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Legislated rate changes

How do you think legislated rate changes should be dealt with?

Occasionally the Government changes tax rates or rates of other deductions or payments made by employers (such as KiwiSaver and student loan). These rate changes are made in legislation and take effect in a variety of different ways:

Legislated rate change How rate change takes effect
Tax on salary and wages

When a rate changes during a pay period and the pay period is one month or less, the new rate applies to the entire pay period.

When the pay period is more than one month, the payment is apportioned.

When the payment is after a rate change but relates to a period before it, the old rates apply.

Tax on extra pays The tax rate applied to an extra pay is the relevant rate in force at the time the payment is made.

Student loan deductions

The rules are the same as the rules for regular salary and wages.

ACC earners' levy

The rate is set in regulations, and applies to liable earnings for pay periods ending in the applicable tax year.

KiwiSaver contributions (employer and employee) New rates apply from the first pay period starting after 1 April.
ESCT

The tax rate applied to employer's superannuation contribution tax is the relevant rate in force at the time the payment is made.

 

The Government thinks that employers’ processes would be simplified if the rules were aligned.

Options are:

  • the pay date
  • the pay period end-date
  • the pay period start-date
  • apportionment

Pay date is the simplest option. However it might sometimes be inaccurate. For example, if the income tax rate changed from 30% to 20% in the middle of the year, a composite rate of 25% would apply for the entire year. An employee who was paid in arrears could have a little too much tax withheld at 20%, and if filing a return, would be likely to have a tax liability. Apportionment would deliver a more accurate result here. However, a pay date basis is more accurate where the rate change occurs at the beginning of a tax year.

Questions         

1.  Do you think that legislated rate changes could be applied in the same way across PAYE-related tax types/products?

2.  Do you agree that a pay date approach is the best option for alignment?

Comments

David Williamson
All changes should be made 1 April. The GST rate increase a few years ago was on the 1 October to coincide with PAYE reductions and this was a nightmare.

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8 months ago
michele hunt
I agree!!

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8 months ago
Andrea
Simplest way of all!!! Why was that option not there in the first place!

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8 months ago
Software training contractor
Apply rate changes from first pay after April1 consistently. Better chance of everyone getting it right then.

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8 months ago
Common Sense
In response to the questions as put: 1. Yes 2. Yes

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7 months ago
Megan B
It should be the pay date and should be the first pay after April 1st each year.

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6 months ago
Jac
I use the IRD calculators for PAYE every time I calculate the employees wage anyway, so as long as the changes are built into your calculator systems I'm not sure it would really affect how our business runs? But from a logical point of view - making everything 1 April seems to make sense.

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6 months ago
Martin Etherington
There does need to be consistency, not just between the dates changes of different taxes apply from but with the dates (i.e. tax year) the information is filed in. The rules for inclusion in the EMS are based around the payment date of the pay period. Whereas the tax rates applied are those as at the end of the pay period. This can result in inaccurate taxes in the employee's tax returns as one pay will have been taxed at the old rates, but filed in the new tax year. e.g. A pay ended 29 March 2015 paid on 1 April 2015, is taxed at 2014/2015 tax rates, but is included in the April EMS and therefore the employee's 2015/2016 tax return. If there had been a change in the tax rates, it would result in tax to pay or a refund depending on whether the rates went up or down. Similarly, with the KiwiSaver rate change applying from the first full pay period after the tax rate changes, (i.e. a pay period after any tax rate changes apply), it can mean some of the KiwiSaver contributions in the April EMS are at the old rate and some at the new rate. This can raise unnecessary audit flags due to it appearing that an incorrect rate has been applied to the whole of the April earnings. I strongly recommend that the date KiwiSaver changes apply from is aligned with the date the tax changes apply from. In practice, I now apply the KiwiSaver changes based on the last day of the pay period to avoid these anomalies - the employee is also better off in the long run. And it stops queries from employees who tend to expect the change to be applied from the first pay that ends after the rate change. From an accounting perspective I personally would prefer that all rates apply as of the last day of the pay period, and the EMS reporting is also based on the last day of the pay period. It would make reconciliation between accounting and payroll records easier. i.e. Accrual rather than cash basis. My second choice would be the rates applicable as of the payment date (with the EMS reporting also based on the payment date). Apportionment is messy and ideally to be avoided. In my mind using the first day of the pay period is not an option - it can be far removed from the actual payment for the pay period and is less likely to be able to be aligned with the EMS reporting.

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5 months ago
Noel Reid
Q1 - yes Q2 - pay date, or pay period end-date Once again, the "real answer" is annualised calculations....

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5 months ago
Chris Mar
The current approach is unnecessarily confusing and inconsistent. Having reporting of income based on pay day and rate changes applicable based on period end date or period start can lead to invalid results. Using pay day is probably the best approach.

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5 months ago
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