1. This submission is from Chapman Tripp, PO Box 2206, Auckland 1140.
  2. Our contacts are:
    • Bevan Miles
    • David Patterson
    • Roger Wallis


  1. Chapman Tripp is a full service corporate law firm with offices in Auckland, Wellington and Christchurch.

Thank you for the opportunity to comment on the paper "Taxation of employee share schemes further consultation" (the September Paper).


  1. We support the proposed continuation of an exemption for widely offered Employee Share Schemes (ESS) and amendments to the existing regime to make schemes less restrictive and simpler to operate (subject to our comments below). As we noted in our submission on the May 2016 officials' issues paper "Taxation of employee share schemes" (the May Issues Paper), widely held schemes are valuable because they provide benefits such as encouraging share ownership by people who otherwise would not participate in our capital markets, greater engagement with company performance and increased financial literacy. Maintaining a regime for widely offered schemes is also consistent with the Government's Business Growth Agenda (BGA) and its efforts to lift productivity and competitiveness.
  2. We are generally supportive of the amendments to the existing widely offered scheme regime proposed in the September Paper, with the exception of the following:
    1. We do not support the proposal that shares are issued for no more than $2,000 less than the market value of those shares and submit instead that the relevant threshold should be $5,000 (in line with the first requirement in paragraph 30 of the September Paper). This would permit employers to choose to issue shares for no consideration, up to a market value of $5,000 per annum, if they wish. We do not see a compelling policy reason why an employer wishing to provide shares for no cost should be limited to an amount below the $5,000 per annum threshold.
    2. Paragraph 31 of the September Paper proposes that, if there is a cost to the employee to acquire shares, the employer must provide an interest-free loan facility. We submit that the rules should provide flexibility as to whether a loan facility is provided to fund acquisition of the shares, providing an employer with the choice to require employees to fund the acquisition if that is commercially desirable.
  3. We are supportive of the amended proposal for transitional relief.
  4. We continue to agree with the proposal to allow a deduction to employers for the benefit provided under ESS.
  5. As noted in our submission on the May Issues Paper, we support aligning the tax treatment of ESS benefits from options and benefits from ESS designed to operate as option-like schemes. In that respect, we broadly support the second principle noted in paragraph 2 of the September Paper, which states that:

"ESS benefits which are options or subject to contingencies should be taxed once the option is exercised or the contingencies are resolved".

  1. However, we disagree with the first principle in paragraph 2, which states that:

"ESS benefits which depend on continued employment should be taxed once that employment has occurred".

  1. The reasons for our disagreement with this point are set out in our submission on the May Issues Paper. We have not repeated those comments, but note that the September Paper has not changed our views.
  2. Finally, the September Paper provides an example of an ESS where funding is provided by way of limited recourse loan (example 7). It is concluded that the limited recourse loan provides protection against a decline in value of the shares, with the result that the taxing point should be deferred. We have two comments on this example:
    1.  As noted in our earlier submissions, we consider that a non-recourse loan should not be sufficient in itself to justify deferral of income recognition because taxable income from debt remission is likely to arise to an employee in the event that the loan is not repaid.
    2. The example suggests that a deduction would arise to the employee equal to the loss arising on disposal of the shares. It is not clear to us the basis for such a deduction. Presumably it is intended that the proposed new rules will provide a deduction for a decline in value of shares obtained under ESS as opposed to the September Paper suggesting that shares acquired under an ESS are held on revenue account.