New Employee Share Option Rules
Why You Can Now Trigger Tax Without Exercising
New Zealand’s latest tax bill makes major changes to how Employee Share Schemes (ESS) are taxed, especially for options and deferred shares.
While the new rules are designed to help employees of unlisted and start-up companies manage cashflow and valuation difficulties, there is also a sting in the tail in these rules. It’s now clear that employees can suffer a tax cost on options, even if they are never exercised.
Current Rules: The Starting Point
Employees who receive shares under an ESS are taxed on the market value of the shares less any amount they pay for them.
That market value is measured at the “Share Scheme Taxing Date”, which is generally when:
- The employee effectively owns the shares unconditionally, equivalent to other shareholders.
- There is no material risk that beneficial ownership will change or that the shares could be transferred or cancelled.
- The employee is not protected from a fall in share value.
- There is no material risk that the terms of the shares will change in a way that impacts their value.
In short: it’s essentially the date the employee’s ownership becomes unconditional.
However, this causes practical problems:
- Difficulty measuring the market value of unlisted shares.
- Cashflow issues when employees must pay tax but cannot sell shares.
- Employer reporting obligations under PAYE/ESS rules.
In terms of options, the historic shorthand has been “taxed when exercised, not when vested.”
That assumption no longer always holds true.
The 2025 Bill – New Deferral Election for Unlisted Companies
From 1 April 2026, it will be possible for employees of unlisted companies to elect to defer tax on ESS benefits until a liquidity event, when, in theory, the shares can be valued and sold more easily.
How it works:
- The employer makes an election for certain shares to be “Employee Deferred Shares”.
- The election is made at the time the shares are issued or transferred to the employee.
- The Share Scheme Taxing Date is deferred to the earliest liquidity event, namely:
- a listing of the company;
- a sale or cancellation of the share; or
- the payment of a dividend on that share.
At that point, the employee is taxed on the market value of the shares minus any amount paid for them.
Employer reporting and withholding obligations remain the same, the only change is the timing of the taxing date. Employers must also notify Inland Revenue when shares are designated as Employee Deferred Shares.
The key advantage of deferring the Share Scheme Taxing Date to a liquidity event is to align with cashflow. Employees are taxed when they can access funds — for example, on sale or IPO — rather than at an earlier point when the shares are illiquid and difficult to value. This also reduces the need for costly private valuations at vesting.
However, the trade-off is that tax is calculated on the market value of the shares at the time of the liquidity event (the new Share Scheme Taxing Date). If the company’s value has significantly increased, the taxable benefit, and therefore the tax liability, will also be higher.
This is an important trade-off for employees to consider. Employees may face a larger tax bill later, but they should have cash available from the liquidity event to fund that tax payment.
The Stinger – Change to the Definition of the Share Scheme Taxing Date
The legislation also includes a key change to the Employee Share Scheme Taxing Date, which could have a significant impact on companies with employees sitting on options.
From 1 April 2026, the Share Scheme Taxing Date occurs when:
- Shares are held by or for the benefit of the ESS beneficiary; or
- The beneficiary has an unconditional right to presently receive the shares.
The phrase “unconditional right to presently receive shares” refers to a point where the employee’s entitlement to the shares is no longer contingent on any remaining conditions, approvals, or future events — even if the legal transfer of the shares has not yet taken place.
In other words, the employee has done everything required under the scheme to earn the shares, and the employer (or trustee) is obliged to deliver them.
At that point, the employee’s right to the shares is enforceable, and Inland Revenue considers that they have effectively derived the economic benefit. This will trigger a tax obligation for the employee in respect of these options, even when they have not been exercised.
Inland Revenue’s reasoning is that once the right is unconditional, the employee has economic ownership of the shares and has effectively derived the ESS benefit, even if the paperwork or share register update follows later.
Employers should review their vesting and exercise provisions carefully.
Where the plan gives employees a present, unconditional right (for example, after a time-based vesting date with no further performance or employment conditions), the taxing point may occur automatically, even if the shares are not yet transferred.
These rules are intended to apply from 1 April 2026. If you have options in place now, or are designing an Employee Share Scheme, we recommend reviewing the terms prior to 1 April 2026.
Contact us to discuss how these changes could affect your tax position as a new or returning New Zealand resident with overseas investments.
Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both New Zealand tax rules and any relevant overseas tax systems before making decisions based on this content.
