Implementing the change for PAYE information
Inland Revenue has recently begun work to determine the recommended approach to sequencing change across the whole tax system. This consultation does not propose an implementation timetable, but the Government expects to be able to introduce legislation in late 2016.
A staged approach
Because employers needs will differ, and because changes to the law are required to enable some aspects of the proposed new processes, implementation of change to PAYE processes will follow a staged approach.
It is likely that during 2016 software developers will launch the ability to submit existing PAYE returns (e.g. employer monthly schedule and KiwiSaver enrolment forms) directly from payroll software. The initial deployment will not include all of the features outlined in Integrating PAYE into payroll software, such as providing information at the time of the business process and deduction information coming back from Inland Revenue through the software.
Software developers are expected to target the small and medium enterprise market first. Large employers have advised that they often use customised systems which will take longer to change.
Requiring PAYE information to be filed on a different basis
Because timely, accurate PAYE information is a pre-requisite for future changes to social policy delivery and is also important to the correct delivery of current social policies, the Government has considered whether it should require employers who can access digital services to use payroll software that is capable of providing information to Inland Revenue when the business process occurs (for example providing information about PAYE income and deductions on a payday basis).
The Government needs to consider whether the system-wide benefits of changes to the way PAYE information is provided justify the costs of implementing the change. Transitional and ongoing costs need to be considered, and it is important that change does not simply result in costs being shifted from government to employers.
Feedback on earlier consultation about whether taxpayers should be required to use digital services was mixed. Some said it should be compulsory where it was feasible and others said it should eventually be compulsory. A significant number of submissions were however opposed to the idea that using digital services might be compulsory for all employers.
In view of this feedback the Government is considering whether:
- the threshold above which employers are required to file PAYE information electronically should be revisited; and
- whether employers should be required to provide PAYE information when the business process occurs (for example PAYE and deduction information when the pay is calculated). Focusing on when information is provided rather than on how leaves the decision about whether or not to use payroll software to the employer.
Threshold for electronic filing
PAYE information submitted electronically is quicker and cheaper to process than information submitted on paper. At present, employers with more than $100,000 of annual PAYE and Employer Superannuation Contribution Tax (ESCT) must file their returns electronically. This rule dates from 1999. Since that date, the use of electronic technology has increased dramatically. Research in 2012 found that 96% of New Zealand businesses with more than 5 employees have access to the internet. More than 60% of employers who are below the current threshold for filing PAYE information electronically nevertheless choose to file electronically.
The Government proposes to reduce the threshold from $100,000 annual PAYE and ESCT deductions to $50,000. This would require employers with ten or more full time employees on the minimum wage, or four full timers on the average wage, to file electronically. A process for obtaining an exemption would remain for those unable to access digital services.
The current threshold is set by legislation – given the speed of change of digital technology, greater flexibility to change is proposed. The threshold could be changed either at the Commissioner’s discretion, or by regulation made by Order in Council which would therefore be subject to parliamentary scrutiny.
Providing PAYE information when the business process occurs
Many of the benefits from better PAYE services, depend on PAYE information being provided to Inland Revenue at the time the business process occurs. The Government needs to balance the employer’s interest in choosing how to provide PAYE information against the wider system benefits of information being provided more quickly than at present.
There are three possible approaches to implementation:
Under this approach, employers would initially be able to choose whether to continue to file using their current monthly approach, or whether to move to a system under which PAYE information was provided when the business process occurs (for example when a new employee is added to the payroll and when the pay is calculated).
Once employers which chose to have adopted and used the new payroll packages and services, the situation would be reviewed to examine their experience and why others had not chosen to adopt them. If sufficient benefits were seen in adoption of the new approach, a timetable could then be set for the provision of PAYE information when the business process occurs. The timetable could differ for different-sized employers, and would include an exemption for those employers who could not use digital services to meet the new requirements This approach would deliver the greatest level of ability to take into account real-world experience before deciding whether or not to require change, but it would provide the least certainty to government and business.
This is the same as the voluntary approach, except that the date of the review would be stipulated at the outset – perhaps 12- 36 months from the legislation taking effect. Following that review, if the results justified it, a timetable could be set.
Under this approach, the Government would set a timetable at the outset. The timetable would identify the date, or dates by which time employers would have to provide PAYE information when the business process occurs. Requirements may vary for different-sized employers, and an exemption process would exist for those that could not use digital services to meet the new requirements. This approach would have limited ability to take into account real-world experience, but the greatest level of certainty for government and business.
It is not proposed that the due dates for PAYE information would change in the initial voluntary stage of each of the possible approaches outlined above. An employer which chose to send PAYE information at the time of the business process would be meeting their current obligations by submitting information progressively. If, under any of the alternative approaches employers came to be required to provide PAYE information at the time of the business process the question of due dates would be revisited to reflect the new obligations.
One potential issue with requiring employers to provide PAYE information about income and deductions on a pay day basis could be some employers seeking to pay their staff less frequently – e.g. changing from a weekly to a monthly pay cycle. This would be undesirable.
Implications for large employers and those with bespoke systems
There are more than 5,700 employers with over 50 ‘employees’ (this definition of employees includes those who receive student allowances, paid parental leave, ACC and income-tested benefits subject to PAYE).
Large employers often have customised payroll systems and they are often supplied from overseas. Overseas suppliers may be unwilling to make changes for the New Zealand market unless it is to meet a legal requirement. In addition to developing and testing the software, time may be required to schedule the change and train staff. Feedback already received suggests 12 – 24 months’ notice of change may be required.
Implications for small and medium-sized employers
58% of employers (109,289) have less than 5 employees – they employ 6% of employees.
23% of employers (44,201) have between 5–10 employees – they employ 8% of employees.
16% of employers (30,451) have between 11-50 employees - they employ 17% of employees.
Early engagement with software developers already supplying the SME market indicates they are likely to be the first to make software available which can submit PAYE information at the time the business process occurs.
The Government recognises that employers will vary in their willingness to adopt or upgrade to software that supports the new digital services. Early adopters will move quickly while others will wait to see how the services are received.
For small employers doing the pay is often the role of the business owner or a family member. While simple software may be attractive to some of these employers cost may be a barrier to upgrading existing software or moving from manual systems to software. However, the New Zealand market has over 50 different payroll software providers, so competition between those suppliers is expected to limit the price of payroll software and upgrades.
At present, a payroll subsidy of $2 per employee per pay period, for up to five employees, is available to employers with annual PAYE (including ESCT) deductions of less than $500,000, provided the employer uses a listed payroll intermediary. The subsidy is paid to listed payroll intermediaries. At least one payroll intermediary uses this subsidy to provide a free service.
Previous feedback on subsidies was mixed – some thought subsidies should be extended; others were opposed to their use.
Employers who can access digital services, but who choose not to adopt software which can submit PAYE information at the time of the business process will have the option of using the upgraded portal. As noted below employers below the digital filing threshold will also retain the option of filing on paper, for the foreseeable future.
Implications for those with very simple payrolls
Almost 45,000 employers have only one employee.
Simple payroll software, perhaps available as an app over a mobile phone or tablet, is likely to be an attractive option for some very small employers. Inland Revenue’s upgraded internet portal will also be available as an alternative, and will be accessible with mobile devices.
Earlier feedback identified the importance of ensuring that those who cannot use digital services are still able to meet their obligations. Paper channels will remain for the foreseeable future for those who cannot access digital services and for small employers (below the digital filing threshold) which do not wish to use any of the digital options.
If provision of PAYE information at the time of business processes becomes a requirement then that requirement is likely to apply to employers who have digital access, who nevertheless choose to submit their PAYE information on paper. This would mean for example, that an employer, who is below the digital filing threshold, could continue to submit PAYE information on paper but they would need to submit PAYE information about income and deductions each pay day.
Implications for not-for-profit organisations
8,900 registered charities are employers, employing 186,000 staff.
48% of registered charities have less than 5 employees.
The not-for-profit sector is made up of many organisations that are exempt from income tax including charities and sports clubs. They range from very small to large organisations.
Small non-profit organisations are likely to combine payroll responsibilities with other duties and may even have their payroll done by a volunteer.
Implications for payroll bureau, payroll intermediaries and other third parties
Some employers use third parties such as bookkeepers, accountants and payroll specialists to run their payroll and meet their PAYE obligations. Payroll intermediaries take over the employer's legal obligations to Inland Revenue. Their role is important because they free employers to focus on their core business and bring professional skills and knowledge to these tasks.
The proposed approach of software connecting directly to Inland Revenue should work for third parties as it will for employers. However, there might be instances where the third party does not currently receive the level of information that it is proposed might be required by Inland Revenue to set up a new employee at the commencement of employment.
In addition it is recognised that some third parties play different roles for different clients and that the processes to manage these roles are convoluted. It is intended that a single customer will be able to have multiple roles in future, while maintaining a single identity with Inland Revenue.
Implications for those unable to access digital services
Employers operating in rural areas without broadband internet or mobile phone coverage are a good example of those who lack digital access. The Government proposes that those without digital access would be exempt, or partially exempt, from any requirement to provide PAYE information at the time of the business process. It is proposed that the exemption process would require an application to Inland Revenue.
Significant advantages for the Government and social policy recipients would be derived from PAYE information being provided on disaggregated basis showing what has been deducted each pay day. Employers calculate this information as part of doing the pay and are required to retain the information.
It is proposed that employers which were exempted from a requirement to provide PAYE information at the time of the business process would only need to provide their information once a month but would be required to show what was paid and deducted on each payday, rather than a monthly aggregation as now.
Because of the benefits that would arise from earlier provision of PAYE information, it is further proposed that in the event that there is a general requirement to provide PAYE information at the time of the business process, employers who have an exemption would be required to provide the information by the 5th, rather than the 20th, of the month following the month in which PAYE deductions were withheld.
The future for IR 56 taxpayers
Some employees are responsible for paying their own PAYE – these are known as “IR 56 taxpayers”. They include private domestic workers, embassy staff, some NZ-based employees of overseas companies, and United States Antarctic Program personnel. IR 56 taxpayers are required to file PAYE information, and pay their PAYE with an employer deductions form, by the 20th of the following month.
These types of employees have PAYE obligations either because their employers are ill equipped to discharge the obligations or because NZ could not enforce the obligations.
If there is a general requirement to provide PAYE information when the business process occurs requiring these employees to provide their PAYE information on a payday basis would be onerous for them.
If there is a general requirement to provide PAYE information at the time of the business process it is proposed that IR 56 taxpayers would be required to provide their information by the 5th of the following month, as proposed for employers unable to access digital services, rather than the 20th as now. However, a delay in IR 56 employees providing information does not have the same effect as a delay in provision of PAYE information from ordinary employers as they would be the only party affected.