Summary

The New Zealand Government allows employers to provide benefits to employees in the form of employee share schemes (ESS).

A share scheme is an arrangement to issue or transfer company shares to a person who will be, is or has been an employee of the Company or Group.

As an employer, if you provide an ESS benefit to your employees, you ARE required to report the value of the ESS benefit to IR via the Payday Filing Employee Information (EI) return.

In Payroll, ESS benefits are treated as liable income for:

• PAYE (optional - 'How it works in PayGlobal')
• Student Loan deductions
• Child Support Payments

ESS benefits are not liable for :

• KiwiSaver (standard employee or employer contributions)
• ACC Earner Levy

Tax Treatment

If PAYE is to be deducted by the employer on the employee's behalf, then the ESS benefit is required to be taxed as an 'Extra Pay'.

GOTCHA - Unlike a 'cash' lump sum payment, ESS benefits DO NOT have the ACC Earner Levy Calculation part of the IR's payroll specification applied.

How it works in PayGlobal

Solution options:

IMPORTANT: If an ESS benefit is included in a pay with ‘real’ money (paying allowances), this will impact the employee's taken home (nett) pay.

IR say “If your employee agrees, you can sell some shares to pay any tax owing.”
(Refer: https://www.ird.govt.nz/employing-staff/paying-staff/employee-share-schemes/paying-tax-on-ess-benefits)

PayGlobal caters for 3 standard solution options. You can have any combination within the one database.

1. ESS Benefit with no PAYE deducted
2. ESS Benefit with PAYE deducted
3. ESS Benefit with PAYE deducted where some shares have been sold to cover the cost of the PAYE. i.e. The cost determined via a 'nett-to-gross' style calculation.

Option 1 can be used when the employer/employee have agreed the employer will not calculate/deduct PAYE on the ESS benefit. If this option is applied, the employee bears the full responsibility for the PAYE amount owing.

IR will advise the employee if there is PAYE debt as part of the tax year end income assessment.

Option 2 can be used when the employer/employee have agreed the employer will calculate/deduct PAYE on the ESS benefit.

PayGlobal will only calculate/deduct the PAYE relating to the ESS benefit if there is sufficient “paying” income to make the full deduction. PayGlobal does this to prevent employees ending up with a net pay amount below the protected earnings threshold or negative nett pay. In these cases, the employer is expected to advise the employee the deduction could not be made so that they can either agree to have the situation handled like option 1 or handled via option 3.

Option 3 can be used when there has been an agreement to gift the employee more shares that will be sacrificed (sold) to cover the cost of the PAYE for the total ESS benefit. Option 3 must be done in a pay with no other transactions, i.e. a manual pay.

Users input the allowance that is configured with Sub-type = Employee Share Scheme With Tax GrossUp, with the total amount being the original ESS benefit value. When you process the pay, PayGlobal will insert the allowance that is configured with Sub-type = Employee Share Scheme Tax GrossUp. The Rate amount will be set to the Tax Total of the original ESS benefit transaction. As this is a paying allowance it is “assessable” income and therefore must have PAYE deducted. The transaction total amount will be the PAYE from the original ESS benefit plus PAYE on the GrossUp, which then means the employee pays zero tax.

Where option 2 or 3 are applied, the employer is deducting the PAYE on behalf of the employee but the employee is ultimately still the one incurring the cost. IR will advise the employee if there is a tax debit as part of the end of year tax assessment process.

Limitation

PayGlobal does not have a standard solution to cater for scenarios where the employer does not want to give them more shares, but does want to compensate the employee for the loss of ‘real’ income. To implement such solutions requires legal/financial advice from a registered tax agent/lawyer and assistance from which a PayGlobal Professional Services Consultant investigate if it is possible to build a custom solution.

Additional Tax Policy information

https://www.taxtechnical.ird.govt.nz/-/media/project/ir/tt/pdfs/tib/volume-30---2018/tib-vol30-no5.pdf?modified=20200329214043&modified=20200329214043

Allowance Setup

Most fields will be preset to the correct settings when you set the Type and Sub-type fields. However the table below can be used to assist with Allowance table updates that are not done via the UI

Important: If you choose to go with option 3, you must have the Allowance for option 2 as well as the Allowance for option 3

Non IR reportable allowances

It's expected that if you aren't required to show the value of the ESS benefit on the Payday EI, then please ensure the Allowance SubType is left blank. The rest of the settings except the tax side apply as above. For tax, if treating the allowance like a Fringe Benefit, then:

• Tax override = Yes
• Tax override rate = The FBT rate applicable - check with IRD.
• Tax override type = "blank".

Transaction Entry

How you handle this will largely depend on whether you want to record the number of shares and their unique dollar value or if you just want to record a ESS benefit value only.

With solution option 3, you only need to input the Employee Share Scheme With Tax GrossUp allowance, because PayGlobal will automatically create/add the Employee Share Scheme Tax GrossUp allowance in order to cover the PAYE and Student Loan payable on the 'original' ESS benefit and this 'cash top-up' allowance.

Important: Option 3 is designed to be completed in a manual pay with no other non-ESS allowances present.

Share value only

• Quantity = '1'
• Rate Amount = total value of ESS Benefit

Shares count and value

• Quantity = total number of shares issued
• Rate Amount = value of a single share

Calculating the value

Refer to the IRD website - https://www.ird.govt.nz/employing-staff/paying-staff/employee-share-schemesl

Student Loans

ESS benefits are income for the purposes of calculating the employee's standard student loan repayment amounts.

Example: An employee received a weekly income $1000 and shares from an Employee Share Scheme worth $1000. The employee's student loan amount will be deducted on a total income of $2000.

Child Support

ESS benefits are income for the purposes of child support payments, it result in employers receiving an updated Child Support Employer Deduction Notice YL0010 in future pay, but they are not included the calculation for protected earnings.

From the above example, protected earnings will be calculated on the $1000 minus PAYE * Protected earnings % only.

Limitations

If an "Extra Pay" ESS benefit allowance is included in a pay in which the nett pay is calculated to be less than zero, then the allowance will be automatically be adjusted to have zero tax and Student Loan and then reprocessed.

An ESS allowance may not be included in a whole pay tax override.