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In Short
- From 1 April 2026, private, unlisted firms may opt into a tax deferral regime so employees pay tax only at liquidity events.
- Employer tax deductions will align with when the employee is taxed, simplifying compliance.
- Companies should review share-scheme documents, governance and payroll now to prepare for the changes.
Tips for Businesses
Start by auditing your ESS (Employee Share Scheme) agreements and internal controls now. Decide whether your company will opt into deferral, update necessary governance and payroll systems, and communicate clearly with employees about when tax will become payable. Ensure you notify Inland Revenue and your staff when you opt in.
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The New Zealand Government will introduce employee share scheme (ESS) tax changes from 1 April 2026 under the Taxation (Annual Rates for 2025-26, Compliance Simplification, and Remedial Measures) Bill. Under these rules, private and unlisted companies will be able to opt into a new tax deferral regime, allowing employees to pay tax at liquidity events rather than on grant. Further, the reforms address long-standing issues with valuation, liquidity, and timing, making ESS more effective for both employers and staff. Overall, this article outlines how the regime operates, to whom it applies, and the steps companies and employees should take to prepare.
Challenges with the Current Tax Treatment of ESS
Currently, employees are taxed when they acquire shares or when share conditions lapse, based on market value minus purchase price. For listed companies, this is manageable as market prices are clear and shares can usually be sold to cover the tax.
For employees of private companies, two issues arise:
- valuing shares without a market price is costly and uncertain; and
- tax often becomes payable before employees can realise cash.
The latter is especially burdensome for early-stage staff who accept below-market pay with shares as part of their remuneration.
Thus, these key issues have made equity-based remuneration much less attractive in New Zealand than in other markets, weakening the ability of startups and growth companies to use ESS as an effective recruitment and retention tool.
Clarifying the Taxing Date
The Bill also introduces clarifications to existing ESS rules. It makes clear that the taxing date occurs when an employee obtains an unconditional right to receive shares, even if the legal transfer of those shares is delayed for administrative reasons. However, if there is still a genuine risk of forfeiture, or the employee has protections against share price declines, the taxing date will not yet arise.
This amendment ensures consistency in how taxing dates are determined, and prevents artificial timing differences between schemes that are structured slightly differently in practice.
Employer Deduction Timing
Employers who provide shares to staff under an ESS are entitled to a deduction corresponding to the taxable income recognised by employees. Until now, there has been uncertainty about when that deduction arises.
The Bill confirms employers can deduct costs on the same date employees are taxed. This alignment provides greater clarity and simplifies compliance.
Why This Matters
These reforms will be particularly valuable for New Zealand's private companies and its startup ecosystem. By deferring tax until a genuine liquidity event occurs, employees can participate in ESS without the risk of facing unaffordable tax bills on paper gains.
For employers, the regime reduces compliance costs by removing the need for costly valuations at grant, and makes equity-based remuneration a more effective tool for attracting and retaining staff.
Practical Considerations
Although the reforms will not take effect until April 2026, companies should begin reviewing their ESS documents and structure now. Employers will need to decide, on a case-by-case basis, whether to apply the deferral regime for future share issues. They should also ensure that governance documents, payroll systems, and communication processes are updated to reflect the new framework.
Employees participating in these schemes should be aware that while taxation is deferred, it is not eliminated. Tax will still become payable when a liquidity event occurs, and staff will need to plan accordingly. In some cases, such as when dividends are small (but still trigger the taxing date), employees may face a cash flow challenge in meeting their liabilities.
Additionally, deferring tax removes access to tax-free capital gains.Companies are therefore likely to decide, on a case-by-case basis, whether to apply the regime or let employees incur tax earlier to benefit fromlater gains.
How the New Deferral Regime Works
The Bill introduces an optional deferral regime for unlisted companies, allowing certain shares to be designated as "employee deferred shares". Employees are not taxed when they receive these shares. Instead, tax is deferred until a defined liquidity event.
Liquidity events include a company listing, share sale or cancellation, or dividend declaration. At that point, the taxable benefit is calculated and tax becomes payable. This change removes the need for upfront share valuations and ensures employees have liquidity to meet tax when due. Thus, employers must notify Inland Revenue and employees when applying the regime and maintain reporting at liquidity events.
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Key Takeaways
From April 2026, private unlisted companies in New Zealand can opt into a new tax deferral regime. Employees will pay tax only at a liquidity event, avoiding upfront tax bills on unrealised share gains. Moreover, employer deductions will align with employee taxing points, which simplifies compliance and reduces administrative complexity.
Ultimately, these reforms ease cash flow pressure by taxing only when employees have access to funds. They also make equity a practical tool for attracting and retaining talent in startups and growth companies.
Therefore, companies should review existing share schemes, update governance processes, and communicate changes before April 2026. Additionally, employees must remember that tax is deferred, not eliminated, and plan carefully for future obligations.
If you have any questions about regulatory changes, our experienced regulatory and compliance lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
Who can use the new tax deferral regime?
Only private, unlisted companies not part of a listed group are eligible to elect into the regime.
What should companies and employees do now?
Companies should review share scheme documents and governance processes before April 2026. Employees should plan for future tax obligations.
