Equity based remuneration
Designed to incentivise employees to take an active ownership approach to their employment, equity based schemes come in many different guises. However in general, no matter what form the scheme takes the end objective is the same – to deliver free or discounted shares to the employees.
Unlike other employment income which is taxed either by way of PAYE or FBT, the tax due on equity based income is not the responsibility of the employer. Instead, the employee must report the income in their personal income tax return and settle the tax liability directly with Inland Revenue.
The tax implications can be complex and if not correctly managed can expose the employees to cash flow problems as well as the imposition of penalties and interest. Not exactly a good outcome for the employees.
While recognising that the tax liability rests solely with the individual employees, most companies provide their employees with some assistance in understanding the tax obligations that come with participating in equity based schemes. From providing a simple overview of the tax consequences to providing a round table briefing with a question and answer session, companies see providing this advice as being an integral part of offering a scheme to their employees.
Recently we have seen increased activity from Inland Revenue whereby they are requesting from the employer, details of any equity incentive schemes and a list of all employees participating in the schemes. It seems this information is then used by Inland Revenue to review the employees’ personal tax returns to ensure they are reporting the income received from the schemes in their tax returns.
From a human resources perspective it can be a time consuming nightmare managing the fall-out that comes from employees’ returns being audited, particularly where the company has not provided any information regarding the tax implications. The possible tax consequences for non-complying employees are significant. A scheme designed to incentivise employees can turn pretty quickly into a big disincentive and the company is left dealing with disgruntled employees who in many cases are senior level executives.
In our view, a company taking a proactive approach to helping employees understand their tax obligations is preferable to having to deal with the difficult conversations at the point Inland Revenue requests scheme information. The feedback Deloitte receives from companies who do provide assistance is that they want the employees to view their participation in the scheme as a positive experience. Companies also consider that in the interests of being a good employer, there is an obligation to make the employees fully aware of the tax implications.
If your company has an equity based scheme in place it is worth considering what, if any, advice the employees receive. If there is nothing in place, it is well worth it from both an employer and an employee perspective to provide the employee, at a minimum, with the information they need to be aware that there are personal tax implications for them. Preferably before Inland Revenue comes calling. For more information about equity based schemes, please contact your usual Deloitte advisor.
 Please note that phantom type schemes that deliver a cash reward are subject to PAYE.
Tax Alert November 2013 contents:
- Multinationals come under the compliance spotlight
- Regular pattern of building and selling houses catches up with trustees
- The OECD Base erosion and profit shifting project – how New Zealand might respond
- Chinese tax and business regulatory framework: evolving landscape and hot topics
- GST and mixed use assets
- Equity based remuneration
- Records in the cloud