Shortfall in PAYE when a payroll donation tax credit is extinguished

Clause 236

Issue: Incorrect calculation of the payroll donation tax credit

Submission

(35 – PricewaterhouseCoopers)

The bill should clarify who is responsible for correcting any errors in calculating the payroll-giving tax credit and the process and timeframe to be followed.

Comment

Under current law, the responsibility for correcting errors that flow through the employer monthly schedule rests with the employer (section RD 4(1) of the Income Tax Act 2007). As the payroll donation tax credit flows through the employer monthly schedule and affects the amount of PAYE payable by the employee, the employer would be responsible for correcting any errors relating to the tax credit.

The process for correcting these errors would require the employer to contact Inland Revenue about the relevant adjustments to be made. If the employer does not correct the error, proposed section LD 5 would apply. Section LD 5 provides that an incorrect tax credit is extinguished and the correct amount is included in the employee’s tax credits for PAYE income payments (salary and wages) for the tax year under section LB 1 of the Income Tax Act 2007.

Officials consider that the process and responsibility for correcting any errors in PAYE resulting from an incorrectly calculated payroll donation credit should follow the current process for correcting shortfalls in PAYE. These matters should also be fully explained in Inland Revenue’s Tax Information Bulletin, which is published following enactment of the legislation.

Recommendation

That the submission be accepted, and that the process and responsibility for correcting any errors in PAYE resulting from an incorrectly calculated payroll donation credit should follow the current process for correcting errors in PAYE.

That this process should be further explained in Inland Revenue’s Tax Information Bulletin on the legislation.

Issue: Employer fails to transfer the payroll donation to the relevant recipient

Submissions

(32 – KPMG, 62 – Minter Ellison Rudd Watts, 67 – New Zealand Institute of Chartered Accountants)

The bill should clarify what happens when a tax credit is extinguished as a result of an employer failing to pass on payroll donations, and who is responsible for correcting the resulting shortfall in PAYE. (KPMG, New Zealand Institute of Chartered Accountants)

If the employer fails to transfer an employee’s payroll donation in circumstances where an eligible recipient has been identified, Inland Revenue should not be able to recover the shortfall in PAYE from the employee. (Minter Ellison Rudd Watts)

Comment

Proposed section LD 6(1)(a) provides that when an employer fails to transfer payroll donations to the relevant recipients within the three-month timeframe, the payroll donation tax credit is extinguished. If this occurs, the employee would have an additional PAYE liability to pay for the relevant pay-period.

Under current law, the employer is responsible for deducting PAYE from an employee’s pay and then paying this amount to Inland Revenue. If there is a shortfall in PAYE deducted from the employee’s pay, the employer is also responsible for correcting and paying this shortfall. As the payroll-giving tax credit is treated in the same manner as PAYE, it follows that the employer would be responsible for correcting any shortfalls in PAYE resulting from the extinguishment of a payroll donation tax credit. If the employer fails to correct the shortfall, the employee would be expected to do so as provided in section RD 4(1) of the Income Tax Act 2007 and section 168 of the Tax Administration Act 1994.

If the failure on the part of the employer is a simple mistake – for example, the employer inadvertently transfers the payroll donations to the wrong recipient, the employer could be expected to take remedial action to correct the mistake and, if so, the tax credit should be reinstated.

If the failure on the part of the employer is deliberate – for example, the employer pockets the payroll donations or the employer knowingly transfers the payroll donation to the wrong recipient, the tax credit should be extinguished and the correct amount included in the employee’s tax credits for PAYE income payments under section LB 1 – that is, it is corrected as part of the end-of-year square-up process. Because the shortfall arises from a deliberate act of the employer, it would be unnecessary to provide for the payroll donation tax credit to be reinstated. In the event that the employer fails to correct the shortfall, Inland Revenue would recover the amount from the employee. Although this approach might seem unfair given that the shortfall arises due to employer fault, it is important to remember that the employee would be able to seek compensation or redress from the employer for failing to transfer the payroll donations to the relevant recipient.

The penalties for employers failing to transfer payroll donations to the relevant recipients are explained in the next section of this report, “Penalties”.

Recommendation

That the submissions be declined, and the process and responsibility for correcting any shortfall in PAYE resulting from the employer failing to transfer payroll donations to the relevant recipient should follow the current process for correcting shortfalls in PAYE.

Issue: Employer transfers the payroll donation to an ineligible recipient

Submission

(68A – Corporate Taxpayers Group)

The bill should clarify what happens when a tax credit is extinguished as a result of an employer mistakenly transferring the donations to an ineligible recipient. If employers have taken reasonable care in determining that the tax credit applies – for example, by checking that the relevant charity is listed with the Charities Commission, the tax credit should not be adjusted.

Comment

Proposed section LD 6(1)(b) provides that when an employer transfers the payroll donation to an ineligible recipient, the payroll donation tax credit is extinguished. If this occurs, the employee would have an additional PAYE liability to pay for the relevant pay-period.

As outlined in Issue: Employer fails to transfer the payroll donation to the relevant recipient, the process and responsibility for correcting errors and paying any shortfall as a result of the payroll donation tax credit being extinguished should follow the current process for correcting shortfalls in PAYE.

If the failure on the part of the employer is a simple mistake – for example, the employer mistakenly transfers the donations to an ineligible recipient, the employer could be expected to take remedial action to correct the mistake and the tax credit should be reinstated.

If the failure on the part of the employer is deliberate – for example, the employer deliberately or knowingly transfers payroll donations to an ineligible recipient, the tax credit should be extinguished and the correct amount included in the employee’s tax credits for PAYE income payments under section LB 1 and corrected as part of the end-of-year square-up process. Because the shortfall arises from a deliberate act of the employer, it would be unnecessary to provide for the payroll-giving tax credit to be reinstated. In the event that the employer fails to correct the shortfall, Inland Revenue would recover the amount from the employee, as discussed in the previous item.

The penalties for employers failing to transfer payroll donations to the relevant recipients are set out in the next section, “Penalties”.

Recommendation

That the submission be declined, and the process and responsibility for correcting any shortfall in PAYE resulting from the employer failing to transfer payroll donations to the relevant recipient should follow the current process for correcting shortfalls in PAYE.