You receive an ESS benefit when you buy or are given shares from your employer free or below market value. If you transfer, cancel or give up your rights to shares, you may receive payment which is also seen as a benefit.
Whichever way you received the ESS benefit, the difference between the market value of the shares and what you paid for the rights or shares is taxable income. Payment you receive for transferring or cancelling your right to shares is also taxable income.
Your employer may choose to deduct tax from your ESS benefits during the year to meet your tax obligations on this income. If they choose not to deduct tax, you’ll be responsible for paying tax on these benefits at the end of the year. The exception is if the benefit is provided under an exempt ESS, in which case the benefit is exempt.
Taxing ESS benefits
Your benefit is treated as income for:
- student loan deductions
- child support payments
- Working for Families entitlements.
If you're entitled to Working for Families, you need to let us know about your ESS benefits. If you wait for this information to come from your employer you may have to pay us back.
How to separate out overseas service
For ESS benefits that add up while a person is neither New Zealand resident nor getting New Zealand source income, use the following formula to work out the amount of the benefit that is not taxable in New Zealand:
Benefit before reduction x offshore period ÷ earning period
This part of the benefit will be treated as non-residents' foreign-source income and is not taxable.
Example: Carey is employed by Parent Co in Australia
On 1 January 2019 Carey is employed by Parent Co in Australia. She is granted Restricted Stock Units (RSU) at no cost for 100 shares vesting over a one-year period in December 2019.
On 1 March 2019 she moves to New Zealand to work for Child Co (a subsidiary of Parent Co). The RSU vesting arrangement stays the same.
On the 31 December 2019 100 shares vest with a market value of $1.50 each.
$150 x 59 (1 January to 28 February - offshore period) ÷ 365 (1 January to 31 December - earning period) = $24.25
The $24.25 is treated as non-residents’ foreign sourced income and is not taxed. The remaining $125.75 is taxable.
The amount is calculated by first working out what period the benefit adds up over. You then work out how many days you were both a non-resident and any income received from that employer was foreign sourced. The period ends once the share rights transfer to you, rather than when the income is earned.
You can find out more in the Tax Information Bulletin Vol 30 No 5 June 2018 (page 63)
Your responsibilities at the end of the year
After the end of the tax year we work out if you’ve paid the right amount of tax and either automatically assess you, or you need to file an IR3 return.
If you are a transitional resident make sure you know about any tax liability you have for ESS benefits received. Unlike some other types of income, there is no temporary tax exemption for ESS benefits, and you may have to pay tax in New Zealand.
You will receive an automatic income tax assessment when the following apply:
- your employer has provided us with the taxable value of your ESS benefit
- your employer has not deducted tax
- you have no other reason to file an IR3.
You should file an IR3 if:
- you have received a benefit from a scheme that is not an exempt ESS
- you were outside New Zealand while earning your benefit and would like to separate it as set out above, or
- your employer has not provided the information to us.
If you have not told us about ESS benefits received from previous years, you will need to let us know. You can make a voluntary disclosure for these.