How are share options and Restricted Stock Units (RSUs) taxed when granted and exercised by an employee in New Zealand?

The tax treatment of employee share schemes, including share options and Restricted Stock Units (RSUs), in New Zealand depends heavily on whether the scheme meets the criteria for an Employee Share Scheme (ESS), which offers tax deferral benefits.

### General Taxation Principle

If the scheme does not qualify as an ESS, or if the employee chooses not to use the deferral rules, the benefit derived from the shares or options is generally treated as employment income and taxed at the time of grant or vesting, based on the difference between the market value and the cost paid by the employee.

### Employee Share Scheme (ESS) Rules

If the scheme qualifies under the ESS rules, employees can often defer paying tax until a 'taxing point' occurs, which is usually when the shares are sold or when the employee leaves employment, provided certain conditions are met.

1. Share Options:

• Grant: Generally, no tax is payable at the time of grant.
• Vesting/Exercise: Tax is deferred until the taxing point. The taxable amount is the difference between the market value (MV) of the shares at the taxing point and the exercise price paid by the employee.

2. Restricted Stock Units (RSUs):

RSUs are rights to receive shares once vesting conditions are met. The vesting date is typically the taxing point unless ESS deferral is elected.

• Taxable Amount: The taxable income is the market value of the shares received on the vesting date (or sale date, if deferred).

### ESS Tax Deferral Election

Employees can elect to defer paying tax on the ESS benefit until the earliest of:

• The employee leaves the employment that gave rise to the benefit.
• Ten years after the grant date.
• The shares are sold.

If the employee remains employed and holds the shares beyond the deferral period, tax becomes due immediately.

### Reporting Obligations

Employers must report the value of the benefit provided under the ESS on the employee's PAYE summary. If the benefit is taxable immediately, PAYE/ESCT must be withheld. If the benefit is deferred, the employer must report the details, but the employee self-assesses the tax liability when the taxing point occurs.