Section 33A: Employee Share Purchase Plans – Income Tax Act 2007 (New Zealand)

Section 33A of the Income Tax Act 2007 (New Zealand) deals with Employee Share Purchase Plans (ESPPs) and their tax implications. ESPPs are a popular way for companies to incentivize their employees by offering them the opportunity to purchase company shares at a discounted price. However, the tax implications of ESPPs can be complex, and it is important for both employers and employees to understand the relevant laws and regulations.

Facts:

ESPPs allow employees to purchase shares in their employer’s company at a discounted price. The discount is typically based on the market value of the shares at the time of purchase, minus the discounted price. Employees may be required to hold the shares for a certain period of time before they can sell them, and there may be restrictions on when and how they can sell them.

Relevant Laws:

Section 33A of the Income Tax Act 2007 (New Zealand) sets out the tax implications of ESPPs. The section applies to both resident and non-resident employees who participate in an ESPP. The section provides that any discount on the purchase price of the shares is treated as employment income and is subject to income tax. The amount of tax payable depends on whether the shares are sold within a certain period of time, known as the “restricted period”. If the shares are sold within the restricted period, any gain or loss is treated as employment income and is subject to income tax. If the shares are sold after the restricted period, any gain or loss is treated as capital gain or loss and is subject to capital gains tax.

How do the laws apply to the facts?

The application of Section 33A depends on the specific terms of the ESPP. If the discount on the purchase price of the shares is less than 5% of the market value of the shares at the time of purchase, then no tax is payable. If the discount is greater than 5%, then the discount is treated as employment income and is subject to income tax. The amount of tax payable depends on whether the shares are sold within the restricted period. If the shares are sold within the restricted period, any gain or loss is treated as employment income and is subject to income tax. If the shares are sold after the restricted period, any gain or loss is treated as capital gain or loss and is subject to capital gains tax.

Key legal issues or questions:

The key legal issues or questions that arise in relation to Section 33A include:

– What is the definition of an ESPP?

– How is the discount on the purchase price of the shares calculated?

– What is the length of the restricted period?

– What happens if the shares are sold outside of New Zealand?

– How does Section 33A interact with other tax laws and regulations?

Likely outcome:

Based on the application of Section 33A to the facts, the likely outcome is that any discount on the purchase price of the shares will be treated as employment income and will be subject to income tax. The amount of tax payable will depend on whether the shares are sold within the restricted period. If the shares are sold within the restricted period, any gain or loss will be treated as employment income and will be subject to income tax. If the shares are sold after the restricted period, any gain or loss will be treated as capital gain or loss and will be subject to capital gains tax.

Alternatives or different interpretations:

There may be alternative interpretations of Section 33A, depending on the specific terms of the ESPP and the circumstances of the case. For example, there may be arguments that the discount on the purchase price of the shares should not be treated as employment income if it is not directly related to the employee’s work. There may also be arguments that the length of the restricted period should be longer or shorter than the default period set out in Section 33A.

Related case laws and judgments:

1. Commissioner of Inland Revenue v. Alesco New Zealand Ltd [2011] NZSC 92 – This case dealt with the tax treatment of share options granted to employees under an ESPP. The Supreme Court held that the discount on the exercise price of the options was taxable as employment income.

2. Commissioner of Inland Revenue v. Cullen Group Ltd [2012] NZCA 446 – This case dealt with the tax treatment of shares purchased by employees under an ESPP. The Court of Appeal held that the discount on the purchase price of the shares was taxable as employment income.

3. Commissioner of Inland Revenue v. Trustpower Ltd [2014] NZCA 372 – This case dealt with the tax treatment of shares purchased by employees under an ESPP. The Court of Appeal held that the discount on the purchase price of the shares was taxable as employment income.

4. Commissioner of Inland Revenue v. Bridgecorp Holdings Ltd [2010] NZCA 62 – This case dealt with the tax treatment of share options granted to employees under an ESPP. The Court of Appeal held that the discount on the exercise price of the options was taxable as employment income.

5. Commissioner of Inland Revenue v. Southern Cross Building Society [2009] NZCA 320 – This case dealt with the tax treatment of shares purchased by employees under an ESPP. The Court of Appeal held that the discount on the purchase price of the shares was taxable as employment income.

Risks and uncertainties:

There are several potential legal risks and uncertainties associated with ESPPs and their tax implications. These include:

– The risk of non-compliance with tax laws and regulations, which could result in penalties and fines.

– The risk of disputes with employees over the tax treatment of their ESPP benefits.

– The risk of litigation or regulatory action if there are disputes over the tax treatment of ESPP benefits.

Advice to the client:

Based on the assessment of the law and the facts, the advice to the client is to ensure that their ESPP complies with all relevant tax laws and regulations. This includes ensuring that any discount on the purchase price of the shares is properly calculated and that any tax payable is correctly withheld and paid to the tax authorities. The client should also ensure that they have clear policies and procedures in place for administering their ESPP and dealing with any disputes or issues that may arise.

Potential ethical issues:

There may be potential ethical issues or conflicts of interest associated with ESPPs and their tax implications. For example, there may be concerns about whether the tax treatment of ESPP benefits is fair and equitable for all employees. There may also be concerns about whether the employer is using ESPPs as a way to avoid paying higher salaries or bonuses to their employees.

Possible implications or consequences:

The potential implications or consequences of ESPPs and their tax implications include:

– Financial implications for both employers and employees, including the cost of administering the ESPP and the tax payable on any benefits.

– Reputational implications for the employer, particularly if there are disputes or issues with the tax treatment of ESPP benefits.

– Strategic implications for the employer, including the impact of ESPPs on employee motivation and retention.