Tax Updates: 3 February 2025

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

A happy new year

Well considering the first month of 2025 has already passed by, it seems someone dated now to wish you all a happy New Year. Regardless, I hope you all had a chance to have some decent time away from the coal face, and have come back refreshed, ready for whatever 2025 will throw your way.

Deferral of ESS benefits proposal

Inland Revenue (IR) officials have just released an issues paper titled “Taxation of employee share schemes: start-up companies.” It updates an earlier 2017 issues paper, which had proposed to defer the taxation point for employees of start-up companies (with a corresponding deferral of the company’s deduction). Deferral would apply to both the timing of the tax obligation and the calculation of the income. The 2017 paper, however, triggered little reaction from the taxpaying community, and therefore the proposals were never progressed. Of late, however, IR has received a number of enquiries from the start-up sector on the issue, and has decided to reissue the paper.

Presently, as most of you are aware, the taxation of benefits derived under an employee share scheme occurs once the shares are earned by the employee, and they become the “economic owner” of the shares. Broadly speaking, an employee is the “economic owner” of the shares when all conditions and contingencies relating to their ownership or retention of the shares have fallen away so that they hold them on substantially the same basis as non-employee shareholders. The date on which this event occurs is referred to as the “share scheme taxing date”.

The primary issue for start-up employers and/or their employees is either a lack of liquidity (both employer and employee lack the funds to pay for the tax on the ESS benefit – the latter often due to no market in which to sell some of the shares to generate the cash to pay the tax liability) or the difficulty in valuing the shares – particularly where the company is unlisted.

IR officials are therefore proposing a tax deferral (both in the income derivation for employees, and the timing of the deduction for the employer), and the issues paper raises a number of questions they would like your feedback on (if start-up companies are part of your world), surrounding the deferral scope, the nature and timing of any election for deferral, the timing of the tax trigger (the “liquidity” event), the timing of the employer deduction, and certain matters of administration and compliance.

The officials’ paper is 26 pages in length, so it’s not an overly taxing read. If you would like to submit your views with respect to any of the questions asked, you should do so no later than 14 March 2025.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.