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

Tax reform of employee share schemes Overview of the proposed new rules Andrew Ryan Sacha Oudyn Tax Partner Tax Special Counsel August 2017

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 Page l 2

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 Page l 3

Unconditional share schemes  Taxed at issue on difference between market value of shares and amount paid  No changes proposed Shares issued Market Value Tax-free capital gains Time Page l 4

Unconditional option schemes  Taxed at exercise on difference between market value of shares and amount paid  No changes proposed Shares issued on exercise Options issued Market Value Tax-free capital gains Taxable Time Page l 5

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 Shares issued Market Value Tax-free capital gains Time Page l 6

Conditional share schemes and option-like arrangements – proposed  Taxed at point of economic ownership, on difference between market value of shares and amount paid Economic ownership Shares issued Market Value Tax-free capital gains Taxable Time Page l 7

Economic ownership  E xists 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 Page l 8

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 ownership before 1 April 2022) Page l 9

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 out 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 Page l 10

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 Page l 11

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 Page l 12

Further information If you would like to discuss the these tax reforms in further detail, please contact one of our experts. ANR SXO Page l 13