ANNEX Summary of impacts of the options (including the status quo) Option 1: Status quo Description Impacts No tax withheld at source. Employees Employers/payroll intermediaries and software developers Tax system(by reference to the integrity of the tax system, impact on Inland Revenue and revenue impact) Society (by reference to social policy programmes administered by Inland Revenue) Advantages - - - - Disadvantages Compliance costs associated with filing returns and payment of tax on any ESS benefits received. If the amount of tax payable exceeds $2,500, the employee faces the prospect of having to comply with the provisional tax rules and accounting for tax in instalments throughout the year. Employees need to have cash resources to meet any tax obligations. - Risk to the tax base from employee non-compliance. Inland Revenue incurs higher administration costs associated with processing returns and any necessary enforcement action. Elevated tax collection risk due to employees being uncertain about their obligations under the Income Tax Act 2007. - Mitigating factors Employees can sell shares to meet any tax liabilities. - - ESS benefits counted towards any obligations/entitlements for child support, student loans or Working for Families tax credits. Conclusion: Employee bears the cost of compliance and associated tax risk. Inland Revenue faces increased non-compliance risk. Option 2: Collection using the PAYE system (preferred option) Description Impacts
Option 4: Collection using a withholding tax Not considered in depth due to concerns that Inland Revenue would not be able to implement the method. Alternative well-developed systems such as PAYE and FBT already exist. Recommended proposal: Employer election with data capture using the PAYE’s employer monthly schedule (EMS) Description Impacts Employer to choose to withhold tax on any ESS benefits received by an employee using the PAYE system Employers disclose the value of any ESS benefits via the employer monthly schedule – this would apply in all cases whether the employer chose to withhold tax or not. Employees Employers/payroll intermediaries and software developers Tax system(by reference to the integrity of the tax system, impact on Inland Revenue and revenue impact) Society (by reference to social policy programmes administered by Inland Revenue) Advantages Employees may have increased certainty about the tax treatment of ESS benefits including their obligations. Reduced compliance costs. Increased employee certainty about the tax treatment of ESS benefits may support the take up of such schemes and inclusion in remuneration packages. Reduced impact on employers if the obligation to pay tax stresses employers’ working capital or interferes with bargains struck between the employer and employee. Cost of compliance is shifted from the employee to the employer when the employer considers there is an overall net benefit to do so. Improved compliance. Improved tax collection. Reduced revenue risk. Reduced administration costs for Inland Revenue from fewer individual tax returns and follow up enforcement action. ESS benefits counted towards any obligations/entitlements for student loans and Working for Families tax credits. ESS benefits counted for child support purposes. Disadvantages Advantages described above are not fully captured if employers decide not to withhold tax on ESS benefits received by employees. May create additional compliance costs on employers. Need for legacy record keeping to ensure that elections are properly captured. Advantages described are not fully captured if employers decide not to withhold tax on ESS benefits received by employees. Possibility that reconciliation errors are created due to amounts not counted for Kiwisaver and when the employer chooses not to withhold tax. This will require additional
Risk of unintended non-compliance if the employer chooses not to withhold and the employee is unaware of their tax obligations. Employer responsible for declaring any ESS benefits entitlements accruing to ex-employees. Risk of unintended consequences if the employer chooses not to withhold and the employee is unaware of obligations under the Income Tax Act 2007. Election is more expensive for Inland Revenue to administer. rework of the EMS by Inland Revenue. Mitigating factors Employee share agreement should clearly articulate the employee’s tax obligations. Inland Revenue to develop a suitable communications strategy to inform employers about their obligations. Employer can elect not to withhold tax. Inland Revenue captures income information ESS using the EMS. Additional legislative change to ensure ESS benefits do not for the purposes of the ACC earners’ levy and Kiwisaver. Conclusion: Takes into account employers’ compliance cost concerns about shifting the obligation to collect tax at source and improves the integrity of the tax system by using the PAYE system to improve the collection of information about employee entitlements under an ESS.