New Zealand: What employers need to check before remunerating employees with cryptocurrency
Employers now have greater clarity regarding IRD’s approach to the taxation of employee remuneration where some or all of the remuneration is in cryptocurrency, following a recent run of IRD rulings.
While this means that key tax elements of remunerating staff in cryptocurrency are now clearer, what is not so clear is the interplay with employment legislation covering how salaries, wages and holiday pay must be paid. In addition, payroll systems may not be able to deal with cryptocurrency, and may need further development to cater for this.
In summary – what you need to know
Cryptocurrency in the spotlight
The recent run of IRD rulings regarding employee remuneration that includes cryptocurrency has put the spotlight on this type of remuneration. There are also further IRD items in the pipeline, regarding the application of employee share scheme tax rules to certain “equity” token offerings to employees and regarding the wider income tax and GST implications of cryptocurrency (not limited to the employment context).
The IRD rulings come off the back of requests for IRD to provide clarity regarding its approach to this emerging form of remuneration, and with Facebook announcing its plan to launch its own digital currency, Libra, in 2020, cryptocurrency may well become a more common, even mainstream, form of employee remuneration in New Zealand.
Given the uncertainty around the status and value of cryptocurrency (for example, the NZD value of Bitcoin over the past 12 months has fluctuated from $4,940 to $19,452, with some sharp drops as well as gains), for now such crypto-remuneration might typically be expected to form part, rather than all, of an employee’s remuneration (unless the employee has other income sources).
IRD’s approach to the taxation of crypto-remuneration
IRD has issued three public binding rulings to date, dealing with cryptocurrency provided as a regular part of an employee’s remuneration, cryptocurrency bonuses and employer-issued cryptocurrency.
The key points for employers to note in relation to IRD’s views set out in these rulings are as follows:
- PAYE applies to some crypto-remuneration: PAYE will apply to currency-equivalent crypto-assets that are directly convertible to NZD or another government-backed (‘fiat’) currency on an exchange and are not subject to any ‘lock up’ period in relation to conversion or sale. The same applies whether the relevant ‘payment’ is regular remuneration or a bonus. PAYE applies because IRD has opted for the view (despite acknowledging contrary arguments) that this type of crypto-remuneration is ‘salary or wages’ for PAYE purposes.
- PAYE calculation and payment by employer: Where PAYE applies, an employer will need to account for PAYE on the ‘payment’, and will need to ‘gross up’ the net amount of the ‘payment’ at the time it is made (in NZD) in order to calculate the PAYE payable. The employer cannot ‘deduct’ the PAYE from the crypto-remuneration, so the crypto-remuneration PAYE amount may instead be deducted from the employee’s ‘ordinary’ salary or wages (in addition to PAYE on the ordinary salary or wages).
- FBT applies to other crypto-remuneration: FBT will generally apply in any other case, for example if crypto-assets provided to an employee are not currency-equivalent or are not directly convertible to a fiat currency, or if a lock-up condition applies. The employer will need to account for FBT based on the market value of the benefit, or otherwise an IRD-determined value, at the time the benefit is provided (which in the case of a lock-up condition will be when the condition is met).
- Employee share scheme tax rules may apply: The employee share scheme tax rules may apply to some crypto-remuneration. The provision of crypto-assets that are treated as ‘shares’ and received under an ‘employee share scheme’ for tax purposes is carved out of the rulings issued to date.
IRD’s view that certain crypto-remuneration is to be treated as ‘salary or wages’ for PAYE purposes also has flow-on consequences in relation to other regimes handled by IRD, including KiwiSaver, student loan repayments and Working for Families entitlements. IRD’s view also begs the question, however, as to whether or not such remuneration is a permissible form of salary/wages under New Zealand wage protection legislation.
The IRD rulings issued to date also do not deal with other key tax issues that arise in relation to crypto-remuneration, including in particular an employee’s position in relation to subsequent gains (and losses) being held on capital or revenue account. IRD has been asked to confirm its position on such issues, which should be covered by future IRD items.
More than just tax to consider
Employers should not rush into any plan to pay staff with cryptocurrency now that IRD has confirmed its views on the tax treatment of crypto-remuneration. There is more to the picture than the tax issues. For example:
- Employment law considerations: As noted, it is not yet clear how the IRD’s views regarding crypto-currency included in employees’ remuneration, and in particular its view that certain crypto-remuneration is ‘salary or wages’ for PAYE purposes, fits in with employment law legislation stipulating how salary and wages must be paid (including under the Wages Protection Act, which generally provides for salary/wages and bonuses to be paid in money only) and holiday pay calculations.The regulator (MBIE) has taken a robust approach to interpreting and enforcing the Holidays Act and many payroll systems providers have experienced difficulties even with getting traditional cash payments right. It is not yet known how MBIE will view cryptocurrency payments, but that view is needed. Employers should consider carefully how any cryptocurrency payment arrangements are included in employment agreements so as to ensure compliance with salary/wage payment and holidays calculation rules.
- Payroll systems issues: There is also the very practical aspect of whether payroll systems are able to deal with ‘payments’ in cryptocurrency. It is quite likely that they do not, and if not, systems updates would be needed to make crypto-remuneration payments work.There will be challenges for those operating off-the-shelf or software-as-a-service systems, whose providers may decide not to provide an update to deal with this development. If a payroll system can be modified, it will be important to allow sufficient time for testing to ensure that the updated system works smoothly and that the employer will still meet its payment and compliance obligations on time. Employers will also need to factor in the internal and external costs of the development, implementation and testing of such updates, which may be significant.
If you are an employer looking at offering cryptocurrency or other crypto-assets to your employees, check that you have the full picture, and get in touch with one of our specialists if you would like further advice.