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Tax Updates

Employee Share Scheme ESS Fringe Benefits FBT Exclusions Employee Share Loans Share Acquisition Tax Deduction Loan Repayment Low Interest Loan Income Earning Asset

 

Employee Share Schemes

Employee share schemes (ESS) are popular incentives offered by companies to motivate Employees and align their interests with those of shareholders. However, these schemes come with specific tax rules that Employees must understand to manage their tax obligations effectively.

Employees can purchase shares in their employer's business through an Employee Share Scheme (ESS), frequently at a discount or as part of their benefits package. Providing employees with a stake in the company's future success is intended to serve as an incentive.

Fringe Benefit

A fringe benefit is something that an employer offers a worker as part of their employment with arises either as described under various sections of IT Act 2007 or the benefits which are not classified.

Fringe Benefit on Employee Share Loans

  • A fringe benefit arises when an employer provides a loan to an employee for the purpose of acquiring shares. The employee share loan is intended for the employee to acquire share of their employer company or associated companies. 

  • The loan is used solely for share acquisition and would be only beneficiary for the complete loan term. This loan should be paid immediately if the owner stopped being beneficial owner.

  • There are certain FBT exclusions for employee share loan as per the section CX 35 (1) as this should not arise for a low-interest loan where an employee obtains the loan to acquire an income-earning asset as it effectively required the loan only to be used for acquiring shares where company maintained the dividend policy.

  • Section CX 35(1) - The exclusions allow certain fringe benefits to be provided to employees without incurring FBT, as the employee would have been able to get a deduction who actually incurred the expense.

  • Loan owing – An arrangement where an employee or an associated person would be paying or liable to pay in future if any particular event trigger.

FBT Exclusions

  • If the funds borrowed to acquire the shares and then transferred those shares to an associate, the FBT exclusion would not apply. 

FBT Rule Applicability to an Associate

As per section CX 2 (5) (b), FBT benefit would be provided to the associate of the employee who obtain the loan to acquire the shares under ESS.

  • This benefit is provided to a person who is associated with an employee.

  • The benefit is provided either by the employer or by another person under an arrangement with the employer for providing the benefit.

FBT Rules Under QWBA

  • The employee obtains the loan and acquired the share rather than trustee as per the term [5] & [6] the loan meets the requirement of Section CX 35 and qualify for employee share loan. It won’t be FBT under Section CX 10(2)(a).

  • The FBT rules apply to a benefit provided to an associate in the same manner as provided to the employee, the similar exclusions in the FBT rules would apply to the associate which are applicable for the employee

Can Trustee “beneficially own” Shares?

As per the judicial statement the term “beneficially own” is interpreted in different ways upon the context the term is used.

  • For example, in Perpetual Trustees, Estate, and Agency Co of New Zealand, Ltd v Commissioner of Stamp Duties [1927] NZLR 714, Stringer J delivering the judgment held that a church had a beneficial interest in a bequest to the church that was to be applied for the purposes of its foreign missionary work. 

  • A number of cases that had considered a person holding funds on trust for a purpose, or to be applied in a particular manner, as being beneficially entitled for the purposes of succession duty.

  • In the context of employee share schemes, the employee to “beneficially own” the shares means the employee must own the rights that give the shares value, in particular the rights to dividends.

Conclusion of Employee Share Schemes

Employee share loans are ultimately an effective tool for businesses trying to recognise and keep talent. Employers and employees must carefully manage the additional layer of complication brought about by the application of the Fringe Benefit Tax. Companies can continue to provide worthwhile benefits that match workers' interests with the long-term prosperity of the company by being aware of the regulations and their ramifications—all without running the risk of incurring unforeseen tax obligations.

The FBT and employee share loan story serves as a reminder that the specifics are crucial when it comes to taxes and finance. And even though the benefits could be enormous, they frequently have a cost.

New Zealand Tax Accountant.