An employee share scheme (ESS) is an arrangement for issuing or transferring shares in a company or a group company to a past, present or future employee or shareholder-employee.
The arrangement must be connected to the person's employment or service. The ESS definition also includes transfers to an associate of the employee or shareholder-employee.
A director who receives a schedular payment is also an employee for tax purposes and may come under the ESS rules.
Types of employee share schemes
There are lots of different types of employee share schemes, for example:
- Long-term incentive plans (LTIP)
- Performance share rights plans
- Employee share option plans (ESOP)
- Restricted stock units (RSU)
- Performance stock units (PSU).
An 'exempt ESS' is not an ESS. It is a scheme that is offered to all, or almost all, of a business’ employees. Both the benefit of the scheme and the amount an employee invests to get that benefit are limited. Different tax rules apply to an exempt ESS.
Income and calculating value
An ESS benefit is treated as income for the employee or shareholder-employee, even if the benefit is provided to an associate.
The value of an ESS benefit is calculated on the share scheme taxing date. This is the earlier of the following dates:
- The date the employee (or associate) beneficially holds the shares and there are no conditions or protections under the scheme that would defer the taxing date.
- The date the shares or share rights are cancelled or transferred to a non-associated person.
The amount of income is broadly equal to the market value of the shares on the share scheme taxing date less any amount paid for the rights or shares. However, if rights or shares are cancelled or transferred to a non-associated person, it is the amount received for the cancellation or transfer, less any amount paid for the rights or shares.
When an ESS benefit is treated as received
An ESS benefit is treated as received by the employee or shareholder-employee on the ESS deferral date. The ESS deferral date is 20 days after the share scheme taxing date. However, for former employees who receive an ESS benefit in shares with no tax withheld, the benefit is received on the share scheme taxing date.
Paying tax on an ESS benefit
In some situations an employer must withhold tax from an ESS benefit. In other situations the employer can choose whether to withhold tax. If no tax is withheld, the employee must pay tax through the end of year tax return process (and provisional tax if it applies).
Receiving employee share scheme benefits
Deducting tax from employee share scheme benefits
Deductions
An employer can usually claim a deduction if they're providing ESS benefits. This deduction generally matches the income to employees in timing and quantity. No other deductions are allowed for providing an ESS benefit, except for costs of establishing or managing a share scheme such as interest costs, or certain costs on other employment income like bonuses.
Reporting
An employer must include information about an ESS benefit provided to an employee in their employment information.
Filing employment information about ESS benefits
Tax Technical advice
Find out more about employee shares schemes (ESS) and how they are taxed.
Employee share schemes (tax.technical.govt.nz)
You may want to speak with your tax professional.