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Employer responsibilities
Ngā kaiwhakawhiwhi mahi takohanga

Deductions from employee share scheme (ESS) benefits

From 1 April 2017, you can choose to tax employee share scheme (ESS) benefits as an "extra pay". This means you can deduct tax and social policy obligations, eg, student loans and child support.

What to include on your Employment information (EI)

You can choose not to deduct any tax. However, in most cases you'll still be required to include the taxable value of the ESS benefit for each employee on the Employment information or Employer monthly schedule (EMS/IR348) you send to us.

The only time you aren't required to show the value of the ESS benefit on the EI or EMS is when:

  • the employee or an associate of the employee sells share rights to a non-associated third party
  • the share benefit arises from an exempt ESS (formerly a "Commissioner-approved" employee share purchase scheme).

If you choose not to deduct tax on benefits an employee receives under an ESS, the obligation to pay tax remains with the employee.

Note - special rules for former employees that receive ESS benefits

If you are filing:

  • an EMS - you don't include the value of any ESS benefits
  • EI - you only include the value of ESS benefits from which tax has been deducted.

How to calculate the value of the employee share scheme benefit

Commissioner's Statement (CS) 17/01 Determining "value" of shares received by an employee under a share purchase agreement provides more information on how you can value shares and determine the value of an employee share scheme benefit.

When to tax the employee share scheme benefit

An Employee Share Scheme (ESS) benefit is taxable for an employee on the share scheme taxing date.

The share scheme taxing date is the earlier of the date when:

  • the benefits are either transferred to a non-associated person or cancelled, or
  • the employee owns the shares as any other shareholder would without the terms of employment affecting the status of the ownership or value.
Example 1

Acme Limited (Acme) transfers shares worth $10,000 to a trust to hold for their employee, Alice. Alice only receives the shares from the trust if she stays employed by Acme for at least 3 years and she receives no benefit from or ownership of the shares if she leaves before then. As the risk that Alice will leave the employment of Acme within the 3 years is material the share scheme taxing date is the date that Alice reaches 3 years employment with Acme.

Example 2

Acme Limited transfers shares worth $10,000 to a trust to hold for their employee, Bob. Bob receives the shares 3 years after they are transferred to the trust as long as he is not dismissed for serious misconduct in this time. Bob will still be entitled to the shares if he ceases employment within 3 years as long the employment is not ceased due to serious misconduct, so the share scheme taxing date is the date the shares are transferred to the trust as there is little risk that Bob will lose his entitlement to the shares.

These rules don’t apply to shares that were granted or acquired before:

  • 29 September 2018 and have a share scheme taxing date before 1 April 2022 (as long as they weren’t granted or acquired with the purpose of avoiding the above rules), or
  • 12 May 2016.

How to tax the employee share scheme benefit

Employee share scheme (ESS) benefits will be taxed as an extra pay/lump sum amount.

ESS benefits are income for the purposes of:

  • student loan deductions
  • child support payments, and
  • Working for Families Tax Credits.

ESS benefits aren't liable to KiwiSaver or ACC.

You can choose whether or not to deduct tax on an ESS on:

  • an employee by employee basis, or
  • a benefit basis for each employee.

You'll need to be aware of the impacts on the employee for either option.

In some cases, if the employee agrees, the employer can sell some of the shares in order to pay the tax owing.

Example: The employer chooses to deduct tax, including student loan

In April 2018 Jane receives an ESS benefit of $2,500. She has:

  • a tax code of M SL
  • a fortnightly salary payment of $1,750
  • KiwiSaver contributions at 3%
  • an ESCT rate of 17.5%

Use the PAYE / KiwiSaver deductions calculator to confirm the:

  • PAYE and KiwiSaver amounts on the normal salary or wage of $1,750, and
  • student loan deduction amount on the normal salary or wage, inclusive of the ESS benefit ($1,750 + $2,500 = $4,250).

Go to our Taxing lump sum payments page to work out the tax on $2,500.

   
PAYE deductions for $1,750
$292.88
KiwiSaver deductions for $1,750
$52.50
Net KiwiSaver employer contributions for $1,750
$43.40
Employer superannuation contribution tax
$9.10
Student loan deductions on $4,250
$421.92
Tax on $2,500 (this amount isn't liable for ACC)
$437.50

The gross earnings and deductions for this pay week would be:

   
Gross earnings
$4,250 ($1,750 + $2,500)
PAYE deductions
$730.38 ($437.50 + $292.88)
Student loan deductions
$421.92
KiwiSaver deductions
$52.50
Net amount paid to employee
$545.20
Net KiwiSaver employer contributions
$43,40
Employer superannuation contribution tax
$9.10
Example: The employer chooses to deduct tax, not including student loan

In April 2018 Jane receives an ESS benefit of $2,500. She has:

  • a tax code of M
  • a fortnightly salary payment of $1,750
  • KiwiSaver contributions at 3%
  • an ESCT rate of 17.5%.

Use the PAYE / KiwiSaver deductions calculator to confirm the PAYE and KiwiSaver amounts on the normal salary or wage of $1,750.

Go to our Taxing lump sum payments page to work out the tax on $2,500.

   
PAYE deductions for $1,750
$292.88
KiwiSaver deductions for $1,750
$52.50
Net KiwiSaver employer contributions for $1,750
$43.40
Employer superannuation contribution tax
$9.10
Tax on $2,500 (this amount isn't liable for ACC)
$437.50

The gross earnings and deductions for this pay week would be:

   
Gross earnings
$4,250 ($1,750 + $2,500)
PAYE deductions
$730.38 ($437.50 + $292.88)
KiwiSaver deductions
$52.50
Net amount paid to employee
$967.12
KiwiSaver employer contributions
$43,40
Employer superannuation contribution tax
$9.10
Example: The employer chooses not to deduct tax

In April 2018 Jane receives an ESS benefit of $2,500. She has:

  • a tax code of M
  • a fortnightly salary payment of $1,750
  • KiwiSaver contributions at 3%
  • an ESCT rate of 17.5%.

If Jane had a student loan, it would've been under-calculated in this example and could cause a compulsory deduction notice to be issued.

Use the PAYE / KiwiSaver deductions calculator to confirm the PAYE and KiwiSaver amounts on the normal salary or wage of $1,750.

Go to our Taxing lump sum payments page to work out the tax on $2,500.

   
PAYE earnings for $1,750
$292.88
KiwiSaver deductions for $1,750
$52.50
Net KiwiSaver employer contributions for $1,750
$43.40
Employer superannuation contribution tax
$9.10

The gross earnings and deductions for this pay week would be:

   
Gross earnings
$4,250 ($1,750 + $2,500)
PAYE deductions
$292.88
KiwiSaver deductions
$52.50
Net amount paid to employee
$1,404.62
KiwiSaver employer contributions
$43,40
Employer superannuation contribution tax
$9.10

Completing your Employment information (EI) or Employer monthly schedule (EMS/IR348)

Whether you choose to deduct taxes from the ESS benefit or not, you're still required to report the value to us in the information you submit in the EI or EMS.

When completing the EI you must list the value of the ESS benefit separately from any other earnings your employee receives. You'll need to add a new entry for your employee that includes:

  • their name
  • their IRD number
  • the payment code "ESS"
  • the taxable value of the ESS benefit. Also include this as "Earnings not liable for ACC earners' levy"
  • the total tax, plus student loan and child support, deducted from the benefit (if any).

When the information is due

If you are filing Employment information (EI) each payday

Employers who are payday filing must report the taxable value of an ESS benefit to us based on the 20th day after the share scheme taxing date.

There are two methods an employer who is payday filing can use to determine when the taxable value of an ESS benefit needs to be reported.

Option 1

  • If the 20th day falls between the 1st and 15th of a month the information must be reported treating the 15th as the payday.
  • If the 20th day falls between the 16th and the end of a month the information must be reported treating the last day of the month as the payday.

Option 2

The employer can treat the 20th day as the payday and report the value of the ESS benefit to us more regularly.

Example using the options

Sam's employer provides him with an ESS benefit on 13 December 2018.

The 20th day after Sam receives the benefit falls between the 1st and 15th of January 2019.

Under Option 1, Sam's employer can report the taxable value of the ESS benefit within 2 working days of 15 January 2019.

Under Option 2, Sam's employer can choose to report the value of the ESS benefit as part of employment information which is due 2 working days from the 2nd of January 2019.

If you are filing employer monthly schedules

Note

If you have opted into payday reporting you will no longer complete employer monthly schedules.

Usually employers declare the PAYE in the month that salary or wages are paid. But to allow twice monthly filers (employers with PAYE and ESCT of over $500,000) time to calculate the value of the ESS benefits, these employers have more time to report and pay any tax on an ESS benefit.

The extension of the timeframes relates only to the ESS benefit and any associated deductions related to it. Any normal pay the employee receives will still need to be declared by their standard due date.

Twice monthly filers advise and pay the tax on the ESS benefit in the pay period immediately following the transfer of the shares or the exercise of an option, ie, the next Employer deductions (IR345) return.

Example: The employer gives their employee an ESS benefit on 10 March

Rather than being required to pay any tax on the benefit by 20 March, the employer carries this over and pays it on 5 April and includes it in the March EMS.

Example: The employer gives their employee an ESS benefit on 21 March

Rather than being required to pay any tax on the benefit by 5 April, the employer carries this over and pays it on 20 April and includes the ESS amount in the April EMS.

We'll investigate instances when this rule has been used to create a tax advantage if market or contractual conditions suggest that exercising an option to receive shares between 16 and 31 March doesn't make sense.

All other filers are required to declare the ESS benefit on the return and pay any tax (if deducted) by their standard due date. There is no change for these employers.

Exempt employee share schemes (exempt ESS)

If you operate an exempt ESS you won't need to report the value of ESS benefits provided on your employer information. The value of a benefit under an exempt ESS is exempt income for an employee.

You will need to complete and send a Notification of Exempt Employee Share Scheme (IR1211) form to us at exemptESS@ird.govt.nz

An exempt ESS is an employee share scheme that either:

  • had approval from the Commissioner under section DC 12 of the Income Tax Act 2007, or
  • meets the criteria of section CW 26C of the Income Tax Act 2007, and the employer has provided us with a completed IR1211 form.
Note

Approvals under section DC 12 of the Income Tax Act 2007 stopped from 29 March 2018. Employers who operate exempt schemes will have to notify us using the IR1211 after this date.

Any customer operating either a "Commissioner-approved" share purchase scheme or an exempt ESS will be required each year to send us information regarding the issue of shares under their scheme using an Exempt Employee Share Scheme: Grant of Shares Information (IR1212) form. This information must be provided no later than 31 May following the end of the relevant tax year.

Information for employees

Find out more about what you need to do as an employee receiving an Employee Share Scheme benefit