Chapter 6 - PAYE - Aligning payments

The discussion document consulted on the possibility of aligning the process of making PAYE payments (and related deductions and contributions such as for KiwiSaver, child support and student loan repayments) to IR with the timing and business process of paying salary and wages to employees.

Summary of comments

Most submitters (including online) did not support payday remittance of PAYE. The minority that supported paying PAYE at the time wages are paid considered it would save time, be more efficient and would allow employers to better manage their tax liabilities.

Those in support said:

“[We support] the voluntary introduction of pay-day payment of PAYE to IR. The most time efficient processing of payroll can be achieved when the payroll calculation, payment instructions, PAYE payment and IR information filing are all completed at the same time, as part of the usual business process of paying employees. We recognise that some employers will choose to retain the status quo and pay PAYE in arrears. However, some small businesses will value the certainty and finality of a pay-day payment over the cash flow benefit from paying in arrears.”

“We are generally supportive of the proposal for PAYE to be paid to Inland Revenue on a pay day basis, due to the expected reductions in compliance and administration costs as well as a potential to help reduce PAYE payment default. However, we submit that there should be an extended transition period for small businesses if pay day payment is adopted.”

“… would not be against the proposal to combine the payment of salary and wages to employees, the payment of PAYE deductions to IRD, and providing PAYE information to IRD on the same day, on the condition that the process of payment and filing of information to the IRD is fully automated.”

“Don’t mind paying PAYE at the same time as the wages – would make the process more efficient instead of having to do it later. But will consider paying monthly instead of fortnightly.”

The main reasons submitters gave against the proposal were:

(1) Cash flow

Employers and their representatives were largely concerned about the impact it would have on the cash flow of businesses, especially on small businesses, which are often under-capitalised and most likely to be adversely affected by the impact of the proposal. Because of this, some submitters suggested that payday alignment should only be targeted at large employers.

“We believe a change to align PAYE payment with salary payments would have a significant effect on overall cash flow in the New Zealand economy. Officials should conduct an analysis of the effects on New Zealand’s business and economy.”

“This would impact cash flow of under-capitalised small businesses. Would be extra work for IRD arranging delayed payments – businesses would be charged penalties and interest resulting in additional tax effectively.”

(2) Ability to offset costs

Employers (being “unpaid” intermediaries in the tax system) would lose the advantage of interest on the PAYE deductions they hold between the time they pay their staff and the time they pay the PAYE deductions to Inland Revenue. Currently employers may offset some of their PAYE compliance costs with the benefit provided by holding the PAYE until payment is due.

“It is often pointed out that some employers consider the time use of money from the delay in paying PAYE is a form of payment from IRD for costs incurred in complying with PAYE obligations…[We have] much sympathy for this view…”

(3) May compromise digital filing through intermediaries

Payroll intermediaries are able to provide electronic filing services at a cheaper price because of the timing delay (30-40% of their revenue comes from interest earned on trust account). Without it, prices will need to be increased (or the payroll subsidy will have to increase) which may result in fewer employers using payroll intermediary services.

“The proposal to align PAYE payment obligations would eliminate a key revenue stream that PAYE Intermediaries rely on to fund and subsidise their services. Without increases in the current subsidies paid by the Commissioner, the proposal would result in payroll intermediaries having to increase their prices charged to employers, or abandon the additional services that they provide, which would in turn result in fewer employers (particularly small employers) using their services. This would leave Inland Revenue to manage these employers directly, at significant additional cost.” “[this proposal would] increase business costs by an estimated $175M in funding costs if all employers had to borrow to fund the short-fall.”

(4) Additional administrative costs

Most submitters thought that more frequent payment was likely to introduce additional administrative burdens and costs to many employers (payroll staff involved, authorisation, and transaction costs). Some large employers make several pay runs a week (sometimes daily) due to different categories of employees being paid on a different frequency.

“An approach which requires PAYE to be paid each time a payment is made to an employee will result in more frequent payments of PAYE. This is particularly the case in large organisations where a large number of extra pays are made to employees through the year, or where employees are paid on a weekly basis…Given the internal administrative costs and transaction costs involved in making a payment of PAYE, this would likely increase compliance costs for many large employers.”

(5) No time for error correction

Payday remittance would expose employers to potential penalties as there will be no time for error correction.

“Filing the EMS with IR requires additional compilation, verification and, often, error correction, over and above the work done for the monthly or fortnightly payment run. If IR were to require the EMS or equivalent at the same time as the payment run, IR would need to waive all interest and penalties payable on the filing of the EMS.”

Other comments:

“This just looks like a scheme to improve the government's cashflow under the guise of tax simplification. I cannot see the time or cost saving.”

“…the 20th of the month following is when most small businesses are paid by their clients, meaning that the 20th is a good time cash flow-wise for them to meet their obligations re IRD to PAYE.”