of proposed amendment

The proposed amendments would enable Inland Revenue to notify a multi-rate portfolio investment entity (PIE) of a tax rate to apply for an investor in that PIE, irrespective of whether the investor has advised the PIE of their notified investor rate or been defaulted on to the top 28% rate.

Application date

The proposed amendment would apply from 1 April 2020.

Key features

An amendment is proposed to the PIE rules in the Income Tax Act 2007 to allow Inland Revenue to notify a multi-rate PIE where it is using an incorrect prescribed investor rate (PIR) for an investor and provide an alternative rate that the PIE must then use.

Such an amendment would widen the existing power in section HM 60(5) of the Income Tax Act 2007 which allows Inland Revenue to advise a PIE of an alternative tax rate to apply where an investor’s notified investor rate is different from their PIR (this provision currently does not cover investors who have been defaulted onto the top 28% PIE tax rate).

Background

The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 enacted changes meaning Inland Revenue is starting to receive more frequent employment and investment income information. One of the benefits of the timelier collection of income information is that Inland Revenue is better able to identify where an individual appears to be using an incorrect tax rate. This would include identifying instances where an investor’s PIE income is being taxed at an incorrect rate.

Section HM 60(5) of the Income Tax Act 2007 allows Inland Revenue to use the improved income information to provide an alternative tax rate to a multi-rate PIE that it must apply for an investor, where an investor has provided the PIE with a notified investor rate that is different from the investor’s actual PIR. However, Inland Revenue is currently unable to put an investor on their correct PIR where the investor has not notified the PIE of a tax rate to use in the first place and has been defaulted onto the top 28% rate. This means in many instances Inland Revenue would not be able to notify a PIE where an investor is being over-taxed.

The PIE tax rules apply to collective investment vehicles, including KiwiSaver funds. Under the PIE rules an investor’s PIR is based on the lower amount of taxable income (plus PIE income) that they derived in either of the previous two tax years. Investors are able to elect a tax rate for a PIE to apply (referred to as a “notified investor rate”).

Where an investor has not notified the PIE of a tax rate, then the top 28% PIE tax rate will apply by default. Tax is paid by a multi-rate PIE based on the rates of its investors.

Unless the investor has nominated a lower PIE tax rate than they should have, PIE tax is a final tax. Therefore, an investor will not get a refund for any overpayments – this includes situations where the investor is defaulted onto the top 28% rate and that rate is too high.

Detailed analysis

Proposed new section HM 60(6) of the Income Tax Act 2007 would allow Inland Revenue to notify a multi-rate PIE where it is using an incorrect PIR for an investor, either where the investor has provided a notified investor rate to the PIE or the investor has been defaulted onto the top 28% rate and that rate is too high. Where Inland Revenue had notified a PIE that an investor was on an incorrect PIR, Inland Revenue would advise the PIE of an alternative tax rate that the PIE must use for the investor. These amendments would ensure Inland Revenue had the power to correct an investor’s tax rate, in all situations where an investor was on a tax rate that was different from their actual PIR.

Proposed new section HM 60(7) clarifies that where subsequent to Inland Revenue advising the PIE of the tax rate, the investor advises the PIE that a different PIR should apply, the PIE should apply the rate subsequently advised by the investor.

As a consequence of the proposed amendments, existing section HM 60(6) – relating to when an investor is defaulted onto the 28% PIE rate – will be re-ordered to become section HM 60(5).

When PIE income treated as excluded income

Under existing section CX 56 of the Income Tax Act 2007 PIE income derived by an individual investor in a multi-rate PIE will generally be treated as excluded income of the investor (as tax will have already been paid on this income at the investor’s tax rate by the PIE). An exception to this rule is where an investor has provided a notified investor rate to a PIE that is lower than the investor’s actual PIR. Section HM 60(4) of the Income Tax Act 2007 provides that in this situation the PIE income will not be treated as excluded income to the investor under section CX 56 and the investor will be required to include it in their individual income tax return. They would then be required to pay tax on the PIE income at their marginal tax rate (although they would receive a credit for tax on this income that had already been paid by the PIE).

If Inland Revenue were to notify a PIE to apply a tax rate to an investor that was lower than their actual PIR the rule in section HM 60(4) would not apply, meaning that the PIE income would remain excluded income to the investor.