NZ now has a framework for taxing employee salaries where some or all of it is paid in cryptocurrency
By James Hawes, partner and Louise Taylor, senior associate at Simpson Grierson.
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 the tax elements of paying staff in cryptocurrency are now clearer, what is not so clear is how this will interplay with employment legislation covering how wages, salaries and holiday pay must be paid. Also, payroll systems may not be able to deal with crypto-currency payments, and may need further development to cater for this.
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.
The rulings come off the back of requests for IRD to provide clarity regarding its approach to this emerging form of remuneration. 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.
However, given the uncertainty around the status and value of cryptocurrency (eg 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-salaries might typically be expected to form part, rather than all, of an employee’s remuneration (unless the employee has other income sources).
Crypto-remuneration tax obligations for employers
The key points for employers to note from the recent IRD rulings are as follows:
- 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. This applies whether the relevant ‘payment’ is regular remuneration or a bonus. PAYE applies because IRD has opted for the view that this type of crypto-remuneration is ‘salary or wages’ for PAYE purposes.
- 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).
- Fringe benefit tax (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).
- 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.
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.
More needed to complete the picture
Employers should not rush any plan to pay staff with cryptocurrency – there is more to the picture than the tax issues. For example:
- Employment law considerations: It is not yet clear how the IRD’s view of crypto-salaries 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 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-salary 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.