Doug Hastie

Entrepreneur Doug Hastie has joined Xero managing director Anna Curzon in criticising an IRD proposal to tax gains on shares issued to employees under incentive schemes.

Mr Hastie – major shareholder and chief executive of Christchurch company Syft Technologies and director and TV pitchman for tea company Chanui – tells NBR stock options are an important element in staff motivation but also in the war for talent amid the global IT skills shortage.

At Syft, Mr Hastie has hired 25 people over the past two years and he’s looking to hire the same again this year. Like most techs, he’ll likely have to fill some positions from offshore, and share options are always part of the bait.

In a discussion document, first revealed by NBR’s Rob Hosking, the IRD proposes changing the rules for employee share schemes to crack down on what it labels tax avoidance (Mr Hosking labeled the under-the-radar move as a “stealth tax”).

The IRD’s paper says: The current treatment of some sophisticated employee share schemes can result in taxable employment income being treated as tax-free capital gains and so escaping taxation. This undermines the fairness of the tax system. These sophisticated employee share schemes can provide a significant amount of untaxed employment income for some high income earners.

Mr Hosking notes that other countries  – such as Australia or the US – only tax the gain in such shares if there is a concession offered by the employer.

Mr Hastie says the IRD’s broader, more aggressive approach in part has cultural roots. He says New Zealanders tend to prefer negative re-enforcement to positive re-enforcement.

Influenced by his time on Wall Street, and US commercial culture in general, the Syft boss is a big proponent of employee shares schemes.

“Just about everyone here has options in the company and we give them generously because we want people to be rewarded in success,” he says.

Employees sometimes work weekends. They do it in part because they love the company, he says, and in part because they own a small chunk of it.

Anything that hinders such incentive schemes “is bad for us and bad for New Zealand.

“If there’s a capital gains tax on everyone, then fair enough. But this seems like a cap on people doing well.”

For her part, Xero’s Anna Curzon says the IRD’s proposal is  “in effect an attempt to impose a quasi-capital gains tax.”

“Changing the tax rules could disincentivise employers to use employee share schemes and could be detrimental to any industry trying to compete globally for talent,” she says.

NBR has asked Revenue Minister Michael Woodhouse for comment.

NBR