If you receive shares in your employer's company for free or below market value because of your employment relationship then you will generally have an employee share scheme (ESS) benefit.
If, instead of receiving an ESS benefit in shares, you receive a payment for the cancellation or transfer of your shares or share rights, that payment will be an ESS benefit.
The benefit is treated as income
Regardless of whether you receive shares or cash, your ESS benefit is treated as income.
The amount of income you receive is broadly equal to the market value of the shares on the share scheme taxing date less any amount paid for the shares or share rights.
However, if your shares or share rights are cancelled or transferred to a non-associated person, it is the amount you received for the cancellation or transfer less any amount you paid for the shares or share rights.
An ESS benefit is treated as your income even if the benefit is provided to an associate of yours (for example your spouse or family trust).
Paying tax
In most cases your employer will report the value of your ESS benefit to us in their employment information.
In some situations your employer must deduct tax from your ESS benefit. In other situations your employer can choose whether to deduct tax. If they do not deduct tax, you are responsible for paying tax on this benefit at the end of the year.
The exception is if you receive shares under an exempt ESS, in which case the benefit is exempt income. This means you do not need to include it in your income tax return or pay tax on it.
Separating out non-taxable income
If, during the time you earn your ESS benefit, you are non-resident and not receiving New Zealand sourced employment income, then part of your ESS benefit will be treated as non-residents' foreign-sourced income. This means it is not taxable in New Zealand.
Use this formula to work out the amount of your ESS benefit that is not taxable.
Benefit before reduction x offshore period ÷ earning period
The benefit before reduction is the total value of the ESS benefit.
The offshore period is the amount of time you were both a non-resident and any income received from your employer was foreign-sourced.
The earning period is the period the benefit was earned over (this period usually ends with the vesting of the shares or rights to shares and typically starts on the grant date).
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 1-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 (benefit before reduction) 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.
You can find out more in the Tax Information Bulletin.
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. Either we automatically assess you, or you need to file an IR3 return.
You will receive an automatic income tax assessment when both of the following apply.
- Your employer has provided us with the taxable value of your ESS benefit.
- You have no other reason to file an IR3.
You should file an IR3 if either of the following apply:
- Your employer has not provided us with the taxable value of your ESS benefit.
- You want to change the value of the ESS benefit reported by your employer because part of it is non-residents' foreign sourced income and not taxable in New Zealand.
Any dividends paid to you will form part of your taxable income and should be included in your tax assesment in the year you received them.
Transitional residents
If you are a transitional resident, make sure you know about any tax liability you have for ESS benefits received. To the extent your ESS benefit is New Zealand sourced income you will need to pay tax in New Zealand. To the extent your ESS benefit is foreign sourced it may not be taxable.
Provisional tax implications
You may have provisional tax to pay if both of the following apply.
- You receive an ESS benefit where tax is not deducted.
- Tax to pay on your ESS benefit is more than $5,000.
ESS benefits affect deductions and entitlements
Your ESS benefit may affect your other deductions and entitlements. This is because it is treated as income for:
- student loan repayment deductions
- child support payments
- FamilyBoost
- Working for Families entitlements.
If you're entitled to FamilyBoost or 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.
Voluntary disclosures
If you have not told us about ESS benefits received from past years, let us know as soon as you can so we can fix it. You may wish to make a voluntary disclosure.
Other information about holding shares
Find out what happens when you sell the shares at a later date.
If the shares are in a foreign company, then you may come under the Foreign Investment Fund (FIF) regime after receiving your benefit. You may wish to speak to a tax professional.