Valuing Shares for Employees: new rules

Valuing Shares for Employees: new rules

Valuing shares is a minefield. Some employers offer their employees the option of participating in employee share schemes as a way of increasing employee engagement. The IRD has introduced some rules on share valuations specific to employee schemes which is helpful.

As of 1 April, 2017, any shares given to the benefit of the employee needs to be reported to the Inland Revenue. This will be done using the Employer Monthly Schedule (EMS). This is the document that companies compile on a monthly basis when they pay PAYE.

Any difference between the amount paid by the employee, and the market value of the shares, gives rise to a taxable share benefit.

Benefits received by an employee under a SPA are considered employment income. PAYE can now be withheld on share benefits received by employees.

Inland Revenue has released a document covering the issue of share purchase agreements (SPAs). SPAs are defined as an agreement to issue or dispose of shares in a company that is entered into as a result of an employment relationship. Whether or not the employee is still employed at the time is immaterial.

The list of valuation methods below is not meant to be exhaustive. The key requirement is that any valuation method chosen reflects the real market value of the shares at the acquisition date.

How do you Value Shares? 

Under the new rules, an employer will need to value the shares offered to employees.

Listed Companies

Valuation is pretty easy in the case of listed companies. The company can choose a valuation based on:

  • Volume Weighted Average Price (VWAP) over the last five trading days prior to acquisition
  • the closing price of the shares on the date of acquisition
  • if the shares are disposed of, the actual disposal price will determine the value. If the shares are in foreign currency, the exchange rate will be determined by the trading spot price exchange rate on the date of disposal.

All of this makes perfect sense.

What about Shares that are not Publically Traded? 

Most companies won’t have their publically shares listed. Unlisted shares don’t have the advantage of being regularly traded in a market. If there is no ready market, companies can choose to:

  • use a suitably qualified valuer who complies with a suitable accounting standard
  • base the valuation on a sale of shares to an independent party in an arm’s length transaction
  • have a Board member, Chief Financial Officer or Chief Executive confirm that the price of the shares is the market value at the time

There are specific rules that apply to any of these option.

What about Start-up Companies? 

Special rules exist for start-up companies. Companies can choose to:

  • use a suitably qualified valuer who complies with a suitable accounting standard
  • base the valuation on a sale of shares to an independent party in an arm’s length transaction in the past twelve months. This might be based on a previous capital raising or the sale of a parcel of shares.
  • a valuation prepared by an appropriate person in the company. There are very specific rules that govern this option and care should be taken if you choose to use it.

Whatever method is chosen, the Employer is required to retain documentation that can support the share value and the method chosen. This must be given to the Commissioner on request.

You can read more about IRD’s rules on SPAs by clicking here.

This article is general in its application and is for guidance purposes only. Tax is a complex area and you should always seek advice specific to your circumstances. Feel free to contact us if you would like specific tax advice. 

Angus is the CEO and founder of Generate Accounting.