Employee share schemes – employer deduction timing
You may recall the relatively recent taxation changes to employee share schemes (ESS), which were effected by the passing of the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters Act 2018).
The changes came into effect from 29th September 2018 and introduced the concept of; a ‘share scheme taxing date’, new reporting obligations for the employer, the option for the employer to withhold and pay an amount of tax in relation to an ESS benefit and the ability of the employer to claim a deduction equivalent to the employees ESS benefit income.
According to IR, some confusion has arisen as to exactly when the employer’s deduction arises, mainly as a consequence of the introduction of an ESS deferral date – a date 20 days post the share scheme taxing date. In this regard, is the deduction for the employer triggered on the share scheme taxing date, or on the later ESS deferral date?
To remove the potential confusion (or at least attempt to do so which is usually the purpose of IR document releases – you are likely to have your own views in this regard), IR has issued a draft QWBA under the reference of PUB00385 – When an employer is party to an employee share scheme, when does an employer’s expenditure or loss under s DV 27(6) or income under s DV 27(9) arise?
The simple answer is that it depends on whether the employer has an ESS benefit reporting obligation or not, as only the existence of a reporting obligation will trigger the ESS deferral date provision (to allow time for the employer to compile and report the relevant information). The draft QWBA in this respect, acknowledges that unless the ESS benefit relates to a former employee, the employer is almost certain to have a reporting obligation.
So where the ESS deferral date applies, the employers deduction entitlement will be triggered 20 days post the share scheme taxing date. Otherwise, the share scheme taxing date will trigger the deduction entitlement.
And just because I am feeling generous, in case you have forgotten what the ‘share scheme taxing date’ is…
It is defined as being the earlier of:
- The first date when the shares are held by or for the benefit of an ESS employee (or associate) and after which, under the provisions of the ESS, there is:
– No material risk that beneficial ownership may change or that a right or requirement in relation to the transfer or cancellation of the shares may operate
– No benefit accruing to the ESS employee (or associate) in relation to a fall in value of the shares
– No material risk that there will be a change in the terms of the shares affecting the value of the shares
- The date when the shares or related rights of an ESS employee (or associate) are cancelled or are transferred to a person who is not associated with an ESS employee.
Should you wish to comment on PUB00385, the closing date for submissions is 27th April 2021.
Income attribution IS
It is hard to believe, at least in my head anyway, that April 1st is almost upon us. While the date for many will immediately trigger thoughts of April fool’s day (I suspect you have all been caught out by some sort of prank over the years), what will not be joke, and certainly not funny to some, will be the fact that April 1st also triggers the increase in the top personal marginal tax rate from 33% to 39% once annual taxable income exceeds $180k.
Highlighted in a recent AWIR in this regard, along with my own outpouring of suspicions that we will see more activity from IR in the personal services attribution rules space, was a draft interpretation statement from IR titled ‘Income tax – Calculating income from personal services to be attributed to the working person.’
Well IR have now completed their tinkering with the draft document, and have recently released IS 21/02, naturally with the same title.
Now don’t get too excited if you think this is to be ‘a one-stop-shop’ as to how the personal services attribution rules should apply in practice. This document (of 50 pages) only discusses how you should calculate the amount of income from personal services that is attributed to the working person under the attribution rule, once you have actually reached a conclusion that the attribution rules apply to your client. For guidance in this last respect, you need to refer to IS 19/02 instead.
With a need to reference IS 19/02 as well, you may then be questioning the 50 page length of IS 21/02. However, IR feel that there is a lot to talk about…
For instance, you need to understand:
- The general rule
- What should and should not be taken into account in the calculation
- What if the entity has a separate loss-making activity or where there are carried forward losses from supplying personal services
- To what extent are the look-through status of LTC’s/partnerships ignored
- What about dividends, both post-year and in-year
- When can foreign tax credits be claimed
- Other implications of the income attribution rules on the likes of child support/WFF calculations, beneficiary income and the interaction with excessive remuneration rules