Issues with current PAYE processes
Pay as You Earn (PAYE) creates obligations for employers to deduct income tax and ACC from employees’ salaries and wages, and to provide information and payments to Inland Revenue. The PAYE process also has a number of other functions, including repayment of student loans and collecting KiwiSaver contributions, and information it produces is important too for things like determining eligibility for tax credits and income related benefits.
Employers provide PAYE information to Inland Revenue in the month after they have paid their employees. Employers with annual PAYE deductions (including employers superannuation contributions tax) of more than $100,000 must provide this information electronically.
Feedback suggests that may employers find their PAYE role onerous. The system was designed for a paper-based world and it creates problems for employers and employees, and it does not deliver information to Government in a timely or useful way.
Using payroll software to manage PAYE obligations
The Government is committed to making it easier for people to interact with government. A core proposal is that PAYE obligations be able to be met via the payroll software that employers increasingly use to manage their organisations.
Using payroll software to support meeting PAYE obligations should enable employers:
- To be confident that their calculations are correct. Using software to make calculations reduces calculation errors and the errors which can arise from using out-of-date rates.
- To eliminate the double-handling of information. Employers now have to run tax and business processes separately; in the future tax compliance should become a by-product of something the organisation is doing anyway. This should eliminate the additional work which comes from double-handling, and the transcription errors which can arise when information is re-entered.
- To benefit from faster processing by Inland Revenue. Information which goes directly into Inland Revenue systems from software will be recorded into employers’ and employees’ tax accounts much more quickly than is now the case.
The Government does not see it as Inland Revenue’s role to develop business software itself; rather, Inland Revenue should work with those who already supply software to businesses to add the facility for it to interact with Inland Revenue's computer system. The new digital services which Inland Revenue will work with software providers to develop include the following:
- The ability for customers to submit PAYE information from within their payroll system as a step in the payroll process rather than a separate tax obligation;
- The ability to receive and upload information from Inland Revenue directly into their payroll system.
Feedback on earlier Making Tax Simpler consultations indicated that if software connects directly with Inland Revenue submitters wanted to retain control. Core elements of payroll software interacting with Inland Revenue will include:
- Leaving the responsibility with the employer to authorise the information being transferred to Inland Revenue.
- Ensuring that processes are secure, for example by ensuring that the software meets standards before being able to access Inland Revenue services and requiring access to only be available to those who are authenticated.
The Government also recognises that not all tax matters are best dealt with across digital channels, particularly in the case of PAYE where payroll issues can be complex. Appropriate off-line support will remain available.
Providing information on a payday basis
At the moment employers are required to provide PAYE information on a monthly basis, regardless of their pay cycle. When PAYE information is sent from payroll software, this information could be provided by authorising a transfer of PAYE information after the payroll is finalised. This would enable submission of information on a pay period basis, rather than monthly which would eliminate the current need for employers to aggregate information from each pay cycle in each month. When this is done manually it creates additional work and an opportunity for error.
For employers already using payroll software and “file transfer” to submit their employer monthly schedule information, digital submission of data from within a payroll system at the time the payroll is finalised, would eliminate the steps of saving the file of PAYE information, logging into ir-File through my IR and sending the employer monthly schedule to Inland Revenue.
Becoming, and ceasing to be, as employer
In the future it is proposed that payroll software would include an option to notify Inland Revenue of the decision to become an employer, and to permanently or temporarily cease to employee staff.
Advising Inland Revenue of a decision to cease employing staff would eliminate the risk of an ex-employer being pursued for failing to file PAYE information. It would also eliminate the need to file nil returns, for example during a season when no staff are employed.
Currently, employers are required to provide information to Inland Revenue about new employees in the month after they are first paid, using the employee monthly schedule, and again, for staff eligible to join KiwiSaver, on the KiwiSaver form KS1.
The Government proposes that where an employer uses a payroll system which connects to Inland Revenue's system, information about the employee could be provided when the employee’s details were first entered into that payroll system. The employer might receive a prompt when the key fields were populated asking “send detail to Inland Revenue?” It is proposed that the following information would be sent to Inland Revenue:
- Employee name
- IRD number
- Tax code
- Contact details (physical address, phone number and email)
- Start date
- Date of birth (this would be a new requirement and would be used to help verify identity, see the discussion in the next section).
If the above information is provided and identity could be confirmed, the employer could be provided with any required change to the tax code, and advised of the employee’s KiwiSaver status and deduction rate, and of any additional deductions required, before the employee was first paid. This would eliminate at source errors which now take time to correct, and remove the need for a separate KiwiSaver auto-enrolment forms. There would still need to be a process for existing employees who opt in to KiwiSaver.
At certain times of year Inland Revenue updates employee deduction information, for example relating to child support, and provides instructions to employers. This information could be sent directly to an employer’s payroll system where, once authorised by the employer, it could be automatically uploaded.
The payroll system could also be used to advise Inland Revenue of updates to employees’ details, such as changes to their contact details or ceasing employment. Electronic notification of cessation of employment would allow Inland Revenue to ‘de-link’ the employer and employee and Inland Revenue would no longer contact the employer about that ex-employee.
Employee information that changes would also be copied by Inland Revenue to the employee, so they could correct any errors.
Date of birth
Security and privacy concerns were raised in previous consultations. Problems can arise in the tax system where people have the same name as others, use different spellings or versions of their own names, or make errors when they provide IRD numbers.
The problems which arise can include deductions, for example for PAYE and student loan repayments, being credited to the wrong person and confusion over who obligations belong to, for example for child support.
These issues could be minimised if employees provided date of birth information to their employer which was passed to Inland Revenue when the employee is first set up. This information would significantly increase Inland Revenue's confidence in confirming a person's identity.
Employers are not permitted to discriminate on the basis of age but once an employee has been appointed they are permitted to collect and record date of birth information. Some employers do this and others do not. It is proposed that the requirement on the employee to provide the employer with a tax code could be extended to include providing their date of birth.
While the proposals above should eliminate a number of errors which currently arise, some will remain. Under the current delayed arrangements for filing PAYE information payroll staff can amend matters that come to their attention before the information is sent to Inland Revenue the following month. If information is sent to Inland Revenue more frequently (when the payroll is run) there will need to be a simple process for correcting errors.
Sources of error, which will remain, include where information has been received after the cut off period, where input errors have been made or where the tax treatment of payments (for example allowances) has been reconsidered. Current processes for error correction, which require manual calculations and form filling, are cumbersome.
In the future, it is proposed that the employer’s payroll system be able to calculate and submit corrections to Inland Revenue at the same time that the payroll itself is updated. In addition when authorising the submission of updated information to Inland Revenue the employer would need to select from a dropdown menu, or add a reason for the change.
Consideration has been given to whether Inland Revenue should simply ask employers to provide the changes to the year to date balances for the information which was in error (this would often be a negative adjustment to the totals). The proposal is for information to be corrected on a pay-period basis because this would retain the integrity of the employee’s record and, if appropriate, provide the basis for the calculation of late payment penalties. Under the proposal there would however be no need for pay period information to be aggregated onto a monthly basis or for forms to be filled out.
There are two ways payroll software could provide error correction information to Inland Revenue:
- the correction could advise what was actually paid and deducted, and what should have been paid and deducted, for each pay period that was in error; or
- the correction could simply advise of the change required to each pay period in which the error occurred.
Where there has been a change to the tax treatment of PAYE income, for example where accommodation allowances had wrongly been calculated as tax free, employers will continue to have a choice of channels available to notify Inland Revenue of the change.
There is currently no PAYE equivalent of section 113A of the Tax Administration Act 1994 which provides for the correction of minor errors in subsequent periods. The Government is interested in feedback on whether section 113A needs to be extended to cover minor alterations to the tax position employers take when they return PAYE information.
Dealing with Inland Revenue directly
Inland Revenue currently provides a secure web-based portal through which employers can file and access information (myIR). This web based portal will be modernised to offer more reliable, secure and user friendly services.
Employers with internet access, who are not using payroll software with the ability to communicate directly with Inland Revenue, could use the portal to submit PAYE information including:
- a decision to become an employer, or to permanently or temporarily cease to be an employer;
- details of new employees and people who have ceased employment
- pay day information about PAYE and other deductions
- amendments to PAYE information
The portal would continue to provide access to information. The portal could be used to receive information about change to employee deductions and tax codes that could also be sent direct to payroll software. It is however unlikely that the portal will offer the same speed of communication as could be achieved when information is sent direct to payroll software,
Accessing information held by Inland Revenue
In the future, employers which use electronic channels should no longer be reliant on statements, but will be able to access this information online in a customer account, either through their payroll software or via Inland Revenue’s web-based portal.
Information received from payroll software which communicates directly with Inland Revenue, will be processed and updated much more rapidly than at present. The objective is for these customer accounts to be updated on a daily basis and for the information to then be visible to the employer. Customers using the portal should also benefit from faster processing of their PAYE information although possibly not as fast as for those communicating via payroll software.
The visibility of more up-to-date information than at present should give employers much more certainty and reduce the need for them to contact Inland Revenue.
Provision of PAYE information to other government agencies
The Government has ambitious goals of achieving better outcomes for New Zealanders through delivering better public services. One way to do this is for government agencies to share more information, enabling businesses and individuals to tell government only once.
At present, PAYE information is used by a number of agencies including Accident Compensation Corporation (ACC), Ministry of Social Development (MSD) and Statistics New Zealand under specific legislative authority. In the future, faster more accurate information would improve MSD’s ability to ensure its customers receive the correct benefit entitlements.
The Government is conscious that other government agencies also require information from employers and that there may be scope to rationalise the number of separate process. It should be noted that for greater sharing to occur a law change or Order in Council would be required.