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Chapter 4 - PAYE income and payroll corrections


4.1 Stakeholder feedback suggests that the law around the taxation of overpaid PAYE income requires clarification. It is Inland Revenue’s current view that overpaid wages and salary are not PAYE income and are generally not taxable in the hands of the employee.[21] This view has not been widely promulgated or included in Inland Revenue’s guidance to employers.

4.2 An employer only has an obligation to deduct PAYE from PAYE income. If an employee agrees to repay an overpaid amount[22] that was originally paid as PAYE income, the parties have agreed that it was not PAYE income. The employer therefore did not have an obligation to withhold from it, and once notified of the error, Inland Revenue should refund the overpaid deductions to the employer.

4.3 In some cases a repayment schedule may be agreed which spreads the employee’s obligation to repay over a number of pay periods. To reduce compliance and administrative costs, it is proposed that the reduction in income could be adjusted in one payday return following agreement to repay, rather than being matched to each repayment from the employee.[23] Alternatively, it could be reported when the sum had been fully repaid. An employer could choose which option best suited the circumstances.

4.4 Not all overpayments result in repayment. Occasionally an employer will agree to leave the overpayment with the employee. Following this decision, the amount might be regarded as a “bonus” and subject to PAYE, or alternatively, taxable as debt remission income.

4.5 Sometimes an employee refuses to repay the employer or leaves the employer with no forwarding address before the overpayment is repaid. Officials understand that when overpaid income is not repaid, it is often treated as if it remains taxable as salary or wages. As a consequence, employers do not adjust the employment income information filed with Inland Revenue.

4.6 It is proposed that the legislation should be amended to make it clear that where an overpayment is not repaid, it is PAYE income and no error correction or adjustment should be made.

4.7 This approach would remove the need to distinguish between when an employer has agreed to leave the amount with the employee and when they have simply been unable to recover it. It would, however, mean that when the employee does not repay the net amount, the employer is unable to recover the PAYE and other deductions from Inland Revenue.

Table 2: Summary of proposals for overpayments
Type of overpayment Proposal
Overpayment repaid When the amount is repaid (or there is agreement to repay) this error type can be corrected either:
  • by amending the original return(s) that contained the error; or
  • by recalculating the pay and tax in the pay periods that contained the error, and netting the amounts off the values in a subsequent return.

If legally able to and with the agreement of the employee, by reducing the gross income in a subsequent pay period and reporting the reduced figures in a subsequent return.
Inland Revenue will not be able to accept negative values in returns at least until after the end of 2019, but after that, it is proposed that negative values should be accepted.

Overpayment not repaid When the overpaid amount is not repaid, it continues to be taxable as PAYE income; no error correction is required and there would be no refund of PAYE and related deductions
Overpayment partially repaid If the amount is partially repaid, the sum not repaid remains taxable as PAYE income. If the employer has made an adjustment based on the agreement to repay, a further adjustment would be required to add back the amount not repaid.

Question

  • Do you support the proposal that the law should be amended to make it clear that overpaid income not repaid remains taxable in the hands of the employee as PAYE income? If not, please explain your reasons.

Fringe benefit tax

4.8 If the employer and employee agree that the overpaid net income should be repaid over a period of time, it is possible that the overpayment could be regarded as an interest-free loan, which should attract fringe benefit tax. The legislation currently excludes a loan provided as an advance against future salary from fringe benefit tax, provided the loan amount does not exceed $2,000 during the fringe benefit tax period, and it is not a term of the employment contract.

4.9 Because the amount to be repaid could exceed $2,000, it is proposed that an amendment to the Tax Administration Act 1994 be made, to clarify that time allowed to an employee to repay overpaid income does not create a liability for fringe benefit tax.

Question

  • If you have any concerns with this approach, can you please tell us why?
 

21 “PAYE where income is received fraudulently or in error”, Tax Information Bulletin Vol 16, No 11.

22 Or, in the limited circumstances under the Wages Protection Act 1983, where agreement is not required.

23 If the employee subsequently defaulted on the repayment there would be an obligation on the employer to advise of a further adjustment which added the amount not repaid back into the employment income information.