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Taxation Annual Rates for 201718 Employment and Investment Income and Remedial Matters Bill

Making Tax Simpler – employment income information

OVERVIEW

A good tax system means having both good tax policy settings and good administration systems. These elements need to go hand in hand. The tax system includes social policies administered by Inland Revenue: Working for Families tax credits, child support, student loan repayments, KiwiSaver and paid parental leave.

Inland Revenue is modernising New Zealand’s tax administration through business process and technology change to make it simpler and more certain for New Zealanders, and to reduce the compliance and administration costs of the system as a whole (known as Inland Revenue’s Business Transformation (BT) programme).

A key design feature of the BT programme is to integrate tax obligations and reporting requirements into normal business processes to reduce compliance costs for businesses. In doing so, the tax obligation then becomes part of a wider process rather than an additional step required by the tax system. As part of the BT programme, progressive changes to support and frame the modernisation of tax and social policy administration are being made.

A major part of the business transformation changes involve more efficient and timely provision of information to Inland Revenue. The Bill contains two sets of proposals relating to the provision of:

  • employment income information and related deductions from that income; and
  • investment income information and the tax withheld.

This section of the report deals with employment income information.

Employment income information

Improving the administration of the pay as you earn (PAYE) system is an integral part of the BT programme. The decision to employ staff exposes an organisation to a range of regulatory requirements including PAYE obligations which can add significant compliance costs.

Increasingly employers are using software to help them run their organisations. This Bill therefore proposes changes to take advantage of modern digital systems to reduce compliance and administrative costs associated with the PAYE process by making meeting tax obligations, such as the provision of information, part of their process of paying employees rather than a separate and additional activity.

A key design principle in the proposed PAYE reforms is for Inland Revenue to receive employment income information on a “payday” rather than the current aggregated (monthly) basis. Payday information would detail the PAYE income and deductions made from employees each payday and would be due with Inland Revenue within a number of working days after payday determined by employer size and the payroll systems they use.

Eliminating the current requirement for employers (or their systems) to aggregate this information over a month before sending it eliminates a step and should enable some errors to be identified and rectified more quickly. This should improve the accuracy of PAYE. For example, it will be more readily apparent where an incorrect tax code is being used or where an individual could benefit from using a special tax code.

In addition payday information will enable Inland Revenue to improve the administration of social policy by providing a sound basis to ensure that employees transitioning off benefits receive their proper entitlements. Payday reporting will also create a foundation for a reduced assessment period for Working for Families tax credits and child support. A reduced assessment period would help ensure that periods of assistance better match periods of need.

There was general support for the payday return of employment income information. However, a number of submitters proposed that seven working days was insufficient time for small employers who choose to continue to file a paper-based return. In addition, several submitters proposed that the time allowed to file “non-standard” information, such as that relating to out-of-cycle pays, schedular payments or shadow payrolls, should be longer than two (or seven) working days.

All those who submitted on the subject of the proposed repeal of the payroll subsidy opposed its repeal on 1 April 2018, some suggesting that it should be better targeted and others proposing that the question of repeal should be revisited when the changes recommended in the Bill had had a chance to “bed in”.

REPEAL OF THE PAYROLL SUBSIDY AND THE LISTED PAYE INTERMEDIARY STATUS

Clauses 129(1), 151(1), 167, 168, 171, 172(32), (42) & (64), 187(22) & (25), 188, 190, 191, 193, 280, 281, 317 and 318

Issue: Retention of payroll subsidy

Submission

(KPMG, BusinessNZ, Datacom Employer Services, Chartered Accountants Australia and New Zealand, ANZ, MYOB, Payroll Intermediary Industry (on behalf of MYOB, Datacom, Flexitime, iPayroll, Simply Payroll, Crystal Payroll and Thankyou Payroll))

Submitters universally recommended that the subsidy not be repealed from 1 April 2018.

The subsidy plays an important role in assisting micro employers, in particular, in meeting their PAYE compliance obligations. (KPMG)

The possible removal of the subsidy would be better examined once all significant tax compliance changes have been passed and the business community has had some time to understand and comply with the new settings. Any steps toward the removal of the subsidy should not be taken until 1 April 2019 at the earliest. (BusinessNZ)

Instead of repealing it, consideration should be given to amending the subsidy threshold so that it targets very small employers. (Chartered Accountants Australia and New Zealand)

The proposal should be removed in favour of reducing the threshold of application for the subsidy. Any decision to remove the subsidy should be delayed at least until 2020 when an assessment of the effectiveness of the new reporting arrangements can be made. (Datacom Employer Services)

The subsidy should be maintained but it should better target eligibility by lowering the threshold to $100,000 of PAYE and ESCT per annum (MYOB) or to small businesses. (Payroll Intermediary Industry (MYOB, Datacom, Flexitime, iPayroll, Simply Payroll, Crystal Payroll and Thankyou Payroll))

The removal of the subsidy should be paused and the question of repeal reviewed after the implementation of the Business Transformation programme. (MYOB, Payroll Intermediary Industry (MYOB, Datacom, Flexitime, iPayroll, Simply Payroll, Crystal Payroll and Thankyou Payroll))

Comment

The payroll subsidy subsidises only one model of payroll service and potentially distorts the payroll service and product market. The proposed repeal is part of a set of proposals that overall are intended to improve the administration of PAYE by taking advantage of modern digital systems to reduce compliance and administrative costs. Because the subsidy only subsidises payroll services provided by listed PAYE intermediaries it is not well designed to support the broader objective of encouraging the use of digital systems and software.

Officials consider that there is some merit in the recommendation to retain the subsidy but target it better at small employers in the short term then revisit the question of its repeal once the payday reporting of PAYE information has bedded in. Officials have begun discussions with Ministers on whether they wish to revisit the repeal of the subsidy from 1 April 2018.

Recommendation

That the submissions, and officials’ comment, be noted.

Issue: Retention of listed PAYE intermediary status

Submission

(MYOB, Payroll Intermediary Industry (on behalf of MYOB, Datacom, Flexitime, iPayroll, Simply Payroll, Crystal Payroll and Thankyou Payroll))

The submitters recommend the retention of the listed PAYE intermediary status as they have played an important part of the payroll landscape for the last 10 years in providing a service layer between Inland Revenue and small employers by being responsible for the PAYE obligations of those employers.

Comment

Both PAYE intermediaries and listed PAYE intermediaries take on the PAYE obligations of the employer although only listed PAYE intermediaries are able to claim the payroll subsidy.

There is no legal requirement for the Commissioner to publicly identify those who can provide tax services to the public, and whether she continues to publish a list is a matter for the Commissioner to determine in the context of care and management of the tax system.

Recommendation

That the submission be declined.

Issue: Redesign of the subsidy to be a service payment

Submission

(MYOB (on behalf of MYOB, Datacom, Flexitime, iPayroll, Simply Payroll, Crystal Payroll and Thankyou Payroll), Chartered Accountants Australia and New Zealand)

MYOB considers that if the payroll subsidy is retained, it should be redesigned as a service level payment. The submission reflects the view that if a payroll subsidy was not paid some currently subsidised employers would do their own payroll and, because of their relative lack of payroll knowledge, more assistance would be required from Inland Revenue. Instead of viewing the payment as a “subsidy” which encourages employers to outsource their legal obligations around PAYE, this submission suggests the subsidy becomes a “payment” recognising that Inland Revenue has outsourced the provision of advice to this segment of the market.

Comment

Currently, all rules in relation to listed PAYE intermediaries and the payroll subsidy are contained in the legislation, which is a consistent way of regulating PAYE intermediaries. Legislation is more transparent than a contractual arrangement and any PAYE intermediary who is considering becoming a listed PAYE intermediary can give a clear understanding of all requirements, rights and obligations by simply checking the publicly available legislation. In addition, it could be claimed that by entering into a contractual arrangement, Inland Revenue has “appointed” a payroll intermediary as its agent. This puts Inland Revenue at risk that the actions of the payroll intermediary are seen as the actions of Inland Revenue.

Officials therefore do not consider that the payroll subsidy should be redesigned as a service level payment.

Further, PAYE intermediaries are not the only service providers who manage the payroll including completing PAYE returns for employers. Payroll bureaus, book keepers and some tax agents also perform this function and, if the subsidy was reframed in the manner recommended by the submitters, it would be difficult to exclude these other third party providers.

The service that PAYE intermediaries provide which other third parties do not is to take over the legal responsibility for discharging employers’ PAYE obligation. In officials’ view, this can only ever be a service provided to employers and not to Inland Revenue.

Recommendation

That the submission be declined.

Issue: Subsidy should be paid direct to employers

Submission

(Chartered Accountants Australia and New Zealand)

The payroll subsidy should be paid to the employer, not to the PAYE intermediary.

Comment

While paying the subsidy to the employer might encourage competition between listed PAYE intermediaries, the current design is intended to minimise compliance costs for employers and administrative costs for Inland Revenue. Under the current legislation, the subsidy is paid directly to listed PAYE intermediaries when they submit a subsidy claim form identifying the employers for whom they have “run payrolls” during the month.

Officials believe this submitter’s proposal would result in greater compliance costs for 30,000 employers compared with the current 20 listed PAYE intermediaries. Employers on whose behalf the subsidy is paid would need to keep records of how often their payroll had run and for how many employees, and they would have to file claims with Inland Revenue in order to claim a subsidy designed to relieve them of record keeping and filing obligations. The current design also reduces administrative costs for Inland Revenue as the subsidy is only paid to the approximately 20 listed PAYE intermediaries, not approximately 30,000 employers.

Recommendation

That the submission be declined.

PAYDAY PROVISION OF EMPLOYMENT INCOME INFORMATION

Clause 200

Issue: Support for moving to payday provision

Submission

(PwC)

The submitter supports the proposal to move to payday filing of employment income information. Moving employment tax information reporting requirements into an employer’s existing pay cycle is simpler than the current process of filing Employer Monthly Schedules and Employer Deduction Forms separately and once implemented should reduce compliance costs.

Recommendation

That the submitter’s support be noted.

Issue: Inland Revenue should provide a free basic software package

Submission

(Chartered Accountants Australia and New Zealand)

The submitter suggests that the Government should reconsider the option of Inland Revenue developing its own basic payroll software suitable for small employers and making it freely available. A basic payroll system does not need to include all the features usually associated with a computerised payroll system, such as holiday pay entitlement calculation. This would facilitate the provision of employment income information digitally by small employers, minimising their compliance costs.

Comment

Designing and maintaining payroll systems is not Inland Revenue’s core business. PAYE and related deductions are only a small part of what a payroll system must do to meet employers’ needs, including meeting other regulatory obligations such as those imposed by the Holidays Act 2003. A simple system which excluded features like holiday pay, such as suggested by the submitter, could mislead employers into believing they had met their payroll obligations when they had not. In addition, providing an entry level payroll system could put Inland Revenue in competition with providers of payroll software whose active participation Inland Revenue requires to transform the PAYE system.

Inland Revenue will continue to provide an online calculator that employers will be able to use to calculate the amount of PAYE and related deductions to be withheld from a payment of salary or wages.

It is intended that, as part of business transformation changes, employers who have used the calculator will be able to save the calculations directly to an “on-screen” employment income form, accessed through myIR, which will include pre-populated information such as employee details. The ability to export information from the calculator to the “on-screen” form will eliminate the need to manually enter the information which should eliminate a source of error as well as reduce compliance costs.

Recommendation

That the submission be declined.

Issue: Setting electronic and non-electronic filing requirements

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the proposal to require the Commissioner to prescribe both electronic and non-electronic forms and means of delivery for employment income information.

Recommendation

That the submitter’s support be noted.

IMPLEMENTATION DATES

Clause 2(28)

Issue: Support for application dates

Submissions

(KPMG, Chartered Accountants Australia and New Zealand)

Submitters support a 1 April 2019 mandatory application date. It provides employers with sufficient time to transition to the new employee income reporting requirements. (KPMG)

Another supports the proposal to allow employers to adopt payday filing from 1 April 2018. (Chartered Accountants Australia and New Zealand)

Recommendation

That the submitters’ support be noted.

Issue: Longer implementation timeline

Submission

(MYOB)

For a successful implementation of the payday reporting proposals there needs to be further engagement on the design of the scheme and longer implementation timeframes. Based on similar experience in other jurisdictions, there should be at least two years for implementation and transition to the new rules.

Comment

Officials consider that the current implementation timelines are adequate. Employers, payroll intermediaries and payroll software developers should have about a 12 month lead-time before it will be mandatory to provide employment information on a payday basis. Inland Revenue is working with payroll software developers and employers who wish to be early adopters of payday reporting from 1 April 2018.

Recommendation

That the submission be declined.

EMPLOYERS (AND PAYE INTERMEDIARIES) TO FILE DIGITALLY WITHIN TWO WORKING DAYS OF PAYDAY (ONLINE GROUP)

Clause 200

Submission

(KPMG, Chartered Accountants Australia and New Zealand)

One submitter expressed support for the proposal to classify employers over the electronic filing threshold as part of the “online group”. Members of this group are required to provide employment income information in electronic form within two working days after payday. Also, they support the classification of employers who are below the electronic filing threshold as part of the online group if they use payroll software. (Chartered Accountants Australia and New Zealand)

In contrast, another submitter stated that requiring such employers and payroll intermediaries to provide PAYE information within two working days may put undue pressure on employers. The impetus for a two working day reporting rule is unclear. The provision should occur within seven working days of the payday to allow employers to better manage their compliance costs. (KPMG)

Comment

The underlying premise for moving to payday reporting is to better integrate PAYE obligations into normal business processes. The information to be provided to Inland Revenue will be available as a result of the payment of salary or wages to employees. The proposal removes the need for this information to be stored and retrieved to complete the employer monthly schedule. Allowing up to seven working days to file the information reduces the incentive to file the information as part of finalising the payroll process, which undermines the potential for savings.

Recommendation

That support for the proposal be noted, and that the submission suggesting that two working days be extended to seven working days be declined.

REPORTING AD HOC IRREGULAR AND OTHER UNUSUAL PAYMENTS

Clause 200

Issue: Out-of-cycle (ad hoc) payments of salary or wages

Submission

(Corporate Taxpayers Group, Deloitte, ANZ)

The submitters note that many large employers make several pay runs a week in addition to their regular payday(s), once various extra pays and out-of-cycle pays are taken into account. The requirement to report out-of-cycle pays on a payday basis could significantly increase compliance costs.

One submitter proposed that such out-of-cycle payments could be better managed by having a minimum period such as a week for reporting on such payments or they could be included in the regular salary or wages pay run. (ANZ)

Comment

Employees must be paid wages “when they fall due”. The employer may set a pay period frequency and payday when what is due for that period is paid. This is referred to in what follows as the “regular payday”. Some employers have different pay periods and different regular paydays for different classes of employee. Out-of-cycle pays are not an employment law requirement but are made by employers as part of their good employer obligations.

Officials acknowledge the concerns that submitters have raised in relation to out-of-cycle payments of salary or wages. Officials note however that some providers of payroll software responded negatively to the prospect that employers could hold the reporting of such payments over until the next regular pay. Payroll providers were concerned that this would encourage employers to process out-of-cycle pays outside the core payroll system and subsequently add the information back in, a practice which risks errors and omissions.

Officials therefore recommend that employers should have the ability to report out-of-cycle pays on a payday basis or to report the out-of-cycle payments with the next regular payment of salary or wages.

The ability to include out-of-cycle pays with the next regular pay run would however be subject to an exception which would prevent the out-of-cycle pay being reported with the next regular pay run where the delay would carry the reporting over the end of a PAYE “payment period”.[1] This exception would require the employer to report such out-of-cycle pays in an ad hoc report, treating the payments as if they were made on any date up to the end of the employer’s payment period.[2] This exception is necessary to enable the amount paid and the amount reported to be reconciled.

If, for example, an employer with a monthly payment period makes an out-of-cycle payment to an employee after the last regular payday in the month, but before month end, the Income Tax Act 2007 requires them to pay the PAYE on that amount by the 20th of the following month. If the employer held reporting over into the next regular payday, it would be reported as if the payment to the employee had been made on that subsequent regular payday. In this event the amount paid to Inland Revenue would not match the information provided by the employer. To prevent this, such payments would need to be reported out-of-cycle so that they relate to the correct payment period.

Mon Tue Wed Thurs Fri Sat Sun
      1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 31  
  Regular paydays.
  Out of cycle pays which if reported with the next regular pay would be included with reports for the month.
  Out-of-cycle pay which, if the information is held over to the next regular payday (in the next month), would be reported as if it had been paid in the subsequent month. This would give rise to a “mismatch” with the amount of PAYE paid for the earlier month which would include deductions made on the 29th.

Officials are investigating whether this exception will be required once PAYE is fully processed within Inland Revenue’s new computer system, which will not be before 2020. It is likely that any solution would require changes to payroll software, as well as to Inland Revenue’s systems, and so would need to be fully assessed and consulted on before it could be introduced.

Recommendation

That the submission be accepted so that employers are allowed to include reporting on out-of-cycle payments of wages and salary with the next regular payday report, except where this would carry information over beyond the end of a PAYE payment period.

Issue: Reporting of schedular payments

Submission

(ANZ, EY, Deloitte (oral))

Proposed section 23D(1) of the Tax Administration Act 1994 should include a separate group for employment income information in relation to schedular payments, with monthly reporting similar to the current EMS process retained for schedular payments. Many schedular payments are administered outside of payroll. Requiring payday reporting of such payments will create additional compliance costs. (EY)

Regular reporting of schedular payments should be on a fortnightly basis. (ANZ)

In their oral submission, Deloitte outlined concern about how schedular payments would be managed on a payday basis.

Comment

Officials understand that many employers pay schedular payments via their accounts payable system which may not be capable of directly reporting to Inland Revenue. In this situation the information would need to be sent to payroll before being filed with Inland Revenue. In addition, schedular payments, like out-of-cycle payments, may be made on a frequent basis. Unlike out-of-cycle payments to wage and salary earners considered above, there is however no “regular payroll” to which schedular payments naturally belong.

More frequent reporting of PAYE income is a core objective of the proposed PAYE reforms and a response to this issue requires an appropriate trade-off between the competing objectives of more frequent reporting and reduced compliance costs. In addition, the rules should be as simple as possible while catering for employers in different circumstances.

Officials consider that employers should have the option of payday reporting schedular payments, but if they choose not to, any schedular payments made between the 1st and the 15th of the month should be reported at a time convenient to the employer but, at the latest, as if the payment(s) had been made on the 15th. Payments made between the 16th and month end should be reported, at the latest, as if they were made at month end.

This formulation would allow an employer with only occasional schedular payments to include them with a regular payday report for salaried employees, except where the schedular payment was made after the last regular pay in each half-monthly period. In those cases the employers would need to file a one-off return. Employers with large numbers of schedular payments could however aggregate them and report all such pays made between the 1st and the 15th as if they were paid on the 15th and all schedular payments made in the second half of the month as if they were paid on the last day of the month.

Recommendation

That the submissions be accepted, and the option of twice monthly reporting be added for schedular payments.

Issue: Shadow payrolls for internationally mobile employees

Submission

(ANZ, Corporate Taxpayers Group, Deloitte (oral), EY)

Submitters explained that employers of internationally mobile employees working in New Zealand may have PAYE reporting and payment obligations in New Zealand even though the employees have been paid in a foreign jurisdiction.

The process of determining the New Zealand taxable income includes not only obtaining employee payment information from offshore payroll providers but also engaging tax agents to confirm the calculation of New Zealand taxable income of that employee. This can be time consuming and complex. (ANZ)

There should be an exemption from the proposed payday reporting for employment income information relating to internationally mobile employees. Applying the proposed payday reporting to this type of employment income information would not only increase compliance costs significantly for employers, but would be impossible to comply with given the proposed timeframes. The current reporting basis should be retained for the purposes of filing employment income information for internationally mobile employees. (ANZ)

There will need to be an exception for employers who operate payroll functions outside their ordinary New Zealand payroll processes. A significant compliance cost will arise for employers who have these arrangements, and in most cases complying with the proposed timeframes will simply not be able to be achieved. This issue could be resolved by either widening the scope of the exemption under proposed new section 23G of the Tax Administration Act 1994 to allow employers with employees on foreign payrolls to be exempt from the payday reporting rules, or by the Commissioner of Inland Revenue exercising her discretion to vary employment income information reporting requirements. (Corporate Taxpayers Group)

Non-resident employers who operate shadow payrolls and make tax equalisation payments to their non-resident employees working in New Zealand will need more time – 20 to 25 days from payday – to provide employment income information to Inland Revenue. Such employees are unlikely to receive social policy entitlements, or have social policy obligations, in New Zealand, so there is not the same rationale for requiring the information to be provided so soon after payday. (Deloitte)

Proposed section 23D(1) of the Tax Administration Act 1994 should include a separate group for employers filing employment income information for employees by way of shadow payroll. The provision covering this group should make it clear that an employer’s PAYE reporting obligations can be satisfied by another entity reporting shadow payroll information to Inland Revenue, provided that the employer has approved the shadow payroll information. Those who fall within this group should have the option of filing either in a prescribed paper form or electronically through Inland Revenue’s website, in both cases with the information due within 30 working days of the date of the payment. (EY)

Comment

Officials acknowledge the difficulties that would be faced by non-resident employers who operate a shadow payroll if they were required to report information about their employees working in New Zealand to Inland Revenue on a payday basis. In addition to the issues that arise for schedular payments,[3] additional time is required to calculate the value of shadow payroll for offshore-based employees before the information can be reported to Inland Revenue.

In order to minimise the number and complexity of the rules relating to special groups, officials recommend that the requirement for reporting shadow payrolls should build on those proposed for schedular payments.

It is recommended that employers should have 20 days to calculate the value of the shadow payroll. The 20th day would be deemed to be the date on which the employee is treated as deriving the income and would be the payday for the purpose of establishing when payment of tax withheld, is due to the Commissioner. Reporting obligations would be as follows:

  • For any payment valued through a shadow payroll where the 20th day after payment falls between the 1st and 15th of the month the information must be reported to Inland Revenue at the latest as if the “payday” was on the 15th.
  • For any payment valued through a shadow payroll where the 20th day after payment falls between the 16th and month end the information must be reported to Inland Revenue at the latest as if the “payday” was the last day of the month.

The regime proposed above would allow a minimum of 22 days[4] following payment for the information on shadow payrolls to be reported, and a maximum of 44 days. If an employer considers that this is insufficient because of their circumstances they can apply to the Commissioner for a variation under proposed section 23P.

Similarly there is no obvious reason why an employer above the electronic filing threshold should have the option proposed by EY, of reporting such information on paper. However, if there is a good reason why digital reporting is not reasonable, the employer could apply either under proposed section 23P or for an exemption under proposed section 23G(3).

Lastly, in response to the concern that it should be clear that an employer’s PAYE reporting obligations can be satisfied by another entity, officials note that, under current law, the Commissioner may receive information relating to a taxpayer from a person who is authorised to act on behalf of the taxpayer. Therefore, officials consider that a legislative amendment to provide that an employer’s PAYE reporting obligations can be satisfied by another entity reporting shadow payroll information to Inland Revenue is unnecessary.

Recommendation

That the submissions to allow extra time for the reporting of shadow payrolls be accepted, subject to officials’ comments.

CONSEQUENTIAL CHANGES TO EMPLOYER REPORTING OF EMPLOYEE SHARE SCHEME BENEFIT INFORMATION

Clauses 13, 132, 136, 148, 172(19) & (41), 187(5), 200, 284(1)(b) and schedule 2

Issue: Support for the proposals

Submission

(Chartered Accountants Australia and New Zealand, KPMG, PwC)

Chartered Accountants Australia and New Zealand supports the proposal to defer recognition of benefits derived by an employee under an employee share scheme. (Chartered Accountants Australia and New Zealand)

KPMG supports the proposed 20 day time frame for reporting employee share benefits. (KPMG)

PwC is supportive of the proposal to extend the concession to defer the recognition of benefits derived by an employee under an employee share scheme by 20 days from when the employee receives the benefit, which was previously only provided to large employers, to all employers. PwC agrees with the rationale that all employers, regardless of size, will require additional time to compile information to support the required disclosures and, if applicable, deduction of tax. (PwC)

Recommendation

That the submitters’ support be noted.

Issue: Frequency of employee share scheme benefit information reporting

Submission

(ANZ, Corporate Taxpayers Group)

The proposed payday reporting would result in a material increase in compliance costs for employers who offer employee share schemes, particularly where the date of exercise of those share options is at the employee’s discretion. Employment income information relating to employee share schemes should be reported to Inland Revenue on a fortnightly basis, rather than on a payday basis. (ANZ)

Corporate Taxpayers Group is supportive of a deferral mechanism because employee share scheme arrangements are often administered outside of ordinary payroll processes and it would not be possible to provide the information within two working days. However, instead of recognition being deferred by 20 days, the employer should instead be required to report the information by a fixed date in the following month. This would significantly reduce compliance costs by allowing employers to combine information relating to multiple employees who received employee share scheme benefits on different days during a month. (Corporate Taxpayers Group)

Comment

More frequent reporting of PAYE income is a core objective of the proposed PAYE reforms and, as with schedular payments, a response to this issue requires a trade-off between the competing objectives of more frequent reporting and reduced compliance costs.

It is recommended that the proposal that employers should have 20 days to calculate the value of the employee share scheme benefit should be retained and then an approach to reporting, similar to that proposed for schedular payments and shadow payrolls, should be adopted:

  • For any benefit received from an employee share scheme where the 20th day after receipt falls between the 1st and 15th of the month the information must be reported to Inland Revenue at the latest as if the “payday” was the 15th.
  • For any benefit received from an employee share scheme where the 20th day after receipt falls between the 16th and month end the information must be reported to Inland Revenue at the latest as if the “payday” was at month end.

The regime proposed above would allow a minimum of 22 days[5] following receipt of the employee share scheme benefit for the information on employee share schemes to be reported and a maximum of 44 days. By having fixed dates of the 15th and end of the month, the proposal allows for the combination of numerous payments into one report.

If an employer considers that this is insufficient because of their circumstances they can apply to the Commissioner for a variation under proposed section 23P.

Recommendation

That the submission to limit the frequency of employee share scheme benefit information reporting be accepted, subject to officials’ comments.

Issue: Length of deferral of the recognition of ESS benefits

Submission

(EY)

The deferral in the recognition of employee share scheme benefits should be 30 days from when the employee receives the benefit, with backdated effect from 1 April 2017. A deferral of 20 days is unlikely to provide employers with enough time to satisfy their reporting and withholding (if any) requirements in relation to the employee share scheme benefit, particularly in relation to payrolls that are run offshore. An extension to the deferral should be backdated to 1 April 2017 to cover any employers who have been unable to comply with the current timeframe for reporting and withholding (if any) requirements.

Comment

The Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 brought in new rules for the collection of tax on employee share schemes and the reporting of employee share scheme benefit information. Officials note that the Finance and Expenditure Committee considered a number of submissions on the length of time needed by employers to make the required disclosures of employee share scheme benefit information and PAYE withheld (if any) when it considered the Taxation (Transformation: First Phase Simplification and Other Measures) Bill. The conclusion reached by the Committee, which is now reflected in the law, provides employers with a minimum period of 20 days between the date on which an employee receives an employee share scheme benefit and when the employer is required to report information about it to Inland Revenue.

Officials note that, if the proposed responses to other submissions (relating to frequency of reporting and time for those not required to report digitally) are accepted, while employers will still have 20 days to value the benefits they will then have between 2 and 24 days after valuation to report them.

Officials do not support extending the timeframe for recognition of an employee share scheme benefit retrospectively, particularly in the absence of any evidence that this minimum period of 20 days, which received extensive consideration, has proved in practice to be insufficient for employers.

In addition, if an employer considers that because of their circumstances the time allowed for reporting is insufficient they can apply to the Commissioner for a variation under proposed section 23P.

Recommendation

That the submission be declined.

Issue: Clarification as to how the deferral of the recognition of benefits will be treated if the deferral bridges the end of the tax year

Submission

(PwC)

Further clarification is required on how the proposed deferral of the recognition of benefits will be treated if the deferral bridges the end of a tax year.

Comment

Under the proposals in the Bill, an employee share scheme benefit received by an employee between 12 and 31 March will be treated as employment income of the employee in the following tax year (commencing 1 April). This is an intended outcome, and one that can arise under the existing rules for employee share scheme benefits received between 16 and 31 March.

Officials note that a Special Report published by Inland Revenue upon the enactment of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 stated that:

Inland Revenue may investigate instances where employees seek to exploit for personal advantage the deferred recognition of income for share benefits provided between 16 and 31 March if those share benefits are provided out of pattern with previous years or the decision to acquire shares is out of step with market conditions.

Recommendation

That the submission be declined.

EMPLOYERS ABLE TO FILE NON-DIGITALLY

Clause 200

Issue: Requirement to provide information within seven working days of payday

Submission

(BusinessNZ, KPMG, Chartered Accountants Australia and New Zealand, MYOB, EY)

The seven working day period allowed for filing employment income information by those exempt from digital filing should be extended. (BusinessNZ, KPMG, Chartered Accountants Australia and New Zealand, MYOB, EY)

There is potential for increased compliance costs for “paper-based businesses”. Filing obligations for those below the mandatory electronic filing threshold should not change until the business community “is aware of the overall net benefits and/or costs of the total Business Transformation programme”. (BusinessNZ)

The manual filing option available for small employers, including those without electronic payroll systems, is supported. However, the timeframe for providing employment income information should be aligned to such employers’ due dates for the remittance of PAYE and ESCT, namely, the 20th of the month following payment of the employment income. (KPMG)

The due date for the provision of information by employers who are not required to provide information digitally should be increased from seven working days to 14 days to allow sufficient time for posting a return. Alternatively, consideration should be given to changing the requirement from “must deliver” to “must post” the information within seven working days. (Chartered Accountants Australia and New Zealand)

Employers who are required to file employment income information within seven working days should be required to file employment income information within 14 working days after payday. Seven working days after payday is not enough time for employers in these groups, who are permitted to provide employment income information in a prescribed paper format, to provide accurate information to Inland Revenue. (EY)

The move to seven working days after payday will significantly increase the burden on small employers and could even put them off transitioning to technology solutions. (MYOB)

Comment

One of the underlying policy outcomes being sought with these changes is the provision of payday information rather than a monthly aggregate. Payday reporting will mean that information is more usable – for example, in determining whether an employee is on the right tax code – and will improve the delivery of social assistance and the provision of cross-agency information.

While Inland Revenue will provide online services to allow small employers to file their employment income information digitally through myIR services, there will be employers who cannot access appropriate digital services and others who will still choose to provide paper returns and use mail services to file their returns. Officials note that NZ Post has indicated that it proposes to cease its FastPost mail service from 1 January 2018.

The information to be provided in payday reporting will be readily available to the employer as part of paying their employees. Payday reporting requires them to enter it into the relevant return format and send it to Inland Revenue each payday rather than to put it aside, return to it at month end, aggregate it and then send it to Inland Revenue.

More timely receipt of the information is important to enable problems to be identified and rectified more quickly and to support future changes to social policy. The key question in determining an appropriate number of days is what period would enable a compliant taxpayer to be confident that they will not be exposed to a penalty for reasons outside their control.

Officials consider that the time allowed for filing returns by taxpayers able to file using paper should be ten working days. This roughly equates to 14 days.

Recommendation

That the submission be accepted.

Issue: Definition of payroll software

Submission

(Chartered Accountants Australia and New Zealand)

The definition of payroll software should be reconsidered to exclude applications such as spread sheets and PAYE calculators. Such applications do not have the ability to provide the information directly into Inland Revenue’s system.

Comment

The definition of payroll software is significant because if you are a small employer but use payroll software you are in the “online group”.

Recommendation

That the submission be accepted.

Issue: Support for electronic filing threshold

Submission

(Chartered Accountants Australia and New Zealand)

The submitter expressed support for the proposal that an employer is in the threshold group (who do not have to file electronically) of employers if the PAYE and ESCT payable for the preceding tax year is less than $50,000 and the employer does not use payroll software.

Recommendation

That the submitter’s support be noted.

Issue: Electronic filing threshold should remain at $100,000 of PAYE and ESCT

Submission

(BusinessNZ)

The submitter recommends that the threshold for mandatory electronic filing should remain at $100,000 a year of PAYE and ESCT. In the regulatory impact statement officials recommended a threshold of $100,000 a year because a lower threshold would have one-off and cash flow impacts and may adversely impact small employers.

Comment

The regulatory impact statement comments were made in the context of a recommended threshold which would also impose an obligation to remit (pay) PAYE on payday. The recommendation that employers be required to remit PAYE to Inland Revenue on payday was not accepted and so is not included in the Bill. In the absence of this obligation, officials do not consider that a lower threshold will have cash flow implications. While a decision to adopt payroll software would have costs, it is generally regarded as bringing wider benefits relating to payroll accuracy and reduced administration costs. Further, given the option of filing employment income information through Inland Revenue’s website, an employer could meet the requirement to file electronically without incurring additional expenditure by adopting payroll software.

Recommendation

That the submission be declined.

Issue: Electronic exempt group and new employers group

Submissions

(Chartered Accountants Australia and New Zealand)

The submitter supports the proposal that an employer is in the electronic-exempt group if they are unable to access digital services.

The submitter supports the proposal that an employer is included in the new group[6] if the employer starts employing in a tax year and in the absence of this rule would be in the online group. The proposal to classify new employers who use payroll software as part of the online group is also supported.

Recommendation

That the submitter’s support be noted.

Issue: Extending the six month period to file paper returns

Submission

(KPMG)

The six month grace period for a new employer should be able to be extended by application to the Commissioner.

Comment

Officials acknowledge that there may be reasons for the Commissioner to extend the six month grace period but consider that proposed new section 23P, which allows the Commissioner to vary the requirements set out in subpart 3C for an employer or class of employers, would meet the need outlined by the submitter.

Recommendation

That the officials’ comment be noted.

Issue: Timeframe for employment income information reporting by employees

Submission

(KPMG)

Under the proposals in the Bill, current IR56 taxpayers will need to provide their employment income information monthly, within seven working days of month-end. A longer time frame for the provision of the employment income information by this group should be allowed. This should be similar to the time allowed for employers who file manually, which KPMG recommends is aligned with those employers’ due dates for payment of PAYE and ESCT.

Comment

The time frame of seven working days from month-end is aligned with the time frame for those able to file non-digitally. If the recommendation to extend that deadline is accepted it would provide ten working days for an employer to file employment income information.

Officials recommend that employees required to file employment income information should have ten working days following the end of the month to file their information.

Recommendation

That the submission to provide more time for an employee to file employment income information be accepted, subject to officials’ comments.

NEW AND DEPARTING EMPLOYEE INFORMATION

Clause 200

Issue: Support for proposal

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the proposal for the delivery of employment income information for new and departing employees.

Recommendation

That the submitter’s support be noted.

Issue: New and departing employees – contact details

Submission

(EY)

The term “contact details” used in proposed schedule 4, tables 2 and 3 of the Tax Administration Act 1994 should be defined in legislation.

Comment

It is important that the term “contact details” is defined given employers will be required to provide this information to Inland Revenue. Contact details are relevant for new schedules 3, 4 and 6 (investment income).

Recommendation

That the submission be accepted.

Issue: Departing employee information

Submission

(PwC)

Some clarity is required as to when an employee has departed to ensure this does not result in operational difficulties, such as an employee ceasing employment with their employer but still being entitled to receive a subsequent PAYE income payment from that employer (such as a bonus or paid out annual leave).

Comment

Officials agree that clarifying when an employee has stopped being an employee of the employer is desirable. The Bill provides that the information that an employee is departing must be provided on the payday on which the employee is last paid or earlier if the employer chooses. If however there is an on-going obligation to make PAYE income payments, the person to whom the payments are made remains an “employee” for tax purposes until that obligation ceases. Following enactment, guidance will be included in an Inland Revenue Tax Information Bulletin and other guidance provided to employers on payday reporting.

Recommendation

That the officials’ comments be noted.

Issue: Date of birth and contact information

Submission

(Chartered Accountants Australia and New Zealand, BusinessNZ)

The submitters expressed support for not making the new requirement to supply date of birth information mandatory.

Recommendation

That the submitters’ support be noted.

Issue: Consolidation and simplification of new employee information

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the proposal to consolidate and simplify information requirements for new employees (including KiwiSaver requirements).

Recommendation

That the submitter’s support be noted.

Issue: Providing a timely response on new employees

Submission

(KPMG, Corporate Taxpayers Group)

The submitters support the proposal to allow new employee information to be provided to Inland Revenue before the first payday to ensure tax codes and the like are validated. However, the real benefits from this proposal will only be realised if any validation information is received before the first payday. KPMG is concerned that such information may just go into a “black hole”.

Comment

The ability and decision to provide new employee information prior to the first payday is in the employer’s hands.

Once PAYE is fully processed within Inland Revenue’s new computer system, START, if new employer information is provided before the first payday, it is Inland Revenue’s objective to notify the employer almost instantaneously of any required changes to the tax codes or similar – for example, a requirement to deduct child support payments. This is not expected to be before early 2020.

Recommendation

That the officials’ comments be noted.

Issue: Using employee-provided information to make deductions if validation has not occurred before the first payday

Submission

(KPMG)

The submitter notes that the lack of any validation prior to the first pay should not prevent the employer from paying employees. This could mean that a grace period should be allowed for deducting PAYE at the declared rate, rather than at the non-declaration rate, provided that the IRD number is associated with any amounts paid during this grace period.

Comment

The Bill provides that new employee information must be provided with the employment information for the employee’s first payday, unless it is provided earlier. The information provided by the employee will be used to calculate the PAYE and related deductions until Inland Revenue informs the employer (and the employee) that a different code should be used; pre-payment validation by Inland Revenue will not be required. The non-declaration rate should only apply if the employee has not provided their name, their tax file number, and their tax code.

Recommendation

That the officials’ comments be noted.

Issue: Employer must have access to the same information that Inland Revenue holds

Submission

(Corporate Taxpayers Group)

To ensure that the maximum benefit is obtained from the interactions between the employer’s payroll software packages and Inland Revenue’s systems, there should be significant improvements in the information that employers can access.

Comment

Inland Revenue intends that through its new computer system, START, employers should be able to access their filed submissions and should be able to update employee details online. This is not possible at present. This will represent a significant advance on the current state.

Recommendation

That the officials’ comments be noted.

Issue: Notification when employer ceases to employ

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the proposal that an employer notify Inland Revenue within 30 days of the date on which the employer permanently ceases to employ any staff.

Recommendation

That the submitter’s support be noted.

EMPLOYMENT INCOME INFORMATION – ERROR CORRECTION AND ADJUSTMENT MECHANISMS

Clause 200

Issue: Regulation making power for matters relating to the correction of errors

Submission

(Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand)

Submitters support the use of a regulation making power for matters relating to the correction of PAYE errors and adjustments. Corporate Taxpayers Group notes the importance of pragmatic error correction mechanisms that are efficient for both employers and Inland Revenue.

Comment

Officials welcome the support for use of regulation making powers for the matters relating to correction of PAYE errors and adjustments.

Recommendation

That the submitters’ support be noted.

Issue: Public consultation on regulations

Submission

(EY)

The submitter considers that the error correction mechanisms should be determined before any of the proposed employment changes are enacted. If they are to be contained in regulation, proposed new section 23M(3) of the Tax Administration Act 1994 should require mandatory public consultation on the regulations.

Comment

Officials note that amendments to primary legislation can take time and some issues, where appropriate, may require a more timely response than is possible with primary legislation.

The regulation making power proposed in the Bill requires mandatory public consultation to be undertaken before such regulations can be made. An officials’ issue paper entitled PAYE error correction and adjustment was released on 9 August 2017 seeking feedback on options on how PAYE errors may be corrected and adjustments made. This consultation will be used to inform any regulations that will be made and EY’s submission in response to the Select Committee will be considered in this context.

Recommendation

That the officials’ comments be noted.

Issue: Application date of regulation making power

Submission

(Matter raised by officials)

The regulation making power for error correction in employment income information in proposed section 23M has an application date of 1 April 2019. To enable regulations to be in place by 1 April 2019 it is necessary that the power has an earlier application date.

To achieve this, a transitional regulation making power is proposed. The new section would apply from the date of Royal assent until the new section 23M comes into force.

Recommendation

That the submission be accepted.

TAX CODES AND PAYE RECORD KEEPING

Clause 204

Issue: Requirement to provide a name to the employer

Submission

(KPMG, Chartered Accountants Australia and New Zealand)

The proposal for a legislative requirement for an employee to notify their employer of their name, tax file number and tax code is supported. If this information is not provided, the non-notified deduction rate of 45 cents applies. There is some uncertainty as to what “name” means if a person does not generally use their legal name recorded on the birth certificate or passport but uses an alias or different spelling. (Chartered Accountants Australia and New Zealand)

The requirement to obtain the name of the employee appears to be a potentially absurd requirement and appears to be unnecessary. “It is expected that the employer will know who they are employing”. (KPMG)

Comment

Officials accept that more clarity should be provided and that the employee’s full name should be provided rather than just their name which could be an alias or a nick-name.

While the employer will know the name the employee has provided, certainty of tax affairs requires matching the name with the person and their IRD number. The rule requires that all three pieces of information be provided to prevent the non-notified tax code (non-declaration tax code) applying. The prescribed form IR330 currently requires these three points but without explicit legislative backing. The non-notified tax code is intended to incentivise the employee to provide this information to the employer. This information is critical so that the income information and the PAYE and related deductions can be allocated to the right person.

Recommendation

That the submission be accepted.

Issue: Grace period to provide tax file number for new employees

Submission

(Chartered Accountants Australia and New Zealand)

The submitter proposes that there be a grace period of one month for a first time employee who does not have a tax file number before the non-notified deduction rate applies.

Comment

Officials understand the submitter’s proposal to provide a grace period for a first time employee who does not have a tax file number before the non-notified deduction rate applies. Such an exemption already exists for non-resident seasonal workers.

Managing such a grace period would however impose additional costs on employers who would have to determine if the employee is “a first-time employee” and then monitor the grace period. Inland Revenue would also incur additional costs because of the need to establish and manage exemptions to the normal process for an employee who is reported as not having a tax file number but who is not on the non-notified rate (non-resident seasonal workers have a different tax code). This process could require Inland Revenue to make contact with the employer, further increasing compliance costs.

While new employees do require proof of identity to obtain a tax file number, immigrants with New Zealand residency can now obtain a tax file number online as part of the immigration process. Increasingly, New Zealand born new employees already have a tax file number as a consequence of belonging to KiwiSaver or having had child support payments made on their behalf. In addition, as those whose parents have obtained a tax file number for them at birth begin to join the labour market, issues around obtaining a tax file number will be further reduced.

Recommendation

That the submission be declined.

Issue: Restructuring of existing provisions

Submission

(Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand)

Submitters generally support the restructuring of the existing provisions dealing with core requirements such as tax codes and PAYE recording keeping. The Corporate Taxpayers Group notes that moves to consolidate sections that are directly relevant to each other are welcomed, as long as they do not mistakenly give rise to unintended policy outcomes.

Recommendation

That the submitters’ support be noted.

Issue: Process for changing tax codes

Submission

(Corporate Taxpayers Group)

As part of Inland Revenue’s business transformation programme the opportunity should be taken for the process for changing tax codes to be electronic.

Comment

Where employers are using payroll software that allows for providing information between systems, the process for notifying changes in tax codes will be electronic. Also, any notification from Inland Revenue to an employee will be through an electronic notification if the employee uses Inland Revenue’s online tax transactions system, myIR.

Recommendation

That the officials’ comment be noted.

REMITTANCE OF PAYE AND RELATED DEDUCTIONS

Issue: Retention of current remittance rules

Submission

(Corporate Taxpayers Group, PwC)

The submitters support the retention of the current remittance rules for PAYE and related deductions.

The period in which PAYE and related deductions is held by the employer is in effect compensation for the employer having to bear the costs of being a tax collector. (Corporate Taxpayers Group)

Another submitter seeks confirmation that this is not a transitional measure and that there is no future intention to align the payment obligations with payday filing. (PwC)

Comment

Officials note the support for the retention of the current remittance rules for PAYE and related deductions. Officials note that there is nothing on the current tax policy work programme to align payment obligations with payday filing. The Government may wish to add it to its work programme at a later date.

Inland Revenue will accept payments of PAYE and related deductions with the provision of payday information.

Recommendation

That the officials’ comments be noted.

Issue: Remittance threshold changes by Order in Council

Clause 130

Submission

(EY, KPMG, Chartered Accountants Australia and New Zealand)

The threshold above which employers are required to pay PAYE and other deductions twice monthly should not be able to be amended by Order in Council. (EY, KPMG)

If this proceeds, section RD 4(7) should require mandatory public consultation prior to any Order in Council being made. Changing this threshold by Order in Council is an overreach. Any decision to change this threshold should be a matter for Parliament, given the potential for a change in the threshold to have a material impact on the business of many taxpayers. (EY)

The submitter supports the proposal to allow the threshold to be changed by Order in Council following appropriate consultation. It, however, notes that any regulation should allow sufficient time for affected employers to be able to comply. (Chartered Accountants Australia and New Zealand)

Comment

The Regulations Review Committee in its letter of the 1 June 2017 to the Committee on the delegated legislative powers in the Bill did not raise any concerns with the proposed regulation making power to change the remittance threshold for PAYE and related deductions.

Officials agree with the point that Chartered Accountants Australia and New Zealand makes that any regulation should allow sufficient time for affected employers to be able to comply. Officials consider that the requirement, in proposed new section RD 4(7) of the Income Tax Act 2007, to undertake consultation that is appropriate and reasonable for the purposes of the section, would require consultation on the application date of any such regulation.

Recommendation

That the submission that the threshold should not be able to be amended by Order in Council be declined.

That the submission supporting the proposal to allow the threshold to be changed by Order in Council following appropriate consultation be noted.

PENALTIES

Clauses 268, 269, 270, 271, 272 and 275(2)

Issue: Late filing and non-electronic filing penalties to remain monthly

Submission

(Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand)

The submitters support the proposal to leave late filing and non-electronic filing penalties monthly despite the move to payday reporting.

Recommendation

That the submitters’ support be noted.

Issue: Maximum penalty for non-electronic filing

Submission

(EY)

Section 139AA(4) of the Tax Administration Act 1994 should be amended such that the maximum monthly non-electronic filing penalty is the lesser of a flat $250 or $1 per employee. The purpose of the penalty should be to encourage employers to comply. A penalty of the greater of $250 or $1 per employee would unduly punish large employers.

Comment

As noted in the submission, the Bill does not increase the current maximum monthly penalty for non-electronic filing. However, because payday filing will generally increase the number of returns required, the risk of incurring the penalty will increase. The electronic filing threshold is proposed at a level that equates to 10 full-time employees on the minimum wage or four full-time employees at the average wage. Employers with more than 250 employees should already be filing digitally and the current penalty incentivises that.

Recommendation

That the submission be declined.

Issue: Shorten the period for resetting the good behaviour penalty reduction in section 141FB of the Tax Administration Act 1994

Submission

(Corporate Taxpayers Group)

The Corporate Taxpayers Group submits that consideration be given to shortening the period for “resetting” the good behaviour penalty reduction in section 141FB of the Tax Administration Act 1994 from two years to one year for PAYE, given the increased filing frequency.

Comment

The use of “resetting periods” is broader than PAYE. Subject to Government priorities, a review of the shortfall penalties system may be undertaken and consideration of the relevant “resetting” period could be considered in this review.

Recommendation

That the submission be declined, but the officials’ comment be noted.

Issue: Focus during the period of transition to the new rules should be on education

Submission

(Corporate Taxpayers Group)

As employers transition to new ways of doing business as a result of these proposals, there should be leniency shown towards businesses who inadvertently do not comply with the tax rules. The focus should be on educating rather than punishing businesses who make mistakes.

Comment

In the early stages of payday filing, it is intended that the Commissioner will adopt a compliance improvement focus and be in touch with taxpayers to raise awareness and assist compliance. Officials recommend that the Bill should provide the Commissioner with flexibility around whether to impose late filing and non-electronic filing penalties during the early stages of the new employment income information regime.

Recommendation

That the submission be accepted.

EMPLOYEE SHARE SCHEME TRANSITIONAL PROVISIONS

Clause 282

Issue: Support for the proposals

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the proposal to require early adopters of payday filing to apply the proposed modifications to the employee share scheme rules early as well.

Recommendation

That the submitter’s support be noted.

Issue: Meaning of “ESS deferral date” during the transitional period

Submission

(Matter raised by officials)

The transitional provision (proposed new section 227C) should be amended to clarify the meaning of the term “ESS deferral date” when an employer has chosen to adopt payday filing of employment income information prior to clause 14 of the Bill coming into force.

Comment

Subsections (3) and (4) of the proposed transitional provision (new section 227C of the Tax Administration Act 1994) in clause 282 of the Bill provide that an employer who chooses to adopt payday filing of employment income information during the transitional period must apply the proposed modifications to the rules for reporting employee share scheme benefit information early as well. Proposed new section 227C will allow an employer to choose to adopt payday filing of employment income information from 1 April 2018.

Subsection (6) of the proposed transitional provision specifies which clauses of the Bill are treated as coming into force early when an employer chooses to adopt payday filing of employment income information during the transitional period. One of these is clause 13, which inserts a new section CE 2(9) into the Income Tax Act 2007. This new subsection, which defines the term “ESS deferral date”, refers to the terms “share scheme taxing date” and “employee share scheme beneficiary”. These two terms are defined in sections (included in clause 14) that are not intended to come into force until six months after the Bill receives Royal assent, which could be up to six months into the transitional period.

Officials recommend that the transitional provision is amended to clarify the meaning of “ESS deferral date” when an employer has chosen to adopt payday filing of employment income information prior to clause 14 coming into force.

Recommendation

That the submission be accepted.

OTHER MATTERS RAISED

Issue: Accelerating the transfer of KiwiSaver contributions

Submission

(Financial Services Council)

The Bill should make provision to accelerate KiwiSaver contributions being passed on to KiwiSaver providers by providing that they are paid directly by employers to KiwiSaver providers, with reporting to Inland Revenue.

KiwiSaver contributions are currently subject to a 12 week delay in passing through Inland Revenue to KiwiSaver providers.

Comment

Officials recognise that it can take up to 12 weeks from when an employee’s contribution is deducted from their salary or wages, until it is received by the KiwiSaver provider. This delay is due to the deadlines for employment income information reporting. Currently, KiwiSaver deductions are paid to Inland Revenue by the 20th of the month and the 5th of the following month for the largest employers, and by the 20th of the following month for all other employers. Information on these deductions is provided to Inland Revenue by the 5th and 20th of the following month respectively. It is then checked and, if needs be, corrected. Once these checks are complete, KiwiSaver contributions are passed on to scheme providers.

When Inland Revenue receives employment information on a payday basis and KiwiSaver processing is completed within Inland Revenue’s new computer system (estimated to be in 2020), KiwiSaver employee contributions will be able to be passed on to providers earlier.

Officials disagree with the submitter’s suggestion that employers pass on KiwiSaver deductions directly to scheme providers. This would increase compliance costs for employers, given they would likely need to make payments to a wide range of KiwiSaver scheme providers. Further, compliance costs for providers would increase as providers would need to police whether the payments were being made.

Recommendation

That the submission be declined.

Issue: Information sharing with other Government agencies

Submission

(Corporate Taxpayers Group)

The submitter notes the need for improvement in the relationships between Inland Revenue and other government departments, such as ACC. They cite the example of when ACC invoices are received from ACC, the invoice can often be wrong as a result of the data that has been transferred from Inland Revenue being incorrect. It is the submitter’s expectation that, as Inland Revenue’s computer system is upgraded, the interface between Inland Revenue and ACC’s systems can be improved.

Comment

One of the outcomes from the implementation of the BT programme and the timelier provision of income information will be improved information sharing with other government agencies, such as ACC. This will enable ACC to deliver better services to their clients, thereby reducing the need for employers to provide the same information twice to the government. Inland Revenue is working with ACC and other agencies to improve the provision of information.

Recommendation

That the officials’ comments be noted.

Issue: Employer should not become an intermediary/messenger between Inland Revenue and the employee

Submission

(Corporate Taxpayers Group)

The Corporate Taxpayers Group supports the proposal that employees should continue to be directly notified of their obligations and that the employer should not be “an intermediary/messenger between Inland Revenue and the employee”.

Recommendation

That the submitter’s support be noted.

Issue: Implementation of proposed rules

Submission

(Corporate Taxpayers Group, PwC, ANZ, MYOB)

Submitters emphasised the need for Inland Revenue to work closely with payroll software developers and employers to produce specifications which employers will need to implement changes to payroll systems.

Comment

Inland Revenue acknowledges the need to engage with employers, PAYE intermediaries, and payroll software developers in the development of payroll specifications and guidance. Inland Revenue has set up a team responsible for working with the payroll sector and with employers and is in the process of establishing a working group to co-ordinate the technical aspects of the transition. A draft payroll specification has been published for comment.

Recommendation

That the officials’ comments be noted.

Issue: Voluntary payday reporting from 1 April 2018 limited to payday reporting via digital systems

Clause 200

Submission

(Matter raised by officials)

Employers who do not use a digital system to file employment income information should be excluded from being able to provide PAYE employment information on a payday basis during the voluntary period – between 1 April 2018 and 31 March 2019.

Comment

Officials consider that the early transition to payday reporting should be limited to employers (including PAYE intermediaries) who use payroll software systems or who file digitally through myIR. The voluntary period is intended to allow Inland Revenue, employers and payroll providers to transition to payday filing using the new digital systems. During this time, the primary focus for paper filers should be on encouraging them to consider adopting digital services. If paper filers can adopt payday filing during the voluntary phase, Inland Revenue will have to bring forward its investment in amending forms and developing new materials and systems. Officials consider that this would be a disproportionate investment for what is likely to be low take-up of payday filing by paper filers during the voluntary phase.

Recommendation

That the submission be accepted.

Issue: Declaration of entitlement to work in New Zealand

Clause 204

Submission

(Matter raised by officials)

That the requirement for an employee when advising of their tax code, to also declare their entitlement to work in New Zealand, be repealed.

Comment

Proposed new section 24C(2) continues the existing requirement that whenever employees notify their employer of their tax code they must complete a declaration of their entitlement to work in New Zealand. This section precedes the Immigration Act 2009 which imposes a positive obligation on employers to determine that workers are legally able to work for them. Completing the declaration required by proposed new section 24C(2) does not discharge the employer from independently ascertaining the right of the employee to work in New Zealand. The Ministry of Business, Innovation and Employment has indicated that the section is no longer required and that its removal “could remove some confusion as certain employers are still regarding holding a copy of the declaration as sufficient to fulfil their checking obligations”.

Recommendation

That the submission be accepted.

Issue: Employers reporting information for special tax codes or special tax rates

Clause 148

Submission

(Matter raised by officials)

An employer who “withholds an amount of tax for a PAYE income payment” has a general obligation to provide employment income information. The provision should be clarified so that it is clear that where an employer makes a PAYE income payment but withholds no tax because the employee has a special tax rate of zero, or a special tax code that requires no amount of tax to be withheld, the employer nonetheless still has to report the relevant details. These will generally include the amounts of gross earnings and ACC earners’ levy deductions, KiwiSaver contributions, student loan repayments, and child support deductions, as applicable.

Recommendation

That the submission be accepted.

Issue: Record keeping requirements for employment income information

Clause 197

Submission

(Matter raised by officials)

Proposed new section 22AA(3)(b) should be amended to state that records do not need to be kept where they have been delivered to the Commissioner as required by the Tax Administration Act 1994 or the Income Tax Act 2007.

Comment

As currently drafted, proposed new section 22AA(3)(b) provides that records do not need to be kept if the employer or PAYE intermediary is required by the Tax Administration Act 1994 or Income Tax Act 2007 to deliver the records to the Commissioner. However, it is not the requirement to send them that is important, but the fact that they have been sent. The suggested change to the provision in the Bill would prevent employers who are obligated to file the information with the Commissioner, but fail to do so, from being exempt from the obligation to keep a record of the information.

Recommendation

That the submission be accepted.

Issue: Schedular payment drafting

Submission

(Matter raised by officials)

The Bill contains a number of consequential amendments to the schedular payment rules as a result of the employment income information changes. Officials propose a number of drafting changes to these amendments to ensure they are clear and work as intended.

Recommendation

That the submission be accepted.

Issue: Employment income information – transitional provisions

Clause 282

Submission

(Matter raised by officials)

Proposed new section 227C(6) of the Tax Administration Act 1994 should be amended to include sections relating to definitions, record keeping, tax codes, KiwiSaver and child support obligations, and to correct previous mis-numbering.

In addition, the general obligation in section 227C(4) that the employer who voluntarily adopts payday reporting must apply other relevant provisions relating to the delivery of information, treatment of benefits or interpretation, should be expanded so that it applies whether or not the relevant provision is listed in section 227C(6).

Proposed new section 227C(6) should be amended to provide that the clauses listed in that section apply from the date the person voluntarily adopts the new provisions.

Comment

Proposed new section 227C allows employers and PAYE intermediaries to voluntarily provide employment information on a payday basis from 1 April 2018 until payday filing becomes compulsory from 1 April 2019. A number of sections need to be added to the transitional provisions in proposed new section 227C(6) to ensure the voluntary adoption works as intended. In addition, to protect against inadvertent omission, it is proposed to add a general provision that “relevant sections” apply to those who voluntarily adopt payday reporting, even if they are not listed in proposed section 227C(6).

The date from which the transitional provisions in proposed section 227C(6) apply should be from when the employer chooses to apply the new provisions, not from 1 April 2018. Otherwise, taxpayers who choose to adopt payday filing part way through the year would be contravening the law from 1 April 2018 until the point they started applying the new provisions.

Recommendation

That the submission be accepted.

Issue: Definition of KiwiSaver status

Clauses 288, 290, 291 and 292

Submission

(Matter raised by officials)

The phrase “KiwiSaver status” should be a defined term.

Comment

The current legislation requires employees changing jobs and employees who wish to opt in to KiwiSaver, or who wish to cease having contributions made on their behalf, to provide their employer with particular forms.

To enable digital exchanges of information, the requirement to provide specified forms has been replaced by a requirement for the employee to notify their employer of their “KiwiSaver status” or a desired change in KiwiSaver status. The clarity of the provisions could be improved if “KiwiSaver status” becomes a defined term which includes membership, deduction rate, and a request for the employer to cease making deductions under section 112B(1) of the KiwiSaver Act.

Recommendation

That the submission be accepted.

Issue: Reporting of employment income information: other particulars as required by the Commissioner

Clause 284

Submission

(Matter raised by officials)

That table 1 in schedule 4, Employment income information for reporting on a payday basis, should have an additional row added to require “other particulars as the Commissioner requires”.

Comment

The existing definition of the employer monthly schedule in section YA 1 of the Income Tax Act 2007 includes other particulars required by the Commissioner for a class of employer.

While proposed section 23P already confers a power to vary the requirements in schedule 4 for an employer or class of employers, it is recommended that for clarity the ability for the Commissioner to require other particulars should be included in the schedule itself.

While “other particulars” will often be specific to a “class of employers”, such as those who use software or those who offer payroll giving, it is recommended that the ability to require other particulars should not be limited to “an employer” or “class of employers”.

Recommendation

That the submission be accepted.

 

1 The largest employers have two payment periods in a month, amounts withheld from payment made between the 1st and the 15th of the month must be paid by the 20th and amounts withheld from payments made between the 16th and end of the month must be paid by the 5th of the following month. All other employers must pay amounts withheld during the calendar month by the 20th of the following month.

2 The flexibility to choose a date up to the end of the payment period would allow an employer who had made several out-of-cycle pays on different days to aggregate them and report them in one additional report.

3 The information is not calculated in the payroll so time is required to get it into a format that can be reported and, secondly, there may be multiple payments on different paydays.

4 For example, if the 20th day after payment fell on the 15th of the month or on the last day.

5 For example, if the 20th day after payment fell on the 15th of the month or on the last day of the month.

6 The “new group of employers” allows a new employer who would otherwise be included in the “online group” and required to file digitally a period of six months before they are required to do so.