Land and Income Tax Amendment Act 1974

This commentary item was published in Public Information Bulletin Volume 81, October 1974

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Employee Share Purchase Scheme

Introduction

The 1973 Budget announced a scheme to encourage a greater identity of interest between employer and employee through the issue of shares. The object of the scheme is to encourage companies to make interest free loans to their employees to enable them to take up shares in their employing company.

The Land and Income Tax Amendment Act recently passed by Parliament, incorporates the scheme in a new section 129CH of the Tax Act.

Main Features Of Scheme

The principal features of the scheme are -

• All shares offered must be fully paid ordinary shares ranking equally in all respects with other ordinary shares of the company.
• A restrictive period during which shares issued may not be dealt with by the employee. The period is a minimum of 3 years and a maximum of 5 years. Subject to this restriction any benefit to the employee arising through preferential buying terms will not be subject to tax.
• During the restrictive period employees are entitled to receive any dividends payable on the shares. Dividends cannot be applied to meet outstanding debts owing to the company.
• Loans to enable employees to purchase shares must be interest free.
• Eligibility to participate must be equal and not, for example, confined to executives or long serving employees.
• The employer company is given a concessional deduction from taxable income for 10 percent notional interest calculated at monthly rests on loans made available to employees to finance the purchase of shares. This is additional to any deduction that may be allowable for actual interest incurred on money borrowed to finance employee share purchases.

Approval Of Schemes

To qualify for the notional deduction of interest, schemes must be approved by the Commissioner. Approval of schemes will be dealt with by our Wellington district office.

Here are the requirements which schemes must satisfy in order to obtain approval.

• The cost to employees of shares made available for purchase or subscription must not exceed market price at the date of purchase or subscription.
• The aggregate amount of loans which may be made to any employee within a 3 year period is not to exceed $1560.
• Every full-time permanent employee must be eligible to participate in the scheme on an equal basis with every other full-time permanent employee. Where the scheme is available to part-time employees or to seasonal employees, they must also be eligible to participate on an equal basis with every other part-time employee, or every seasonal employee.
• Any minimum period of service which may be required before a full-time permanent employee becomes eligible to participate in the scheme is not to exceed 3 years. In the case of other employees any minimum period of service is not to exceed an accumulative period that is the equivalent of 3 years full-time service.
• Loans to employees for the purchase of shares must be free of all interest and other charges.
• Where it is a requirement that loans made under the scheme to any employee shall be of a minimum amount, the minimum amount is not to exceed $624.
• The repayment of loans by employees is to be by regular equal instalments at intervals of not more than 1 month over a period of not less than 3 years and not more than 5 years from the date of the loan.
• Any employee may however elect to repay all or any part of his loan prior to the due date for repayment, but the shares may not be released until after the end of the restrictive period.

The following conditions must apply during the restrictive period -

• The shares are to be held in trust for the employee.
• Any employee, for whom shares are held on trust, is to be precluded from assigning, charging, alienating, or otherwise disposing of all or any of his rights in respect of the shares.
• The trustee must pay to the employee all dividends received in respect of any shares. Dividends are not to be appropriated towards repayment of any loans owing under the scheme or towards any other debts owing to the company.

At the end of the restrictive period the following provisions apply -

• On repayment of loans and at the expiry of 3 years or other restrictive period. The shares are to be transferred to the employee by the trustee or at the employee's option the shares are to be purchased by the trustee from the employee at the market price (but not exceeding cost price to the employee at the date of purchase).
• On death of employee. The shares must be transferred to the trustee of the deceased employee's estate or, at the option of the trustee of the estate, are to be purchased by the trustee of the scheme at market price (but not exceeding the original cost price to the employee). This is subject to repayment of any loans outstanding in respect of the shares.
• On accident, sickness or redundancy of employee. Any shares are to be transferred to the former employee, or at the former employee's option are to be purchased by the trustee at market price (but not exceeding the original cost price to the employee). This is subject again to repayment of any loans outstanding in respect of the shares.
• On termination of employment. The trustee is not to transfer to the former employee any shares held on trust, but is to purchase the shares from the former employee at market price (but not exceeding the original cost price to the employee) subject to the repayment of all loans outstanding in respect of the shares.
• Early withdrawal.Any employee is to be entitled to withdraw from the scheme after the expiry of 3 months prior notice to the trustees of the scheme. In these circumstances the conditions of withdrawal will be on the same terms as on termination of employment.
• Hardship. Where the trustee is satisfied that any employee in the scheme has suffered loss or there are circumstances where the employee's continued participation in the scheme entails or would entail serious hardship, the trustee with the consent of the employee, is to have a discretion to -
  • Vary the terms of the repayment of any loan made to the employee under the scheme.
  • Allow the employee an immediate withdrawal from the scheme on the same terms as if he had terminated employment.

Miscellaneous Amendments

These involve amendments to other statutes. The main features are -

• Trusts under the scheme will not be regarded as unit trusts.
• The rule against perpetuities will not apply to these trusts.
• Transfers within the scheme will be exempt from stamp duty and gift duty.

Application

The scheme first applies to tax on income derived in the income year that commenced on 1 April 1973.

How To Obtain Approval

Send a copy of the rules and/or trust deed to -

District Commissioner, Inland Revenue Department, Private Bag, WELLINGTON.