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Inland Revenue issues Revenue Alert about employee share purchase schemes

Inland Revenue has issued a Revenue Alert, RA 15/01, advising that some employee share purchase schemes may constitute tax avoidance.

Revenue Alerts are issued by the Commissioner of Inland Revenue to provide information and guidance about significant tax planning issues.

Inland Revenue Group Tax Counsel Graham Tubb says the Commissioner’s view is that a number of employee share purchase schemes are not being operated in accordance with Parliament’s intentions.

“We are only concerned with schemes that have been aggressively planned and have pushed the envelope of the legislation too far. For example, in such a way as to artificially lower the value of the shares relative to their real value by trying to accelerate the point in time at which the employee can be said to have acquired them, without acquiring anything in reality,” Mr Tubb says. 

“The overall intent of these arrangements is to reduce or eliminate any tax on any subsequent increase in value of these shares.

“This is certainly contrary to the intent of the legislation. Parliament contemplated that the taxable benefit to an employee under a share purchase scheme would be the value of the shares acquired (less the price paid by the employee for those shares) at the time of acquisition, not at some earlier date.”  

Companies or organisations which have set up these types of employee share schemes need to carefully consider whether they comply with the expectations of Parliament. Employees who have benefited from such schemes could also be liable for additional income tax.

If a taxpayer has any concerns about its employee share scheme as a result of this Revenue Alert, it should seek professional advice and potentially consider making a voluntary disclosure to Inland Revenue about its scheme, Mr Tubb says.

“I would certainly encourage anyone for whom this may apply to contact us.” 

Meanwhile, the current tax policy work programme includes consideration of changes to the current law on the tax treatment of employee share schemes to ensure the law achieves the intended policy outcome of taxing the full benefit from employee share schemes.