Employment tax update

There have been a number of employment tax changes introduced in the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Act 2026 (the Amending Act)¹ and other recent publications including the QB 26/02 When does the fringe benefit tax exclusion for benefits to health and safety apply? Additionally, we are seeing increased activity with salary sacrifice arrangements and whilst not a change in law, we thought it useful to cover in this issue.

While targeted in nature, the changes are relevant for employers reviewing payroll settings, benefits policies and remuneration structures.

In this Tax Tips, we discuss the key employment tax changes:

• Fringe Benefit Tax (FBT)
• PAYE and contractor alignment
• KiwiSaver and ESCT
• Non-resident visitors
• Salary sacrifice arrangements
• Employee share schemes (ESS)

Fringe Benefit Tax

Gift cards

Gift cards are now expressly within the FBT rules. A fringe benefit will arise where an employer provides a gift card to an employee, unless the employer elects to treat the benefit as employment income subject to PAYE. Where FBT applies, the taxable value is the amount loaded onto the card, and gift cards are treated as unclassified benefits however the de minimis exemption will be available to apply where appropriate.

Reimbursements

Where an employer reimburses an employee for expenditure on a benefit that would have been an unclassified fringe benefit if provided directly, the employer may elect to treat the reimbursement as either employment income subject to PAYE or an unclassified fringe benefit subject to FBT. 

Health and safety benefits

The Amending Act clarifies the FBT exemption for benefits related to health and safety. Broadly, a benefit will be excluded from FBT where it is provided to manage workplace health and safety risks, consistent with the employer’s obligations under the Health and Safety at Work Act 2015.

This may include personal protective equipment, protective clothing, workstation assessments, eye tests and work-related counselling services. However, broader wellbeing benefits, such as gym memberships or general employee assistance programmes (EAPs), may not qualify unless sufficiently targeted at managing identified workplace risks. Apportionment may be required where a benefit has both work-related and private elements.

Further guidance has been provided recently in QB 26/02 When does the fringe benefit tax exclusion for benefits to health and safety apply? This guidance confirms that Inland Revenue considers that EAP counselling services provided to an employee with the aim of managing risk to health and safety in the workplace will be excluded under the health and safety exemption. Inland Revenue have removed their earlier drafted distinction between work-related and non-work-related stress having now recognised that stress can cause health and safety irrespective of its origin.

QB 26/02 also clarifies when the exemption can be extended to a counselling benefit provided to family members specifically when the circumstances of the family member are negatively impacting the employee and may cause a risk to health and safety in the employee’s workplace. Given the confidential nature of EAP services it is likely difficult for an employer would be able to differentiate in the types of counselling services provided. 

Inland Revenue will not be applying resources to checking taxpayer positions prior to 1 April 2026. 

Overall, QB 26/02 is a positive development as it provides support for how many employers would currently be applying the health and safety exemption. However, we recommend businesses should consider if any apportionment may be required going forward and update FBT processes accordingly.

Employment-related loans

The Amending Act updates how the prescribed interest rate for employment-related loans is set to better align with market conditions.

Rather than being set by regulation, the Commissioner will determine the prescribed rate based on the Reserve Bank floating first mortgage new customer housing rate. Transitional rules apply until the first determination is made.

PAYE and contractor alignment

The Amending Act confirms that workers who meet the new “specified contractor” test under employment law will generally be treated as contractors for tax purposes as well. This helps avoid mismatch between employment law and tax law.

However, the label in the contract is not enough on its own. The arrangement needs to meet the gateway criteria, including a written contractor agreement, freedom to work for others, no requirement to accept additional work, and an opportunity for the worker to seek independent advice.

For businesses, this is a good time to review contractor arrangements and documentation. Where a worker is a specified contractor, PAYE salary and wage treatment should generally not apply, but schedular withholding may still be required depending on the nature of the work.

KiwiSaver and ESCT

The Amending Act updates the KiwiSaver definition of salary or wages to align with the Income Tax Act definition, including the exclusion for specified contractors. This should ensure KiwiSaver obligations are consistent with PAYE treatment.

The minimum employee contribution rate also increases from 3% to 3.5% from 1 April 2026, with a further increase to 4% from 1 April 2028, subject to certain exceptions. 

There may be issues where total remuneration employment contracts are in place as any changes to employee pay should be communicated with the employee. We encourage employers to check in with payroll teams to ensure this initial transition has been processed appropriately. Sample payslip tests to validate the rate change should be carried out within 3 months of the change to ensure employers are meeting their minimum compulsory employer contribution obligations.

Non-resident visitors

The Amending Act introduces a new regime for certain non-resident visitors working in New Zealand on a short-term basis to reflect the increasing prevalence of remote work and short-term cross-border working arrangements.

Broadly, the regime applies to individuals in New Zealand for up to 275 days in an 18-month period who are working for non-resident employers or offshore customers. Where the requirements are met, income from personal or professional services performed in New Zealand may be exempt, provided the income is taxed in the individual’s home jurisdiction. In addition, FBT, withholding tax and ESCT will not apply.

Salary sacrifice arrangements

There has been a proliferation of benefit arrangements being marketed to employers which include salary sacrifice arrangements and the provision of public transport or e-bikes or other low-powered vehicles. A number of these arrangements have product rulings to support the implementation and provided an employer follows the scheme to the exact letter then they should be eligible for the tax treatment highlighted in the specific scheme. 

The schemes do require the employer to consider a number of issues before implementing the schemes. The tax treatment will depend on the legal and commercial design of the arrangement, and employers should carefully work through the PAYE, FBT, GST and KiwiSaver implications before implementation. 

PwC View

The employment tax changes contained in the Amending Act and additional guidance provided in QB 26/02 are largely targeted and technical. They do not amount to fundamental reform, however they are relevant for employers reviewing payroll systems, FBT processes, contractor arrangements, and remuneration structures. 

The Amending Act also includes, from 1 April 2026, some significant changes to the New Zealand ESS tax rules (previously discussed in our September Tax Tips), including:

• a new elective tax deferral regime for unlisted company ESSs; and  

• changes to the timing of employer ESS income tax deductions.  

New elective deferral regime for an unlisted company ESS

From 1 April 2026 unlisted companies can elect to defer the tax liability for employees under an ESS if shares are designated as “employee deferred shares”.

The practical effect of electing into the regime is that regardless of the terms or structure of the ESS, the taxing date will be deferred to the “liquidity event date” (generally, sale or IPO). Tax will be based on the value of the shares / sales proceeds at that time.

This is not a concessionary tax regime, and offers no tax advantage that cannot already be achieved with any other ESS.  However, the regime is likely to be attractive commercially to those privately held companies looking to bring employees into share ownership well before any intended sale of the company. We accordingly expect to see strong uptake of the regime by those companies who have until now been put off granting shares to employees because of the “dry tax charge” that can arise where there is no market for the shares.

Importantly, shares can only be designated as employee deferred shares at the time shares are issued and the election is irrevocable. This means the regime is only available for new share awards (not to existing awards), and that for a loan scheme the election must be made a lot earlier in the scheme’s lifecycle than an option scheme. The designation can be made on an employee by employee basis, but can only be made by the employer. There are reporting obligations, and as with any ESS it is important that tax advice is obtained as part of implementation.

Timing of income tax deductions

From 1 April 2026, the income tax deduction that arises to an employer in relation to ESS benefits derived by New Zealand employees arises on the share scheme taxing date (and not 20 days after this date as was previously the case). 

This is likely to have limited impact on taxpayers with ongoing ESS arrangements, however in an M&A / deal context will in many cases result in:

• the tax deduction arising under vendor ownership; and

• the employer reporting and withholding obligations arising under purchaser ownership.

Transitional provisions apply to ESS deductions arising under transactions where an unconditional agreement had been entered into prior to 1 April 2026.

PwC view

For many taxpayers, both of the above changes are generally timing in nature and should not have a material impact on the overall economic outcome. However, there are some scenarios where we expect these changes could be more relevant including:

• Start ups, growth and other privately owned companies issuing illiquid equity – the deferral regime provides an ability for companies to provide unconditional equity without triggering a dry tax charge. This should make unlisted company equity awards more accessible and alleviate a lot of the complexity of the ESS rules.

• M&A – ESS tax deductions now arise on the share scheme taxing date which, in a share transaction, is generally immediately before completion. This change means that:
  • ESS deductions can be offset against income tax payable up to completion of a transaction; and 
  • any tax losses arising as a result of the income tax deduction will arise pre-completion and be subject to business continuity test conditions (assuming the change in ownership is significant).

Footnotes

¹ Discussed in our September 2025 and March 2026 Tax Tips