Making tax simpler – employment and investment income information
- Overview
- Employment income information
- Record keeping (PAYE)
- Payday provision of employment income information
- Employment income information and threshold amendments to the Income Tax Act 2007
- Tax codes
- Penalties
- Consequential changes to employer reporting of employee share scheme benefit information
- Employment income information consequential amendments
- Transitional provisions
- Repealing the subsidy for listed PAYE intermediaries
- Investment income information
- Detail and frequency of investment income information
- Bringing forward due dates for provision of information by PIEs
- Measures to encourage provision of IRD numbers
- Encouraging electronic filing
- Improving the administration of RWT exempt status
- Removing some requirements to provide end-of-year withholding tax certificates
- Correction of errors in information provided
OVERVIEW
The Government is modernising New Zealand’s tax administration system through business process and technology change to make it simpler and more certain for New Zealanders, and to reduce administrative costs (known as Inland Revenue’s business transformation programme). A major part of the changes revolves around more efficient provision of information to Inland Revenue.
This Bill contains two sets of proposals which have been the subject of recent public consultation:
- Making tax simpler: Better administration of PAYE and GST, which sought feedback on changes to improve the administration of PAYE and GST released in November 2015
- Making tax simpler: Investment income information, which sought feedback on changes to improve the administration of investment income information released in July 2016
Public feedback on these proposals was generally supportive and public submissions have helped shape the final proposals contained in this Bill.
Improving the administration of PAYE is an integral part of this reform. Employing staff can add significant compliance costs to a business or not-for-profit organisation.
Increasingly employers are using software to help them run their organisations. This Bill therefore proposes changes to take advantage of modern digital systems to reduce the compliance and administrative costs associated with the PAYE process by making meeting tax obligations part of the process of paying employees rather than a separate and additional activity. Employers using payroll software will be able to report information to Inland Revenue from within their payroll software. Those who choose not to use software will be able to report their employment income information through Inland Revenue’s secure online services or, if they fall below the electronic filing threshold, on paper. The key changes in the Bill relating to PAYE are:
- Record keeping (PAYE): consolidating requirements on employers
- Payday provision of employment income information
- Employment income information and threshold amendments to the Income Tax Act 2007
- Tax codes: clarifying the circumstances in which the no notification deduction rate applies
- Consequential changes to employer reporting of employee share scheme benefit information
- Penalties: amendments to retain late filing and non-electronic filing penalties as monthly penalties
- Transitional provisions: to enable voluntary payday reporting from 1 April 2018
- Repealing the subsidy for listed PAYE intermediaries
The proposals aim to make it easier to get an employee’s pay right and to quickly address issues, such as using the wrong tax code. The result would be lower compliance costs for employers and improved accuracy of deductions for employees.
The changes will also create opportunities to improve the future administration of social policy, such as child support, KiwiSaver, Working for Families and student loans.
One such improvement may involve shortening the annual period over which some social policies are currently assessed to better match periods of assistance with need.
Because of the more widespread use of electronic services and diversity of payroll products and services that are now available the Government has also decided to repeal the payroll subsidy from 1 April 2018.
The Bill also proposes to consolidate and more logically structure the administrative requirements relating to employment income information in the Tax Administration Act 1994. To achieve this some amendments are proposed to the Income Tax Act 2007 and the introduction of a number of new subparts and schedules is proposed in the Tax Administration Act 1994 as is the shifting of a number of sections within that Act to more appropriate locations.
The second set of proposals relate to the provision of investment income information. Investment income refers to interest, dividends, portfolio investment entity (PIE) income, taxable Māori authority distributions and royalties.
The proposed amendments aim to reduce compliance costs for recipients of investment income and administrative costs for Government, while improving the administration of investment income to ensure that taxpayers’ tax obligations and social policy entitlements and obligations are calculated more accurately during the year.
Inland Revenue currently receives limited and infrequent information about the investment income that taxpayers earn and the tax withheld or paid on that income. For interest subject to resident withholding tax (RWT) or non-resident withholding tax (NRWT) and portfolio investment entity (PIE) income, Inland Revenue only receives information about the income taxpayers earned and the tax deducted from that income after the end of the tax year. For dividends, Māori authority distributions and interest income that is exempt from RWT or subject to the approved issuer levy (AIL), Inland Revenue only receives information about the amounts received by recipients when it is specifically requested.
The key changes relate to the following:
- obtaining more frequent and detailed information for interest, dividends and Māori authority distributions;
- bringing forward the due date when PIEs are required to provide information to Inland Revenue;
- encouraging the provision of IRD numbers;
- increasing electronic filing;
- improving the administration of RWT exempt-status (certificates of exemption);
- removing some requirements to provide end-of-year withholding tax certificates; and
- improving error correction.
EMPLOYMENT INCOME INFORMATION
Background
PAYE is a withholding tax mechanism used by New Zealand employers (and PAYE intermediaries) to deduct income tax and the ACC earners’ levy from employees’ salaries, wages and as appropriate, from schedular payments, and pay it directly to Inland Revenue. The PAYE system is also used to collect payments and information for many income-related social policies including student loan repayments, KiwiSaver contributions and some child support payments.
The changes proposed in the Bill are part of modernising New Zealand’s tax administration and are intended to use business/payroll systems to reduce the compliance and administrative costs associated with the provision of PAYE information.
No compulsory changes are proposed to employers’ current obligations around the payment of PAYE and other deductions. Employers will however be able to remit PAYE and other deductions to Inland Revenue on payday if they choose to.
The key changes in the Bill are:
- Record keeping (PAYE): consolidating requirements on employers
- Payday provision of employment income information
- Employment income information and threshold amendments to the Income Tax Act 2007
- Tax codes: clarifying the circumstances in which the no notification deduction rate applies
- Consequential changes to employer reporting of employee share scheme benefit information
- Penalties: amendments to retain late filing and non-electronic filing penalties as monthly penalties
- Transitional provisions: to enable voluntary payday reporting from 1 April 2018
- Repealing the subsidy for listed PAYE intermediaries
RECORD KEEPING (PAYE)
(Clauses 169, 197, 199, 201, and 284(1)(a), and schedule 2)
Summary of proposed amendments
The Bill proposals bring together the sections that impose PAYE record-keeping requirements on employers. New schedule 3 itemises the information that employers must record and keep.
Application date
The proposed amendments will come into force on 1 April 2019.
Detailed analysis
All references are to the Tax Administration Act 1994 unless stated otherwise.
| Current section | Proposed changes |
|---|---|
Section 24 provides that an employer who makes a PAYE income payment to an employee must keep proper records showing the amount of income and the amount of tax withheld. The section also requires PAYE intermediaries to keep a proper record of their actions undertaken for the employer. Section 24(2) further requires safe custody of such records and supporting information for a period of seven years unless the Commissioner has notified that retention is not required. Clause 201 proposes to repeal section 24. When information is transmitted electronically section 23(2)(c) permits employers not to retain a return that is an employer monthly schedule. Section RP 8 of the Income Tax Act 2007 also details the record keeping obligations on an employer and requires that the employer provide information to the intermediary within the agreed timeframe. |
Proposed new section 22AA contains the PAYE record keeping obligations from section 24 and also requires employers to keep the records required under the KiwiSaver Act 2006; the Student Loan Scheme Act 2011; and Child Support Act 1991. The new section proposes to place the detail of the specific records in new schedule 3 Table 1: Record-keeping requirements for employers and PAYE intermediaries. Clause 199 proposes to amend section 23(2) so that where information has been transmitted electronically an employer is not required to retain the employment income information that has been provided to the Commissioner. Proposed new schedule 3 sets out the items for which records, certificates and notifications are required to be kept. Clause 169 amends section RP 8 so that it no longer repeats the requirements in the proposed new section 22AA. |
PAYDAY PROVISION OF EMPLOYMENT INCOME INFORMATION
(Clauses 130, 147, 148, 172(14), (17), (40) and (41), 187(12) and (14), 200, 228, 230, 233, 236, 238, 284(1)(b), 288 and 290, and schedule 2)
Summary of proposed amendments
The Bill defines what is meant by “employment income information”, when different groups of employers must provide the information to the Commissioner and how it must be delivered.
An amendment also proposes how acceptable means for error correction and adjustment may be established. Consequential changes are proposed to the Income Tax Act 2007.
Application date
The proposed amendments will come into force on 1 April 2019 but under the transitional provisions employers may choose to adopt payday filing of employment income information beginning on 1 April 2018.
Key features
Clause 200 proposes a new subpart 3C in the Tax Administration Act 1994 (Employment income information) consisting of sections 23B–23P. Proposed new section 23C defines “employment income information” as the items of information set out in schedule 4, tables 1–3. These tables include the information required on the employer monthly schedule, information about employer’s superannuation contribution tax (ESCT), which is currently required on the PAYE income payment form, and information about new and departing employees. Date of birth information and contact details will be required from all new employees.
New sections 23E to 23H of the Tax Administration Act 1994 establish four employer groups for the delivery of employment income information to the Commissioner. These groups establish the employers’ obligations to file employment income information, including due dates and the means of delivery.
The due date for employment income information from “online employers” above the electronic filing threshold, payroll intermediaries and from employers below the threshold using payroll software is proposed as two working days after payday.
“Threshold employers” below the electronic filing threshold will be able to continue to report employment income information on paper but it is proposed that they will need to do so following each payday. The due date for employment income information from employers below the electronic filing threshold that are not using payroll software is proposed as seven working days following payday.
The Bill proposes that the electronic filing threshold be reduced from $100,000 a year of PAYE and ESCT to $50,000 a year of PAYE and ESCT. The Bill further provides that in future this threshold may be changed by Order in Council following appropriate consultation.
An exemption to electronic filing by the second working day after payday is proposed for “electronic-exempt employers” who while above the electronic filing threshold, cannot access suitable digital services. If an exemption is granted, the exempt employer will be able to file their employment income information on paper and it will not be due until seven working days after payday.
New section 23H proposes how employment income information obligations apply to employers who start employing within a tax year and new section 23I proposes employment information requirements when these fall on an employee.
Proposed section 23J identifies how the employment income information requirements relate to employee share schemes, this provision is dealt with later in this Commentary under “Consequential changes to employer reporting of employee share scheme benefit information”.
Proposed section 23M of the Tax Administration Act 1994 establishes a regulation making power whereby acceptable means of error correction and adjustment may be set out in regulations, made on the advice of the Minister of Revenue, and following appropriate consultation.
Detailed analysis
All references are to the Tax Administration Act 1994 unless otherwise stated.
Employment income information and employer groups
Proposed sections 23C to 23H define “employment income information” and establish four employer groups, along with requirements for the employment income information for each group and due dates for the proposed requirement that the information is provided on a payday basis. Proposed section 23I sets out the requirements for employees to provide employment income information.
| Current section | Proposed changes |
|---|---|
Section YA 1 of the Income Tax Act 2007 defines:
Clause 172(14) and (41) propose that these definitions are repealed. |
Proposed new section 23C(1) defines “employment income information” as the information set out in new schedule 4, tables 1 – 3 of the Tax Administration Act 1994. This proposed new schedule contains information relating to:
The proposed information fields differ from those currently required as follows:
The proposed requirements for date of birth information and contact details are discussed in more detail in the commentary on proposed new section 23K under “Employment income information for new and departing employees”. Proposed new section 23C(2) requires the Commissioner to prescribe one or more electronic forms and means of electronic communication for the delivery of employment income information. See also the commentary on proposed section 23N. |
Section 46 requires an employer to provide details of persons employed and of their salaries, wages and other emoluments received in the month. Clause 236 proposes to repeal Section 46 as the requirements are now included in subpart 3C. Section 36E allows an employer not required to file their employer monthly schedule or PAYE income payment form electronically, to elect to do so. It is proposed to repeal this section. Section 48 provides that with prior consent of the Commissioner any requirement for the delivery of information by an employer or PAYE intermediary can be varied. The consent may have conditions and may be varied or revoked at any time. Clause 238 proposes to repeal this section. |
Section 23D(1) proposes the establishment of four employer groups for the provision of employment income information on a payday basis; the online group; the threshold group; the electronic exempt group and the new group. Despite the existence of four groups, section 23D(2) proposes that a PAYE intermediary is always included in the online group. Section 23D(3) proposes that any employer can choose to provide their employment income information before the date set out in the relevant section. Under proposed section 23D(4) an employer may choose to provide employment income information electronically even if they are not required to. Section 23D(5) proposes that an employer can seek approval to deliver employment income information in a different way. The Commissioner may consent, with conditions, vary the conditions or cancel the approval at any time. |
Section RD 22 of the Income Tax Act 2007 requires employers who have withheld $500,000 of PAYE and ESCT in a year, or more, to provide a PAYE income payment form with the twice-monthly payments of PAYE, due on the 20th of the month for the first payment period and the 5th of the following month for the second period. These employers must provide the employer monthly schedule by the 5th of the following month. All other employers provide the PAYE income payment form and employer monthly schedule on the 20th of the following month. The changes proposed in clause 148 replace existing RD 22 of the Income Tax Act 2007 with a section which provides an obligation to return PAYE information as set out under sections 23E to 23H of the Tax Administration Act 1994. For further discussion of the changes to RD 22 of the Income Tax Act 2007 see the subsequent section on employment income information and threshold amendments to the Income Tax Act 2007. |
The proposed changes replace monthly and twice-monthly filing with payday filing of employment income information. The proposed change from information provision on a monthly and twice-monthly basis to a payday basis is intended to reduce compliance and administrative costs by integrating tax requirements into an employer’s existing pay cycle(s). The online employer group proposed in section 23E is the default group. It is proposed that an employer is an online employer unless they fall into one of the other groups (the threshold group, the electronic exempt group and the new group). It is intended that online delivery of employment income information will be possible from within payroll software or using Inland Revenue’s secure online service – myIR. An employer in the online group must deliver employment income information to the Commissioner in a prescribed electronic form and using a prescribed form of electronic communication, within two working days following payday. Clause 187(12) proposes the insertion of a definition of “payday” into section 3 of the Tax Administration Act 1994. Payday means the day on which an employer makes a PAYE income payment to an employee. Section YA 1 of the Income Tax Act 2007 defines “pay”. The definition includes to distribute an amount to a person, or to credit an amount to them. An online employer who makes a payment to an employee outside the normal payroll cycle would be required to provide the relevant employment income information within two days of the out-of-cycle payday. |
Section RD 22 of the Income Tax Act 2007 provides that employers who withhold less than $500,000 a year of PAYE and ESCT have until the 20th of the following month to file their employment information. The changes proposed in clause 148 replace existing section RD 22 of the Income Tax Act 2007 with a section which provides an obligation to return PAYE information as set out under sections 23E to 23H of the Tax Administration Act 1994. Section 36A(2B) exempts employers who have withheld less than $100,000 of PAYE and ESCT in the preceding tax year from the requirement to file PAYE information electronically. Clause 228 proposes that section 36A is repealed. Section 36D requires an employer who is not required to file electronically and who has not chosen to do so, to file on a prescribed form. Clause 233 proposes to repeal this section. |
The threshold employer group is defined in proposed new section 23F and comprises employers below a threshold of PAYE and ESCT withheld in the previous year and who do not use payroll software. The proposed threshold employer group recognises that some small employers do not use payroll software or other digital systems. These employers nevertheless calculate PAYE information on a payday basis; they need to do so to withhold appropriately. The threshold employer group requires employers below the filing threshold who do not use payroll software, to file employment income information on a payday basis but permits them to file on a prescribed paper form. The due date, of seven working days after payday, allows time to post the information to the Commissioner. A definition of “payroll software” is proposed in new section 23O as a commercially available computer application or service which enables the calculation of salary and wages and the computation of PAYE. The definition also includes a bespoke equivalent of a commercial offering. Section 23F(4) proposes that the threshold be set at $50,000 a year of PAYE and ESCT, and section 23F(6) provides that the threshold may be amended by Order in Council on the recommendation of the Minister of Revenue. The proposed threshold reduction reflects greater use of digital services than in 1999 when the threshold was first introduced. Before making any recommendation to change the threshold the Minister of Revenue must, under proposed section 23F(6), undertake appropriate consultation. |
Section 36B provides that the Commissioner may authorise an employer above the electronic filing threshold to furnish the information in a non-electronic format if the employer’s accounting system is incapable of providing the information in the prescribed electronic format. In considering whether to allow an employer above the electronic filing threshold to provide an employer monthly schedule in a non-electronic format section 36B requires the Commissioner to have regard to whether the employer employs 50 or fewer employees. Clause 230 proposes to repeal section 36B. |
The Bill proposes that employers which are unable to access suitable digital services may be exempted by the Commissioner from the requirement to file electronically. Proposed new section 23G provides that exempt employers may file employment income information in a prescribed non-electronic (paper) format and that employment income information from this group must be delivered to the Commissioner within seven working days after payday. When deciding whether to exempt an employer the Commissioner must have regard to whether the employer can access appropriate digital services and consider the compliance costs that would be incurred by the employer in meeting the online requirements. An employer who does not have a digital payroll system can meet the requirements for the online group in proposed section 23E by filing electronically through myIR. In this context it is not considered appropriate in deciding a case for an exemption to have regard to whether an employer’s accounting system is capable of providing the information. Because the electronic filing threshold is calculated on the basis of PAYE and ESCT withheld it exempts micro employers from electronic filing. Proposed new section 23G therefore focuses on the reasons why electronic filing may not be a reasonable expectation rather than on the numbers employed. |
Section 36A(2B) provides that a new employer is not required to file an employer monthly schedule or a PAYE Income payment form electronically in relation to the months of the year in which the total amount of tax withheld remained under the threshold. As noted above clause 228 proposes the repeal of section 36A. Notwithstanding the requirements in section 36A(2B), section 36CA provides that a new employee who is required to file electronically may furnish an employer monthly schedule on a paper form for the first six months of business. Clause 233 proposes the repeal of this section. |
The new group of employers allows employers which start employing and which cross the electronic filing threshold a period of time in which to establish electronic filing systems. Proposed new section 23H provides that new employers who cross the electronic filing threshold within a tax year may choose, for the first six months they employ employees, to deliver their employment information in a non-electronic format, within seven days after payday. The proposed provision differs from existing section 36CA, which allows a new employer over the electronic filing threshold six months to begin electronic filing from the date on which “the employer begins business”. The commencement of employment is considered more relevant than the commencement of business. This provision may also apply to employers that are not businesses. If new employers choose to use payroll software during the first six months the section proposes that they are immediately included in the online employer group and must provide their employment information within two days of payday. At the end of the six-month new-employer period, new employers, provided they are over the threshold, are included in the online group. Employment income information from new employers using a payroll intermediary will be required to be delivered electronically because of the proposal in section 23D(2), that all payroll intermediaries are included in the online group. |
Section RD 4(2) of the Income Tax Act 2007 requires an employee whose employer has not withheld an amount of tax from a PAYE income payment, to pay the amount of tax and provide an employer monthly schedule to the Commissioner by the 20th of the following month. Section RD 21(1)(a) of the Income Tax Act 2007 provides that if an amount of tax is not withheld the employee must provide an employer monthly schedule with the details and pay the deficiency. |
Despite the introduction of payday reporting it is proposed that employees who have an obligation to provide employment income information only have to provide it on a monthly basis within seven days of the end of the month. This recognises that such employees are not employers in the normal sense and are unlikely to have payroll software systems. The obligation applies to employees whose employers have not withheld tax from a PAYE income payment and includes taxpayers whose employers are not obliged to withhold PAYE and other deductions. The group includes private domestic workers and the employees of foreign embassies. Proposed new section 23I provides that employees, who have an obligation to provide employment income information, must deliver the information to the Commissioner within seven working days of the end of the month in which the PAYE income was paid. Clauses 130 and 147 propose to amend the Income Tax Act 2007 as a consequence of the restructuring of the provisions imposing obligations on an employee. For more detail, see the subsequent section on employment income information and threshold amendments to the Income Tax Act 2007. |
Commentary on proposed section 23J is included in the separate section on consequential changes to employer reporting of employee share scheme benefit information.
Employment income information for new and departing employees
At present when an employee starts a new job they are generally required to fill in two paper forms for Inland Revenue. The forms include a substantial amount of repetition and often overlap with information the employer collects for its own purposes. The KiwiSaver enrolment form requires an employee’s contact details.
New section 23K proposes to modernise the requirements for setting up new employees with Inland Revenue. Once Inland Revenue’s business transformation is complete, sending employee details to the department before a new employee is first paid is intended to enable Inland Revenue to automatically check the IRD number and proposed tax code and communicate back in near-real time if changes are necessary or if there are other deductions, such as for child support, to be made. Near real-time checking of employee details before the employee is first paid will minimise the need to subsequently correct errors such as tax codes and deductions. While Inland Revenue will encourage employers to provide “new employee” information before the employee is first paid this will not be a requirement.
Similarly, if an employer could provide earlier advice to the Commissioner when an employee ceases their employment, it will assist the Commissioner to provide correct advice to a new employer about the correct tax code and will enable Inland Revenue to delink the employer and employee so that the previous employer does not continue to be contacted about that employee. Earlier advice of an employee’s commencement and cessation dates will also improve the quality of information-sharing with the Ministry of Social Development and the Accident Compensation Corporation.
In addition to information that is currently required, the Bill proposes that the employer will be required to provide a new employee’s date of birth and contact details to Inland Revenue to help verify the employee’s identity, and maintain contact with individuals.
If date of birth information is provided it should decrease the requirement for contact between Inland Revenue, the employer and employee, to resolve problems that arise when an employee uses a variation of the name used to obtain the IRD (tax file) number or wrongly transcribes their number. As a consequence, it should reduce recourse to the “no notification” withholding rate of 45c in the dollar, which is used when an employee’s identity cannot be confirmed. To limit compliance costs employers will not be required to sight verification of the date of birth information provided by an employee, and the obligation to provide the information will only apply when date of birth information is supplied by the employee.
All new employees eligible for enrolment in KiwiSaver and existing employees, who choose to enrol, are required to advise their employer of their address, tax file number and whether they are a KiwiSaver member. The Bill proposes to generalise the requirement for contact details so that employers are required to provide the information to Inland Revenue for all new employees. The information will be used by Inland Revenue to maintain contact with individuals.
The proposed changes to employee information are also intended to simplify the requirements for setting up new employees. Rather than fill out multiple paper forms including a tax code declaration and a KiwiSaver deduction notice, with often overlapping requirements, proposed new section 23K and schedule 4, table 2 will enable a new employee to provide the information required by Inland Revenue directly into an electronic form in the employer’s software system. The required information can then be sent to Inland Revenue by the employer directly from the system, either at the time it is first added, or with the first return of employment income information that includes the new employee. For those still using paper it is intended that there will be a single paper form.
| Current section | Proposed changes |
|---|---|
The employer monthly schedule definition in section YA 1 of the Income Tax Act 2007 requires an employee’s commencement date to be included in the month the employee started and their cessation date in the month in which their employment ended, as noted earlier it is proposed to repeal these definitions. Section 24B(3) requires an employee including a new employee, to provide their employer with a tax code notification. The prescribed tax code notification form states that if the name, tax code and tax file number are not provided the employee will be on the no-notification (45%) tax code. The name, tax file number and tax code are included in the definition of the employer monthly schedule in section YA 1 of the Income Tax Act 2007. For further commentary on the replacement provisions see the subsequent commentary on tax codes. Section 22 of the KiwiSaver Act 2006 requires every new employee to give notice to their employer of name, address and tax file number and whether they are already a KiwiSaver member. If they are a member they are required to provide further information about their KiwiSaver status (deduction rate, contribution holiday or non-deduction status). Clause 288 proposes to amend this section. Section RD 3(2) to (4) of the Income Tax Act 2007 provide how a shareholder employee in a closely held company may treat PAYE income payments. Section 46(7) includes in the definition of employees for the purposes of section 46 (Employers to make returns as to employees), any person who receives a payment which would but for section RD 3(2) to (4) of the Income Tax Act 2007, be a PAYE income payment. Clause 236 proposes that this subsection is repealed as part of the general repeal of section 46. |
New section 23K proposes that if an employer choses to they may provide early advice of a new employee (subsection (3)) or departing employee (subsection (4)). To enable an employer to provide early advice to Inland Revenue of a new or departing employee it is proposed to separate out the information required each payday (schedule 4, table 1) from that required if stand-alone advice of a new employee (schedule 4, table 2) or ceased employee (schedule 4, table 3) is given. The requirement proposed in section 23K is, however, that the information be included with the first or last payday return of employment income information relating to that employee. In addition to the information required to identify the employer it is proposed in schedule 4, table 2 that employers provide to Inland Revenue a new employee’s:
For a departing employee it is proposed in schedule 4, table 3 that the following information is required:
Under section 23K(5) it is proposed, for the avoidance of repetition, that if the new or ceased employee information is provided electronically, along with payday income information, only the additional information is required (that is, no requirement to repeat the name, tax code and tax file number that are already included in the return). Clauses 288 and 290 propose to replace the requirement on a new employee or on an employee opting in, to give the employer a KiwiSaver deduction notice with a requirement to advise the employer of the employee’s KiwiSaver status or of a desired change in status. It is envisaged that this advice could be entered directly into the employer’s software system or on a prescribed paper form. Section 23K(6) proposes a remedial change to the section 46(7) by narrowing the scope of the reporting obligation. Section 23K(6) proposes that the only requirement on employers of shareholder employees, which are not subject to withholding, is to provide information about commencement and cessation dates. |
When an employer ceases to employ and ability to correct errors in employment income information
New section 23L proposes a requirement to notify Inland Revenue when an employer ceases to employ staff.
Compared with annual tax processes such as filing an IR 3 or company business tax returns, PAYE and related withholding processes are characterised by high volumes of data and short turnaround times. The process for error correction and adjustment should have low compliance and administrative costs, and must be fair to employees.
New section 23M proposes that the manner in which errors can be corrected will be set out in regulations and that the Minister of Revenue, before recommending the content of the regulation, must consult appropriately. Early consultation work is currently under way.
| Current section | Proposed changes |
|---|---|
| Section RD 22(6) of the Income Tax Act 2007 requires an employer whose business has ended to notify Inland Revenue by the 15th day of the second month following the month in which business is ended. Clause 148 proposes to replace section RD 22 of the Income Tax Act 2007; the replacement section does not include this requirement. | For obligations relating to employment income information, it is status as an employer, not as a business, that is relevant. It is therefore proposed to replace the obligation on employers to notify Inland Revenue when business ends with a requirement to notify when they permanently cease to employ, which will include when a business ends. Notification will eliminate the possibility of an employer being penalised for failure to file employment income information. New section 23L proposes to require an employer, who intends to permanently cease to employ, to notify Inland Revenue within 30 working days of the date on which they ceased to employ any staff. |
The only specific legislative provision relating to the amendment of PAYE information is in section 15L, which provides that a payroll intermediary may make amendments to a monthly schedule and is then responsible for the accuracy of the amendment. It is proposed to update this section by replacing the reference to the “employer monthly schedule” with “employment income information”. Inland Revenue’s published guidance requires employers to amend already filed PAYE information by correcting the previously filed information. Employers can do this by submitting an amendment form, which requires the previously filed details and the corrected information or, if it is straightforward, an employer can phone the information in. This information then has to be manually entered into the record by Inland Revenue staff. Inland Revenue also accepts the practice whereby employers make changes to past periods in the current period, provided none of the items on the employer monthly schedule become negative. Payroll intermediaries can file an automated employer monthly schedule amendment. |
Compared with annual tax processes, such as filing an IR 3 or company business tax return, PAYE and related withholding processes are characterised by high volumes of data and short turnaround times. Payday reporting of employment income information will shorten the turnaround time and reduce the time available to employers to correct employment income information before it is sent to Inland Revenue. In this context the process for error correction and adjustment must have low compliance and administrative costs and must provide materially accurate employee information. To balance the potentially competing requirements of employers, employees, software providers and the tax administration, the Bill proposes a regulation-making power in new section 23M and requires the Minister of Revenue to consult before making recommendation on the content of the regulations. The consultation will seek to understand the impact of the proposals on software providers, on employers’ compliance costs and on the accuracy of employee information. Proposed new section 23M provides that the manner in which PAYE and related errors can be corrected will be set out in regulation and that the Minister before recommending the content of regulations must consult appropriately. Early consultation work is currently underway and will inform more comprehensive consultation later this year. |
Setting electronic and non-electronic filing requirements
New section 23N proposes to require the Commissioner to prescribe both electronic and non-electronic forms and means of delivery for employment income information. These requirements are intended to ensure that:
- employment income information can be automatically read and processed by Inland Revenue;
- external parties, such as those using payroll software that communicates with Inland Revenue, can do so securely; and
- customers using such software are able to have their identity verified.
The Bill does not retain the current distinction between an information return (the employer monthly schedule) and a form to accompany payment (the PAYE income payment form). Payday reporting and faster processing should ensure that employment income information precedes or accompanies payment. The objective is to eliminate the requirement to repeat the summary information on both forms. During the implementation period the requirement for summary information is, however, likely to remain and it is also possible that a requirement may remain for certain classes of employers – for example, those who continue to submit paper returns. The Bill therefore proposes that the Commissioner may require some employment income information to accompany payment.
| Current section | Proposed changes |
|---|---|
Section 36A requires the Commissioner to prescribe an electronic format for the employer monthly schedule and enables the Commissioner to prescribe an electronic format for the PAYE income payment form. Clause 228 proposes to repeal section 36A. The paper forms for these returns are prescribed under the Commissioner’s general power to prescribe forms in section 35. Section RD 22(1) of the Income Tax Act 2007 provides that an employer who withholds an amount of tax from a PAYE income payment must provide an employer monthly schedule and a PAYE income payment form in relation to the amount. Clause 148 proposes to replace this with a section that imposes an obligation to return PAYE information as set out under sections 23E to 23H of the Tax Administration Act 1994. |
Proposed new section 23N(1) requires the Commissioner to prescribe both electronic and non-electronic forms and means of communication and proposes that the Commissioner may set specifications for payroll software for use in the delivery of information. Section 23N(2) provides that to enable processing of a payment the Commissioner may notify employers that certain items of employment income information must accompany the payment. |
Definition of “payroll software” and variation of requirements
The Bill proposes that employers below the electronic filing threshold who use payroll software and new employers who use payroll software become part of the online group. The Bill also provides that the Commissioner may set specifications for payroll software to be used in the delivery of employment income information. To support these provisions a definition of “payroll software” is provided in section 23O.
Proposed new section 23P provides that the Commissioner can vary the requirements in subpart 3C and schedule 4.
| Current section | Proposed changes |
|---|---|
| Payroll software is not currently defined but the Commissioner does issue specifications to payroll software providers setting the required formats for prescribed electronic forms. | Proposed new section 23O defines payroll software as a commercially available computer application or service or bespoke equivalent which enables the calculation of amounts of salary or wages and amounts that are required to be withheld under the PAYE rules. |
Section 24P provides that the Commissioner may vary the requirements set out in RD 22 of Income Tax Act 2007 (Returns for amounts of tax paid to the Commissioner); 24B (PAYE tax codes); 24H (When entitlement to use a tax code ends); 24I (PAYE tax code notification and certificate) and 24L (schedular notifications). Clause 207 proposes to repeal this section. Section 46(2) and (3) provide that the Commissioner may vary requirements relating to particulars of commencement or cessation of employment but no variation can impose a more onerous requirement on the employer than is imposed by the employer monthly schedule. Clause 236 proposes the repeal of section 46. The definition of an employer monthly schedule in section YA 1 of the Income Tax Act 2007 includes other particulars as required by the Commissioner for a class of employers. As noted above, it is proposed to repeal this definition. |
It is proposed in new section 23P to provide the Commissioner with the power to vary the requirements in subpart 3C and schedule 4. The scope of the proposed power to vary is broadly analogous to the scope of the existing provision. The requirement that variations to requirements around commencement and cessation be no more onerous than those imposed by the employer monthly schedule has been omitted as the definition of the employer monthly schedule itself provides for “other particulars required by the Commissioner for a class of employers”. See the following commentary on tax codes in proposed new section 24 regarding the power to vary provisions relating to tax codes. |
EMPLOYMENT INCOME INFORMATION AND THRESHOLD AMENDMENTS TO THE INCOME TAX ACT 2007
(Clauses 130, 147 and 148)
Summary of proposed amendments
The Bill has been drafted to consolidate the administrative requirements relating to PAYE in the Tax Administration Act 1994. This change and the proposed requirement for payday reporting of PAYE income require a number of changes to the Income Tax Act 2007. It is also proposed that the threshold for PAYE and other deductions to be paid twice monthly should be able to be changed by Order in Council.
Application date
The amendments will come into force on 1 April 2019.
Key features
The changes proposed to the Income Tax Act 2007 are largely consequential on the introduction of payday reporting of employment income information.
The obligation on an employee to provide information about their gross income and PAYE and other deductions, when their employer had not withheld, is currently included in both sections RD 4(2) and RD 21(1)(a). It is proposed to remove the requirement to provide information from section RD 4(2) and rely on an updated section RD 21(1)(a).
Although there is currently no proposal to alter the threshold, the Bill also provides that the threshold above which employers are required to pay PAYE and other deductions twice monthly, currently set at $500,000 a year of PAYE and ESCT, should in future be able to be changed by Order in Council following appropriate consultation.
The requirement for consultation is intended to ensure that the potential impact of any change, for example on cash flows and compliance costs, is appropriately considered.
Detailed analysis
All references are to the Income Tax Act 2007 unless otherwise stated.
| Current section | Proposed changes |
|---|---|
Section RD 4 sets out the requirements for once monthly and twice-monthly remittance of PAYE. Subsection (1) provides that employers must pay PAYE and other deductions twice monthly unless they are an employer to whom section RD 22(3) or (4) applies. This section defines the due dates for providing an employer monthly schedule and a PAYE income payment form. Section RD 4(2) establishes an employee’s liability to pay tax and provide information when an amount of PAYE is not withheld. Section RD 22 establishes an obligation on employers to provide an employer monthly schedule and PAYE income payment form. It also establishes the due dates for these returns. The general rule is that the PAYE income payment form must be provided twice monthly and the employer monthly schedule must be provided monthly by the 5th of the following month. Section RD 22(3) and (3B) create an exception for employers that withhold less than $500,000 a year of PAYE and ESCT. These employers are required to provide a PAYE income payment form and employer monthly schedule by the 20th of the following month. Section RD 22(4), requires new employers to file their employer monthly schedule and PAYE income payment form by the 20th of the following month until the amount of PAYE and ESCT withheld exceeds $500,000; they are then covered by the general rule. Section RD 22(5) and (7) set out how the threshold is to apply if an employer runs more than one business, or is a group of companies, a partnership or if they are persons in whom property has become vested or to whom control has passed. Section RD 22(6) requires an employer whose business has ended to notify the Commissioner by the 15th day of the second month following the month in which business is ended. |
Clause 130 proposes replacing section RD 4. Some of the changes proposed to section RD 4 are consequential to changes to section RD 22 (Returns for amounts of tax paid to Commissioner). However it is also proposed that the obligation in section RD 4(2) on an employee whose employer has not withheld to provide information to the Commissioner, should no longer be contained in that section. Section RD 21(1)(a) already sets out the obligations on an employee when tax has not been withheld. Clause 147 proposes replacing section RD 21(1)(a). The proposed replacement paragraph establishes an obligation on an employee whose employer has not withheld some or all of an amount of tax, to provide employment income information as set out in section 23I of the Tax Administration Act 1994. Section RD 22 details the obligation on the employer to provide information returns for amounts of tax withheld from a PAYE income payment. The changes proposed in clause 148 replace RD 22 with a section which establishes an obligation on an employer who withholds tax under section RD 4 to return employment income information as set out under sections 23E to 23H of the Tax Administration Act 1994. These proposed sections require PAYE information to be provided on a payday rather than a monthly basis. Replacement section RD 22 does not include an equivalent of section RD 22(6) (When business ended) but proposed new section 23L of the Tax Administration Act 1994, requires an employer to notify the Commissioner if they cease to employ with the intention that it is a permanent cessation. Although employers will be able to choose to remit PAYE on a payday basis, the payment obligation in section RD 4 will remain as a once or twice-monthly obligation. Because the once or twice-monthly payment obligation can no longer be defined in terms of the payday information obligation, the proposed replacement section RD 4 includes the rules, previously in section RD 22, setting the $500,000 a year threshold for twice-monthly payment, the rules for new employers, and how the threshold is to be applied if the employer runs more than one business or is a person to whom control has become vested or passed. In addition, section RD 4(7) proposes that the threshold contained in subsection (2) for twice monthly payment may be amended by Order in Council on the recommendation of the Minister of Revenue following appropriate consultation. |
TAX CODES
(Clauses 139, 146, 203, 204, 207, 284(1)(c), 303, 305 and 306(2), and schedule 2)
Summary of proposed amendments
The Bill proposes to clarify the circumstances in which the “no notification” deduction rate applies and to restructure the provisions relating to the use of tax codes more logically by placing much of the detail in schedule 5.
Application date
The amendments will generally come into force on 1 April 2019.
Key features
The Bill sets out the core requirements relating to tax codes in proposed subpart 3D of the Tax Administration Act 1994, placing the detail in new schedule 5, parts A to C. The intent is to restructure the existing provisions to improve clarity, and in some circumstances, such as the proposed obligation to notify an employer of a changed tax code in replacement section 24B, to make explicit what was previously implicit.
Section 24B(3) of the Tax Administration Act 1994 requires that the employee must notify their employer of their tax code. Section 24B(3B) of the same Act provides that if an employee does not provide the employer with a tax code notification and the Commissioner has not done so, they have a “no notification” tax code. The no notification tax code results in tax being withheld at the rate of 45c in the dollar.
The prescribed form for a tax code notification requires the employee to provide their name and tax file number, in addition to their tax code. The employee’s name and tax file number are critical to establishing their identity. It is now proposed that the implication of not providing a name or tax file number – being placed on the “no-notified” tax code – is spelled out in proposed new section 24E. The no notification tax code has now been renamed the “non-notified” tax code.
Detailed analysis
All references are to the Tax Administration Act 1994 unless otherwise stated.
| Current section | Proposed changes |
|---|---|
| Section 24B(1) and (2) provide that tax codes apply for the purposes of the PAYE rules and do not apply to extra pays; schedular payments or the payment of income-tested benefits. Clause 204 proposes to replace section 24B. | Proposed section 24B defines a tax code for the purposes of the PAYE rules as:
Subsection (4) proposes that the basic tax rates for the tax codes are set out in the Income Tax Act 2007, schedule 2, part A. The section proposes that tax codes do not apply to extra pays or schedular payments, and that the amount of tax for income-tested benefits is set out in section RD 11(3) of the Income Tax Act 2007. |
Section 24B(3) requires an employee to notify their employer of their tax code and lists the codes. Section 24I(4) requires that a tax code notification must include a statement of entitlement to work in New Zealand under the Immigration Act 2009. Clause 204 proposes to replace these sections. |
Replacement section 24C proposes that an employee must notify their employer of their applicable tax code, or of a change in tax code. The section refers to schedule 5, part A where the tax codes are listed. The section further proposes that the obligation to notify the employer of a tax code does not apply:
Replacement section 24C also proposes that in providing a tax code notification an employee must state their entitlement to work for their employer under the Immigration Act 2009. |
Section 24F provides that an employee may apply for a special tax code to apply for a veteran’s pension, superannuation or other employment income. Clause 204 proposes to replace section 24F. |
Replacement section 24D proposes that an employee may seek a special tax code from the Commissioner to apply in the same way as section 24F(1AB) currently provides. Schedule 5, part B proposes how the Commissioner may issue a special tax code and how the amount of tax is to be calculated. |
The definition of the “no notification” tax code in section 24B(3B) provides that it applies when the employee has not provided their employer with a tax code notification and the Commissioner has not provided the employer with a tax code or special tax code for the employee. Clause 204 proposes to replace section 24B. |
It is proposed to set out in replacement section 24E the circumstances in which a non-notified tax code will apply, as follows:
|
| The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 inserted a new section RD 10B into the Income Tax Act 2007 and amended section 24L to allow contractors who are subject to the schedular payment rules to elect their own withholding rate without having to apply for a special tax code. | Proposed section 24F identifies how standard, payee and set rates for schedular tax payments apply and where they are set out. Proposed section 24G provides that a payee may apply to the Commissioner for a special tax rate. The detail is contained in proposed schedule 5, part C. The changes proposed to these sections are consequential on the re-organised tax code and tax rate provisions. |
Subsection 24B(3) contains a list of tax codes. Subsection 24B(4) provides how tax codes from another Act may be combined with the tax codes in section 24B(3). Section 24G provides the steps that the Commissioner may take when she considers an incorrect tax code is being used, and the consequent requirements on the employer. Section 24H provides when entitlement to use a tax code ends. Section 24I provides that an employee who wishes to have their amount of tax reduced may notify their employer of the applicable tax code. Clause 204 proposes to replace these sections. |
The proposed schedule 5, part A contains detailed provisions in relation to the application of general (not special) tax codes. As noted above, the intent is to improve clarity, not to amend the provisions. Part A proposes provisions relating to:
|
Section 24F provides that the Commissioner may provide the employee with a special tax code certificate. If a special tax code is issued in respect of a veteran’s pension or superannuation the Commissioner must notify the responsible department. The section sets out what the special tax code may include how it should be calculated and the overriding nature of the special tax code certificate. Section 24F(6) provides that the Commissioner may cancel a special tax code at any time. Section 24E provides that a private domestic worker can apply to the Commissioner for a tax code. Section 24F(5B) prevents a non-resident seasonal worker from applying for a special tax code. Clause 204 proposes to replace sections 24E and 24F. |
The proposed schedule 5, part B contains detailed provisions relating special and particular tax codes. As with part A, the intent is to clarify rather than change the existing legislation. Part B includes provisions relating to:
|
| Section 24P provides the Commissioner with the power to vary sections: 24B (PAYE tax codes); 24H (When entitlement to use a tax code ends); 24I (PAYE tax code notification and certificate) and 24L (schedular notifications). Clause 207 proposes to repeal section 24P. | New section 24H proposes that the Commissioner can vary the requirements of section 24B and schedule 5, part A, clause 4. This new section is intended to carry over the Commissioner’s power to vary, as it relates to tax codes, from section 24P. |
PENALTIES
(Clauses 268, 269(1), (5) and (6), 270, 271, 272 and 275(2))
Summary of proposed amendments
Because there are no mandatory changes proposed for the timing of PAYE and related deductions, the Bill does not change the penalty provisions around non-payment of PAYE and related deductions.
The proposed requirement for employers to file employment income information on a payday basis will increase the number of times most employers file information relating to PAYE income payments. The Bill proposes, however, that late filing penalty and non-electronic filing penalties will remain monthly penalties. Regardless of how many times an employer fails to file electronically in a month, or has failed to file employment income information on time during a month, only one penalty will be imposed for non-electronic filing, and a maximum of one penalty will be imposed for late filing.
The due date for paying the penalties is proposed as 30 days from the end of the month in which the information was due.
Application date
The proposed amendments will come into force on 1 April 2019.
Key features
It is proposed that the non-electronic filing penalty will remain a monthly penalty. Regardless of how often an employer fails to file electronically in a calendar month the maximum penalty will be $250 or $1 for each employee for whom information was returned in a format other than the prescribed electronic format.
The late filing penalty under the proposals in the Bill will continue to be a penalty that is not imposed for a first instance of late filing. If an employer fails to meet the filing due date, the Commissioner must notify them that a further failure to file on time after receipt of the Commissioner’s notice will result in the imposition of a $250 penalty. The Bill proposes that the maximum late payment penalty that may be imposed on an employer is $250 a calendar month.
The Bill also proposes that the shortfall penalty for not paying an employer monthly schedule amount is renamed as a penalty for unpaid amounts of employer withholding payments. The current monthly penalty and maxima for an employer who fails to withhold PAYE from a non-resident contractor entitled to double tax relief, will remain.
Detailed analysis
All references are to the Tax Administration Act 1994 unless otherwise stated.
| Current section | Proposed changes |
|---|---|
Section139A(6) provides that if a taxpayer has filed their employer monthly schedule on time for the previous 12 months, the Commissioner must give notice that a further failure to file will result in a penalty. If the taxpayer has not filed on time for the previous 12 months, following a further failure to file on time the Commissioner must give notice to the taxpayer that the late filing penalty is payable. Clause 268 proposes to amend section 139A; the amendments include replacing subsection (6). Section 142(1A) provides that the due date for payment of a late filing penalty is the 5th of the month following the month in which a twice-monthly payer of PAYE is required to file their employer monthly schedule and the 20th of the following month for all other taxpayers. Clause 272(2) proposes to replace section 142(1A) |
New section 139A(6) proposes that the late filing penalty will remain one that is not imposed for a first instance of late filing of employment income information in a 12-month period. If the taxpayer has filed on time for the previous 12 months: a. After an initial failure to file employment income information on time the Commissioner must notify the taxpayer that a further to file on time will result in a penalty. b. After further failure to file on time, within 12 months of the first failure, the Commissioner must notify the taxpayer that the penalty is payable. It is proposed that the late filing penalty will remain a monthly penalty. The maximum penalty that could be imposed for a failure to file employment income on time is proposed as $250 a month regardless of the number of failures to file on time in that month. Clause 272(2) proposes to amend section 142(1A) so that the due date for the payment of a late filing penalty is 30 days after the end of the month in which the taxpayer is required to deliver their employment income information. |
Section 139AA provides that a non-electronic filing penalty may be imposed on an employer required to provide returns in a prescribed electronic format, who does not do so. The non-electronic filing penalty in subsection 139AA(4) is the greater of $250 or $1 for each employee employed during the month to which the employer monthly schedule relates. Clause 269 proposes to amend section 139AA; the amendments include replacing section 139AA(4). Section 142G provides that a non-electronic filing penalty is due on the 5th of the month following the month in which the employer was required to furnish an employer monthly schedule in a prescribed electronic format. Clause 275(2) proposes replacing section 142G. |
It is proposed to amend section 139AA to replace a reference to the requirement to file electronically with a reference to section 23E (the online group). Under proposed replacement section 139AA(4) the non-electronic filing penalty will remain a monthly penalty. Regardless of how often an employer fails to file electronically in a calendar month the maximum penalty will be $250 or $1 for each employee for whom information was returned in that month. The proposed replacement section 142G provides that the non-electronic filing penalty is due 30 days after the end of the month in which the information was due to be received in a prescribed electronic form or by means of the prescribed electronic communication. |
| Section 141AA imposes a capped shortfall penalty for an employer who fails to withhold PAYE from a non-resident contractor, entitled to double tax relief. | Clause 270 amends the references in section 141AA to the “employer monthly schedule” and “return period” so that the $250 per contractor per month penalty capped at a total of $1,000 per month remains. |
Section 141ED(1) provides that an employer is liable for a shortfall penalty if it:
Clause 271 proposes to replace this section. |
Clause 271 proposes to rename the penalty in section 141ED, for not paying an employer monthly schedule amount, as the employers’ withholding payment penalty. It is proposed that section 141ED be replaced with a section which clarifies the circumstances in which the penalty applies and replaces references to employer monthly schedule with employment income information. The proposed replacement section does not intend to change the operation of the penalty. |
CONSEQUENTIAL CHANGES TO EMPLOYER REPORTING OF EMPLOYEE SHARE SCHEME BENEFIT INFORMATION
(Clauses 13, 132, 136, 148, 172(19) and (41), 187(5), 200, 284(1)(b) and schedule 2)
Summary of proposed amendments
From 1 April 2017, employers will be required, under amendments made to the Income Tax Act 2007 and the Tax Administration Act 1994 by the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016, to disclose the value of share benefits employees receive under employee share schemes (and any tax they choose to withhold under the PAYE rules). This disclosure is to be captured on the employer monthly schedule as part of PAYE information reporting.
To ensure that employers can meet their employee share scheme benefit information reporting obligations in the proposed new PAYE reporting environment, the Bill proposes to defer the recognition of benefits derived by an employee under an employee share scheme by 20 days from when the employee receives the benefit, with effect from 1 April 2019, in order to provide all employers with sufficient time to compile information to support the required disclosures and deduction of tax, if to be withheld. These measures do not change the date on which the value of the benefit is determined.
Application date
The amendments will come into force on 1 April 2019.
Key features
Proposed amendments to section CE 2 of the Income Tax Act 2007 will defer the date that an employee who receives a benefit under an employee share scheme is treated as deriving income in relation to the benefit by 20 days from the taxing point. This deferral will apply for all employees who receive benefits under an employee share scheme that their employer is required to report to Inland Revenue about as part of employment income information.
A proposed amendment to section RD 6 of the Income Tax Act 2007 will mean that an employee share scheme benefit from which an employer has chosen to withhold tax under the PAYE rules will be treated as paid on the 20th day after the taxing point for the benefit received by the employee.
Proposed replacement section RD 22(2) will require employers to provide employment income information in relation to employee share scheme benefits to Inland Revenue under proposed new sections 23E to 23H of the Tax Administration Act 1994 as modified by section 23J of that Act.
Proposed new section 23J(1) of the Tax Administration Act 1994 specifies that the payday for an employee share scheme benefit is the 20th day after the taxing point for the benefit received by the employee. The payday is relevant for the purposes of determining the due date for the provision of employment income information to Inland Revenue for the various groups of employers described in proposed new sections 23E to 23H of that Act.
Proposed new section 23J(2)(a) of the Tax Administration Act 1994 specifies that employers are not required to provide Inland Revenue with information on:
- employee share scheme benefits received by former employees if they have not chosen to withhold tax from the benefit; or
- benefits arising under tax-exempt, widely offered employee share schemes.
Proposed section 23J(2)(b) and new schedule 4, table 1 of the Tax Administration Act 1994 specify the particulars in relation to employee share scheme benefits that must be provided to Inland Revenue by employers who are subject to the reporting requirements.
Detailed analysis
From 1 April 2017, employers will be required to disclose the value of share benefits employees receive under employee share schemes (and any tax they choose to withhold under the PAYE rules). This disclosure is to be captured on the employer monthly schedule as part of PAYE information reporting.
Employers who have until the 20th of the following month to provide an employer monthly schedule for a given month to Inland Revenue, will be required to include information in relation to a benefit received (at any time during a month) by an employee under an employee share scheme in the employer monthly schedule they file for that month. This gives the employer a minimum of 20 days to compile information to support the required disclosures and deduction of tax, if to be withheld.
“Large” employers are required to provide an employer monthly schedule for a given month to Inland Revenue by the 5th of the following month. This would not provide these employers with sufficient time to compile information to support the required disclosures and deduction of tax, if to be withheld, in relation to benefits received during the second half of the month by employees under an employee share scheme. Therefore, a special rule defers the recognition of benefits received by employees of “large” employers under an employee share scheme. The effect of this deferral rule is to provide “large” employers with the same minimum period of 20 days that other employers have to compile information to support the required disclosures and deduction of tax, if to be withheld.
Changes to employer reporting of benefits derived by employees under employee share schemes (and any tax withheld) are necessary as a consequence of the proposed shift to reporting of employment income information on a payday basis from 1 April 2019.
To ensure that employers can meet their employee share scheme benefit information reporting obligations in the proposed new employment income information reporting environment, it is proposed to defer recognition of benefits derived by an employee under an employee share scheme by 20 days from when the employee receives the benefit, with effect from 1 April 2019. The proposed new deferral rule will apply in relation to all (rather than only “large”) employers who are required to report employee share scheme benefit information as part of employment income information on a payday basis. The rationale for widening the application of the deferral rule is that all employers (regardless of size) will require additional time to compile information to support the required disclosures and deduction of tax, if to be withheld.
| Requirements from 1 April 2017 | Proposed changes |
|---|---|
| Section CE 2 specifies when an employee derives a benefit under an employee share scheme. The combined effect of subsections (10) and (11) is to defer the timing of the derivation of income in relation to employee share scheme benefits received by employees of “large” employers (that is, those required to provide an employer monthly schedule for a given month to Inland Revenue by the 5th of the following month, and that are required to remit PAYE deductions on a twice-monthly basis) to the next “PAYE income payment form period” after the one in which they receive the benefit. | Proposed amendments to section CE 2 of the Income Tax Act 2007 will defer the date that an employee who receives a benefit under an employee share scheme is treated as deriving income in relation to the benefit by 20 days from when they receive the benefit. The proposed amendment names this 20th day after an employee receives a benefit the “ESS deferral date”. This deferral will apply for all employees who receive benefits under an employee share scheme that their employer is required to report to Inland Revenue about as part of employment income information. |
Section RD 6 specifies when a benefit under an employee share scheme from which an employer has chosen to withhold tax under the PAYE rules is treated as paid. In the case of “large” employers, the benefit is treated as paid on the first day of the “PAYE income payment form period” after the one in which they receive the benefit. In the case of other employers, the benefit is treated as paid on the date the benefit vests in the employee. The date on which the employee share scheme benefit is treated as paid will be the end date of the four-week period referred to in the extra pay tax rate calculation in section RD 17, which employers will use to calculate the amount of tax they must withhold from the benefit. It will also influence when the employer is required to pay the withheld tax to Inland Revenue by. |
A proposed amendment to section RD 6 of the Income Tax Act 2007 will mean that an employee share scheme benefit from which an employer has chosen to withhold tax under the PAYE rules will be treated as paid on the 20th day after the benefit is received by the employee. This will apply irrespective of the size of the employer. |
Section RD 7B enables an employer to elect to withhold tax from a benefit received by an employee or former employee under an employee share scheme. The section specifies that an employer makes such an election by calculating the amount of tax required to be withheld from the benefit and paying it to Inland Revenue, and by reporting the value of the benefit to Inland Revenue on their employer monthly schedule by the relevant due date. |
A proposed amendment to section RD 7B will replace the requirement to report the value of the benefit to Inland Revenue on their employer monthly schedule by the relevant due date with a requirement to include the value of the benefit in their employment income information under proposed new subpart 3C of the Tax Administration Act 1994, treating the 20th day after the employee received the benefit as the relevant payday. |
Section YA 1 defines the payment period for which an employer must provide a PAYE income payment form under section RD 22(2) as the “PAYE income payment form period”. The “PAYE income payment form period” definition is relevant for the deferral in the recognition of benefits under employee share schemes of “large” employers. For a given month, the first “PAYE income payment form period” runs from the 1st day to the 15th day of the month, and the second “PAYE income payment form period” will run from the 16th day to the end of the month. |
The Bill proposes to repeal the definition of “PAYE income payment form period” in section YA 1. The Bill proposes to insert a new defined term “ESS deferral date” into section YA 1 of the Income Tax Act 2007 and section 3(1) of the Tax Administration Act 1994 which refers to the definition of that term in proposed new section CE 2(9). |
The requirement for employers to report employee share scheme benefit information to Inland Revenue on their employer monthly schedule under the PAYE rules if they have elected to withhold tax from the benefit is supplemented by section 46 of the Tax Administration Act 1994. Section 46 requires employers to file an employer monthly schedule containing particulars of the persons employed by them in a month and of all salaries, wages, and other emoluments received in that month by each person employed. Section 46(6B) specifies that “other emoluments” includes a benefit that an employee receives under an employee share scheme in relation to which the employer has not made an election under the PAYE rules to withhold an amount of tax, except if the benefit was received by a former employee or the benefit arose under a tax-exempt, widely offered scheme. |
Section 46 of the Tax Administration Act 1994 is proposed to be repealed. Proposed replacement section RD 22(2) of the Income Tax Act 2007 will require employers to provide employment income information in relation to employee share scheme benefits to Inland Revenue under proposed new sections 23E to 23H of the Tax Administration Act 1994 as modified by section 23J of that Act. Proposed replacement section RD 22(3) specifies that employers are not required to provide Inland Revenue with information on:
Proposed new section 23J(1) of the Tax Administration Act 1994 specifies that the payday for an employee share scheme benefit, for the purposes of determining the due date for the provision of employment income information to Inland Revenue for the various groups of employers described in proposed new sections 23E to 23H of that Act, is the 20th day after the taxing point for the benefit received by the employee. Proposed new section 23J(2)(a) of the Tax Administration Act 1994 specifies that employers are not required to provide Inland Revenue with information on:
Proposed new section 23J(2)(b) and proposed new schedule 4, table 1 of the Tax Administration Act 1994 specify the particulars in relation to employee share scheme benefits that must be provided to Inland Revenue by employers who are subject to the reporting requirements. The employee share scheme benefit-specific information that employers who are required to report employee share scheme benefit information for current employees is:
Employers who are required to report employee share scheme benefit information for former employees because they have chosen under the PAYE rules to withhold tax from the benefit, must report:
|
Example
Under the proposed rules, if an employee received a benefit under an employee share scheme on 5 July 2019, they would be treated as deriving income in relation to the benefit on 25 July 2019.
For the purposes of their employer’s obligation to provide information in relation to the benefit to Inland Revenue under the proposed new requirement for employers to report employment income information to Inland Revenue on a payday basis, 25 July 2019 would also be the relevant payday. This would mean that their employer would be required to report information about the value of the benefit received by the employee and any tax withheld in relation to the benefit by the 2nd working day after 25 July 2019 if they are an employer above the $50,000 per annum of PAYE and ESCT threshold, or by the 7th working day after 25 July 2019 if they are below the threshold.
25 July 2019 would also be the relevant date for determining the due date for the payment of tax withheld in relation to the benefit (assuming that the employer elected to withhold tax in relation to the benefit). In this example, the due date for paying the tax withheld to Inland Revenue would be 5 August 2019 if the employer was above the $500,000 per annum of PAYE and ESCT threshold, or 20 August 2019 if they are below the threshold.
EMPLOYMENT INCOME INFORMATION CONSEQUENTIAL AMENDMENTS
Consequential amendments to the Income Tax Act 2007
| Clauses 105 (section LB 1) 108 (section LB 8) 110 (section LD 4) 111 (section LD 5) 127 (section RC 3) 129(2) (section RD 2) 137 (section RD 8) 138(3) (section RD 10) 143 (section RD 13B) 145(2) and (3) (section RD 17) 149(1), (3) and (4) (section RD 23) 170 (section RP 14) 181(1), (2), (4), (5) and (7) (schedule 2) |
These clauses propose amendments as a result of the new rules for employment income information and the replacement of the employer monthly schedule and in some cases the PAYE income payment form. |
| 150 (section RD 24) 172(22) (section YA 1) |
These clauses propose to delete a reference to an exemption certificate and replace it with an exemption. |
Consequential amendments to the Tax Administration Act 1994
| Clauses 194, 195, 234 insert new headings 187(3), (23) and (24) (section 3) 192 (section 15L) 196 (section 22) 208 (section 24Q) 237 (section 47) 255 (section 80D) 257 (section 80KT) 267 (section 125) 277 (section 183A) 278 (section 183D) 279 (section 183F) |
These clauses propose to update references as a result of the new rules for employment income information and the replacement of the employer monthly schedule and the proposed changes to the structure of the Act. In some cases the changes reflect the proposed renaming of the “penalty for not paying the employer monthly schedule amount” as the “employers’ withholding payment penalty”. |
Consequential amendments to the KiwiSaver Act 2006
| Clauses 286 (section 4) 287 (section 17) 289 (section 23) 291 (section 42) 292 (section 60) 294(2) (section 64) 295 (section 73) 296 (section 93) 297 (section 97) 298 (section 98) 299 (section 98A) 300 (section 99) |
These clauses propose to update references as a result of the new rules for employment income information and the replacement of:
|
TRANSITIONAL PROVISIONS
(Clause 282)
Summary of proposed amendments
The application date for the changes relating to payday filing of employment income information is 1 April 2019. Employers may however choose to adopt payday filing from 1 April 2018.
The transitional period is from 1 April 2018 to 1 April 2019 but for information relating to PAYE income payments made in March 2019 the transitional period extends until 30 April 2019.
Application date
The transitional provisions will come into force on 1 April 2018.
Key features
Although the Bill proposes that the provisions relating to payday filing of employment income information are effective from 1 April 2019, it is proposed that employers, if they wish to take advantage of the new arrangements, can choose to file on a payday basis from 1 April 2018.
Employers who choose to file on a payday basis will, however, not be subject to a late filing penalty unless they fail to meet the current filing dates for an employer monthly schedule relevant to them.
The Bill also proposes to require early adopters of payday employment income information reporting to apply the proposed modifications to the employee share scheme rules early as well.
Detailed analysis
The transitional period for the provision of the information required on an employer monthly schedule or PAYE income payment form is proposed as 1 April 2018 to 1 April 2019. However under proposed section 227D(1) for information relating to PAYE income payments made in March 2019 the transitional period is proposed to extend until 30 April 2019. This is to allow employers who have not adopted payday reporting of employment income information prior to 1 April 2019 to provide information on PAYE income payments made in March 2019 in an employer monthly schedule filed during April 2019. Proposed new section 227D(2) contains an exception for employee share scheme benefits received between 16 March 2019 and 31 March 2019 by employees or former employees of employers who are required to remit PAYE deductions on a twice-monthly basis. These employers will be required to apply the proposed modifications to the employee share scheme rules described in the preceding section of this Commentary, rather than being required to provide information about these benefits during May 2019 in an employer monthly schedule relating to the month of April 2019.
New section 227C(2) proposes that despite the effective date for payday filing of employment income information being 1 April 2019, employers may choose to file on a payday basis from 1 April 2018. If an employer wishes to start filing on a payday basis during the 2018–19 year it is not necessary, that they start with the information relating to the first PAYE income payment made in April 2018. An employer could start to file employment income information on a payday basis in an appropriately prescribed manner at the beginning of any month during the 2018–19 year.
Proposed new section 227C(3) and (4) propose that an employer who elects under proposed subsection (2) to adopt payday filing of employment income information during the transitional period must apply the proposed modifications to the employee share scheme rules described in the preceding section of this Commentary for all employee share scheme benefits received by their employees or former employees on or after the day that is 20 days before they made the election.
New section 227C(6)(b) proposes that an employer who chooses to file employment income information on a payday basis during the transitional period will not be subject to a late filing penalty unless they fail to meet the current filing dates of the 5th of the month for employers who have a twice-monthly payment obligation or the 20th of the month for all other employers.
Section 227C(7) proposes that an employer who elects to provide employment income information on a payday basis before 1 April 2019 may not revert to providing the information on a monthly basis unless the Commissioner agrees to the change.
REPEALING THE SUBSIDY FOR LISTED PAYE INTERMEDIARIES
(Clauses 129(1), 151(1), 167, 168, 171, 172(32), (42) and (64), 187(22) and (25), 188, 190, 191, 193, 280, 281, 317 and 318)
Summary of proposed amendments
The Bill proposes that the subsidy currently paid to listed PAYE intermediaries that undertake payroll obligations for small employers ceases on 1 April 2018.
Application date
The amendments will come into force on 1 April 2018.
Transitional provisions will ensure that listed PAYE intermediaries can claim and receive the subsidy for PAYE income payments made in periods up to but excluding 1 April 2018.
Key features
It is proposed that the payroll subsidy paid to listed PAYE intermediaries ceases. Relevant provisions in the Income Tax Act 2007, the Tax Administration Act 1994 and the Income Tax (Payroll Subsidy) Regulations 2006 are being repealed or amended to abolish the legislative framework for the payment of the payroll subsidy.
Employers can continue to transfer their PAYE and ESCT obligations to a PAYE intermediary, but the use of the intermediary’s services will no longer be subsidised.
Background
This subsidy is currently paid by the Commissioner of Inland Revenue to listed PAYE intermediaries who assume PAYE obligations for employers who are only required to remit PAYE monthly. The subsidy is $2 per employee per PAYE income payment made in a period and is payable for up to five employees of the employer.
The way many businesses manage their payroll and the payroll services available have changed since the subsidy was introduced in 2006. For example, a growing number of small employers make use of payroll software or digital services to manage their payroll and PAYE. There is a range of different payroll products and services available. The subsidy incentivises only one model of payroll services. Because only services provided by listed payroll intermediaries are subsidised, the payroll subsidy potentially distorts employers’ choices between different types of payroll products and services. The Government therefore proposes that the payroll subsidy is repealed.
INVESTMENT INCOME INFORMATION
Background
The key changes relate to the following:
- obtaining more frequent and detailed information for interest, dividends and Māori authority distributions;
- bringing forward the due date when PIEs are required to provide information to Inland Revenue;
- encouraging the provision of IRD numbers;
- increasing electronic filing;
- improving the administration of RWT exempt-status (certificates of exemption);
- removing some requirements to provide end-of-year withholding tax certificates; and
- improving error correction.
Application date
Most of the proposed changes come into force on 1 April 2020, although some apply from 1 April 2018 and 1 April 2019.
DETAIL AND FREQUENCY OF INVESTMENT INCOME INFORMATION
(Clauses 212, 239, 241, 246, 283 and 284(1)(d), and schedule 2)
Summary of proposed amendments
Several amendments are proposed to enable Inland Revenue to receive more frequent and detailed information from investment income payers on the amount of income taxpayers earn and the tax withheld on that income. The proposed changes are as follows:
- Payers of interest (including interest subject to the approved issuer levy but limited to domestically issued debt), dividends and taxable Māori authority distributions are to provide investment income information to Inland Revenue by the 20th of the month following the month in which the income was paid.
- Payers of interest, dividends and taxable Māori authority distributions exempt from withholding are to report investment income information yearly by 20 April, or monthly at the payer’s preference.
- Multi-rate PIEs are to report investors’ prescribed investor rates (PIRs) six-monthly.[1]
- A transitional measure: payers of interest are to report the currently required year-end information by 15 May, rather than 31 May, until the above monthly reporting changes take effect.
Application dates
The first three amendments will come into force on 1 April 2020, however payers can apply the new rules voluntarily from 1 April 2019.
The fourth amendment will apply from 1 April 2018 until 1 April 2019 (for payers who elect to apply the new rules early), or until 1 April 2020 for all other withholders.
Key features
Amendments are proposed to the Tax Administration Act 1994 to require payers of interest, dividends and taxable Māori authority distributions to provide investment income information by the 20th of the month following the month in which the income was paid, and for payers of income exempt from withholding to provide investment income information at year-end by 20 April.
Investment income information includes:
- the name, IRD number and contact details of the payer of investment income;
- the customer’s name, contact details, IRD number and date of birth (if held);
- the customer’s tax rate/PIR;
- the amount and type of income paid;
- the amount of tax withheld (if any) and the date it was withheld, as well as any imputation or Māori authority credits attached; and
- for PIE funds, whether the fund the payer is invested in is a retirement savings scheme or not.
This information will be required for all owners of an account, where the account has multiple owners and the income payer has information on the joint owners.
An amendment is proposed to require payers of interest to report year-end information by 15 May, rather than 30 May, until the monthly reporting changes take effect.
It is also proposed that PIEs will report investors’ PIRs six-monthly.
Background
Currently, Inland Revenue does not receive sufficiently detailed or frequent information about the investment income that taxpayers earn and the tax withheld or paid on that income. If Inland Revenue received more frequent information, it would be able to ensure taxpayers’ tax and social policy obligations/entitlements were more accurate during the year. For example, if Inland Revenue knows how much investment income a taxpayer earns during the year, it will be able to ensure that social policy entitlements the taxpayer receives take the investment income into account, as the entitlement relates to the income the person receives. It will also be in a position to advise the taxpayer of the appropriate withholding rate to use, as well as pre-populate tax returns for the taxpayer at the end of the year. Taxpayers who have not paid the correct tax or received the correct social policy entitlements during the year will need to square up at the end of the year, resulting in a debt or refund. Often taxpayers are unaware of these obligations. This means Inland Revenue may pay out more in social policy entitlements than it otherwise should and taxpayers may pay less tax and social policy obligations than they should.
It is estimated that $21 to $27 million of income tax per annum is forgone due to interest income not being correctly returned as income. This would be identified if interest income were pre-populated into tax returns and personal tax statements. Further, in 2015, at least 185,000 individuals did not have their interest income taken into account for Working for Families purposes.[2]
The proposed amendments focus on obtaining more detailed and frequent information on the investment income that taxpayers earn so Inland Revenue can pre-populate tax returns, proactively adjust tax rates and ensure taxpayers’ tax obligations and social policy entitlements and obligations are calculated more accurately during the year.
Obtaining more frequent and detailed information on income that is exempt from withholding tax, subject to NRWT or subject to AIL is intended to allow Inland Revenue to determine whether the tax treatment applied is appropriate, and if it is not, to take that income into account in the person’s tax affairs.
Requiring payers of interest to provide their year-end information by 15 May rather than 31 May until monthly reporting takes effect will give Inland Revenue sufficient time to pre-populate that information onto taxpayers’ tax returns and personal tax summaries. While interest subject to NRWT will not be pre-populated, given it relates to non-residents, it is still proposed to be required by 15 May for ease of compliance so that payers do not have to provide their interest information on two separate dates.
Date of birth information is proposed to be required (when the payer holds that information) so that Inland Revenue can use it as a data verification point to help determine the IRD numbers of non-declared taxpayers or those whose IRD number does not appear to be correct.
It is proposed that payers provide Inland Revenue with taxpayers’ tax rates and PIRs to better enable Inland Revenue to assess whether the relevant taxpayer is on the appropriate rate, based on the information that Inland Revenue holds about that individual, and to enable Inland Revenue to proactively correct the rate if they are not.
Detailed analysis
Proposed new subpart 3E of the Tax Administration Act 1994 (clause 212 of the Bill, proposed new sections 25B to 25S) codifies the requirements regarding information that payers of investment income must provide to the Inland Revenue. The persons who are required to provide this investment income information are listed in section 25E. Each person covered in section 25E has a specific section in subpart 3E which outlines the information that must be provided by reference to proposed new schedule 6 of the Tax Administration Act 1994, and when it must be provided. The following analysis outlines what each proposed new section does. This is followed by a comparative table, which outlines the current provisions of the Tax Administration Act 1994 that relate to investment income information, and the changes that are proposed.
Information on interest (proposed new section 25F in clause 212, clauses 239 and 241)
The Bill proposes that a payer of interest (including interest subject to the approved issuer levy, but limited to domestically issued debt) must deliver investment income information to Inland Revenue in electronic form by the 20th of the month following the month in which the amount of investment income was paid to the investor.
Like all of subpart 3E, this provision comes into force on 1 April 2020. To ensure that payers of interest are required to report the currently required year-end information by 15 May, rather than 31 May, clauses 239 and 241 amend sections 49 (NRWT withholding certificates and annual reconciliations) and 51 (RWT withholding reconciliation statements) respectively, to require this information to be filed by 15 May from 1 April 2018 until monthly filing comes into effect on 1 April 2020.
Information on dividends (proposed new section 25G)
The Bill proposes that a payer of dividends must deliver investment income information to Inland Revenue in electronic form by the 20th of the month following the month in which the dividend was paid to the investor.
Information on royalties (proposed new section 25H)
This provision provides that a person paying royalties to non-residents must provide investment income information to Inland Revenue by 31 May after the end of the tax year. This is the same as currently required by section 49 – the provision has simply been moved as part of codifying the investment income information requirements.
Information on Māori authority distributions (proposed new section 25I)
The Bill proposes that a Māori authority that makes a taxable distribution to a member must provide investment income information to Inland Revenue by the 20th of the month following the month in which that distribution is paid to the member.
Information on attributed PIE income (proposed new sections 25J and 25K, and clause 246)
Proposed new sections 25J and 25K essentially reproduce what is currently required by section 57B of the Tax Administration Act 1994. The only differences are:
- Investment income information will be required by 15 May (rather than 31 May) for a multi-rate PIE that is not a superannuation fund or retirement savings scheme (see section on bringing forward due dates for provision of information by PIEs).
- Six monthly reporting of PIRs will be required for all multi-rate PIEs (by 20 October for the first six months of the year, and with the year-end report for the final six months of the year).
These sections apply from 1 April 2020. To ensure that year-end PIE information is provided by 15 May from 1 April 2018, clause 246 amends section 57B(7) to this effect from 1 April 2018, and repeals it from 1 April 2020.
Information from emigrating companies (proposed new section 25L)
This provision retains the three month timeframe provided for in sections 49 and 51 for an emigrating company to provide information to the Commissioner in relation to the dividend that the company is treated as paying to shareholders under section FL 2(1) of the Income Tax Act 2007.
Information in relation to persons with RWT-exempt status (proposed new section 25M)
This provision requires payers of interest, dividends and Māori authority distributions to provide taxpayer-specific information to Inland Revenue in relation to payments made to persons with RWT-exempt status (the new equivalent of a RWT exemption certificate) by 20 April following the end of the year or, if the payer prefers, the 20th of the month following the month in which the income was paid.
It replaces section 51(2A), which provides that the Commissioner may require taxpayer-specific information in relation to interest (including certain dividends) paid to a person holding an RWT exemption certificate. There are currently no information requirements in relation to dividends (other than dividends treated as interest or dividends from which a trustee or agent is required to withhold RWT) and Māori authority distributions paid to a person holding an RWT exemption certificate.
Information from payers with no withholding obligations (proposed new section 25N)
This provision reproduces section 52 of the Tax Administration Act 1994 (see the table below); the section has simply been moved as part of codifying the investment income information requirements.
Information on financial arrangements (proposed new section 25O)
New section 25O requires a person with RWT-exempt status who acquires or disposes of a financial arrangement from/to another person to provide the Commissioner with detailed information regarding the acquisition or disposal of that financial arrangement with their return of income for the year.
This provision reproduces section 53 of the Tax Administration Act 1994.
Investment income information: variation of requirements (proposed new section 25S)
This provision allows the Commissioner to vary the requirements set out in new proposed subpart 3E and apply those requirements as varied.
It replaces sections 51(6) and 49(5) which allow the Commissioner to vary the information requirements relating to interest subject to RWT, and income subject to NRWT.
Transitional provision: application of investment income information provisions (proposed new section 227E, clause 283)
New section 227E allows payers of investment income to voluntarily apply the provisions relating to the delivery of investment income information and the correction of errors under the new proposed subpart 3E from 1 April 2019, before the provisions become compulsory from 1 April 2020.
Changes at a glance
| Current section | Proposed change |
|---|---|
Section 49 – This section requires payers of non-resident passive income to provide investment income information to Inland Revenue by 31 May. |
Investment income information relating to interest, dividends and Māori authority distributions subject to NRWT will now be required by the 20th of the following month per proposed new sections 25F, 25G and 25I. Information regarding royalties paid to non-residents will continue to be required by 31 May following the end of the tax year per proposed new section 25H. The definition of “reconciliation statement” in section 3 of the Tax Administration Act 1994 will also be removed given the proposed repeal of section 49. |
Section 49(4) and (4C) – This section provides that a payer who ceases to carry on a taxable activity in New Zealand must provide the information required by section 49 (relating to income subject to NRWT) to Inland Revenue before 40 working days after the end of the month in which the taxable activity ceases. |
This information will now be required by the 20th of the month following the month in which the income was paid to align it with the general rule regarding the provision of investment income information. This also aligns with when payment of the NRWT is currently required when a taxable activity ends (section RA 16). As such, this specific provision is not contained in the new legislation. |
Section 49(4B) and (4C) – This section provides that when an emigrating company is treated as paying a dividend, it must provide the investment income information required by section 49 to the Commissioner before three months after the time of emigration. |
This information will continue to be required by three months after the time of emigration per proposed new section 25L. This aligns with when the payment of NRWT is currently required for emigrating companies (section RA 18). |
Section 49(5) – This section allows the Commissioner to vary the requirements of section 49 and apply the requirements as varied. |
This is now contained in proposed new section 25S. |
Section 50 – This section requires a payer of resident passive income to provide Inland Revenue with summary information to accompany the payment of RWT relating to interest and dividends. |
Summary information will no longer be required to accompany a payment of RWT. Instead, per proposed new sections 25F (interest) and 25G (dividends), detailed investment income information will be required to accompany the payment – which is the 20th of the month following the month in which the income is paid to the investor. |
Section 51 – This section requires payers of interest (including certain dividends) subject to RWT to provide investment income information to Inland Revenue by 31 May following the end of the year (note that the 31 May date was inadvertently removed from the section as a result of an amendment in 2006, but continues to apply in practice). |
Detailed year-end information for interest will no longer be required. Instead, detailed information will be required monthly, as outlined above. |
Section 51(2A) – This section provides that the Commissioner may request investment income information from a payer who pays interest to a recipient holding an RWT exemption certificate. |
Proposed new section 25M provides that payers of interest, dividends and Māori authority distributions must provide taxpayer specific information to Inland Revenue in relation to payments made to persons with RWT-exempt status by 20 April following the end of the tax year, or at the payer’s preference, the 20th of the month following the month in which the income was paid. |
Section 51(3) – This section provides the due date for information where the Commissioner has requested this information. |
This provision is no longer required given detailed information will be required by the 20th of the month following the month in which the income is paid. |
Section 51(4) and (5C) – This section provides that a person who ceases to carry on a taxable activity or business in New Zealand must provide the information required by section 51 (interest subject to RWT) before 40 working days after the end of the month in which the business/taxable activity ceases. |
This information will now be required by the 20th of the month following the month in which the income was paid to align it with the general rule regarding the provision of investment income information. This also aligns with when payment of the RWT is currently required when a taxable activity ends (section RA 16). As such, this specific provision is not contained in the new legislation. |
Section 51(5) and (5C) – Under section RE 4 of the Income Tax Act 2007, a person has an obligation to withhold RWT from interest if the payment is made as part of carrying on a taxable activity in New Zealand. In order to ensure a withholding obligation applies to exempt persons such as charities or entities carrying on financial services (which do not constitute a taxable activity) that pay interest, section RE 4(3) states that a person holding an RWT exemption certificate also has a withholding obligation. Sections 51(5) and (5C) provide that where a person ceases to hold an RWT exemption certificate (and is not required to withhold RWT by virtue of making payments in the course of a taxable activity in New Zealand), they must provide the information required by section 51 before 40 working days after the end of the month in which they ceased to hold the RWT exemption certificate. |
This information will now be required by the 20th of the month following the month in which the income was paid, as explained above. This also aligns with when the payment of RWT is currently required when an RWT exemption certificate expires (section RA 17). |
Section 51(5B) and (5C) – This section provides that when an emigrating company is treated as paying a dividend (previously companies could migrate without paying tax on all income earned in New Zealand, section FL 2 of the Income Tax Act 2007 deems a liquidation and dividend to shareholders to ensure tax is paid) it must provide the information required by section 51 before three months after the time of emigration. |
This information will continue to be required within three months after the time of emigration as proposed in new section 25L. This is consistent with when the payment of RWT is currently required for emigrating companies (section RA 18). |
Section 51(6) – This section provides that the Commissioner may vary the requirements of section 51 in relation to any person and apply the requirements as varied. |
This is now contained in proposed new section 25S. |
Section 51(7) – This section states that a dividend paid by an RWT proxy is treated as interest for the purposes of section 51. |
This provision will no longer be necessary as the proposed information requirements for interest and dividends will be the same. |
Section 52 – This section provides that a payer of interest who is not required to withhold RWT because the payment of interest was not made in the course of a taxable activity or was less than the minimum threshold of $5,000 for the tax year must provide investment income information to the Commissioner with their return of income for the year when the interest is allowed as a deduction. |
This provision is now contained in section 25N. |
Section 53 – This section requires a person with RWT-exempt status who acquires or disposes of a financial arrangement from/to another person to provide the Commissioner with detailed information regarding the acquisition or disposal of that financial arrangement with their return of income for the year. |
This provision is now contained in proposed section 25O. |
Section 54 – This section allows the Commissioner to request from a payer taxpayer-specific information relating to recipients of resident passive income. |
This provision will no longer be needed as payers of resident passive income will be required to provide this information to the Commissioner. |
Section 57B – This section sets out the return requirements for multi-rate PIEs, although it is different from the other sections discussed in this Commentary as it covers payment of the tax as well as providing the information. |
Section 57B(7), which relates to providing information and not to payment of the tax, has been moved to proposed sections 25J and 25K. |
Section 67 – This section provides that an ICA company which declares a dividend must provide information regarding that dividend to the CIR with the return of income for the year. |
This information must now be provided on the 20th of the month following the month in which the dividend is paid, per proposed new section 25G. |
Section 68B – this section requires a Māori authority to provide Inland Revenue with summary information regarding any Māori authority distributions paid with the return of income for the year. |
This is now covered by proposed new section 25I. |
BRINGING FORWARD DUE DATES FOR PROVISION OF INFORMATION BY PIES
(Clauses 212, 246 and 284(1)(d), and schedule 2)
Summary of proposed amendments
Amendments are proposed to enable Inland Revenue to receive detailed information earlier from multi-rate PIEs that are not superannuation funds or retirement schemes by 15 May,[3] rather than 31 May, following the end of the income year.
Application date
The amendments will come into force on 1 April 2018.
Key features
Proposed new subpart 3E (clause 212 of the Bill) of the Tax Administration Act 1994, along with current section 57B, codifies the information requirements for multi-rate PIEs. Proposed section 25J provides that the detailed year-end information to be provided by PIEs that are not superannuation funds or retirement savings schemes is to be provided by 15 May after the end of the tax year. The information required is set out in proposed new schedule 6 of the Tax Administration Act 1994. Proposed section 25J will come into force on 1 April 2020. Clause 246 amends section 57B(7) to require the detailed year end information by 15 May (applying from 1 April 2018) and then repeals section 57B(7) from 1 April 2020.
The table below outlines the provisions of these sections and highlights the changes that are proposed.
Changes at a glance
| Current section | Proposed change |
|---|---|
Section 57B (7)(a) – requires a multi-rate PIE, that has a corresponding income year that does not end after the end of the tax year and is not a superannuation fund or a retirement savings scheme, to provide Inland Revenue with detailed recipient information for the year by 31 May after the end of the tax year. |
Multi-rate PIEs (that have a corresponding income year that does not end after the end of the tax year and are not a superannuation fund or a retirement savings scheme) will be required to report detailed recipient information for the year to Inland Revenue by 15 May after the end of the tax year. |
Background
Currently, Inland Revenue receives detailed PIE income information for multi-rate PIEs (other than superannuation funds and retirement savings schemes) by 31 May following the end of the income year. While the PIE tax in respect of this PIE income is treated as a final tax (unless the prescribed investor rate chosen is too low) the income from these PIEs does need to be taken into account for social policy income calculations.
Receiving the information on or around 31 May is too late to associate the PIE income with recipients’ other income records held by Inland Revenue as part of the personal tax summary process. By bringing the due date forward to 15 May the PIE information will be able to be associated with recipients’ employment income, which will give Inland Revenue a better understanding of recipients’ overall income position and will help enable Inland Revenue to ensure taxpayers’ tax and social policy obligations/entitlements are correctly calculated. It will also help Inland Revenue to ensure that PIE investors are selecting the correct PIR for the following year.
MEASURES TO ENCOURAGE PROVISION OF IRD NUMBERS
(Clauses 81, 85, 180 and 215)
Summary of proposed amendments
Amendments are proposed to the Tax Administration Act 1994 to encourage taxpayers to provide their IRD numbers to payers of investment income. The use of IRD numbers improves the overall administration of the tax system as it ensures Inland Revenue can attribute income to the taxpayer. In order to encourage taxpayers earning interest income to provide their IRD numbers, the non-declaration rate (the rate that applies when a taxpayer has not provided their IRD number) will increase from 33% to 45%. For PIE income, investors opening new investments in multi-rate PIEs will be required to provide their IRD number to the PIE in order to remain a member of the PIE.
Application date
The changes to the non-declaration rate for interest income will come into force on 1 April 2020. The requirement for new investors in a PIE to provide their IRD numbers in order to stay invested in the PIE will come into force on 1 April 2018.
Key features
Non-declaration rate
Clause 180 increases the non-declaration rate that applies to taxpayers (including non-natural persons) who do not provide their IRD number to payers of interest income from 33% to 45%.
PIE funds
Deemed exit
Clause 215 (section 28B) requires an investor in a multi-rate PIE to notify the PIE of their tax file number within six weeks of becoming an investor in the PIE.
Clause 85 (section HM 62) requires multi-rate PIE funds to close a member’s account and refund their investment if they have not provided their IRD number to the PIE within six weeks of opening their account.
Tax effects of deemed exit
Clause 81 (section HM 4) provides that an investor who has not provided their IRD number to the multi-rate PIE within six weeks of becoming a member is treated as reaching the exit level. This requires the PIE to calculate its tax liability in relation to the exiting investor, under sections HM 42 and HM 47 of the Income Tax Act 2007.
Clause 85 (section HM 62) amends section HM 62 of the Income Tax Act to update the definition of exit level to include where an investor has failed to provide their IRD number to the PIE within six weeks of becoming an investor.
Background
Inland Revenue has difficulty attributing income to a taxpayer if it does not have the taxpayer’s IRD number. Around 20 percent of the interest certificates received by Inland Revenue do not contain the recipient’s IRD number. In relation to PIE income, 2 percent of investors have not provided their IRD number to their PIE fund.
Currently, taxpayers are not incentivised to provide their IRD number to Inland Revenue as the non-declaration rate may be too low. The non-declaration rate is 33% for interest income and 28% for PIE income, which equates to the top marginal tax rate for the respective income types. As a result, these rates do not incentivise taxpayers on the top marginal tax rate to provide their IRD number. Further, taxpayers with social policy entitlements or obligations may have much higher effective tax rates (taking into account abatement of entitlements or additional obligations) and may realise that by not providing their IRD number, it is unlikely that their investment income will be taken into account when social policy entitlements/obligations are calculated. This may mean they receive more social assistance or pay less in child support and student loan repayments than they should.
No changes are proposed to encourage provision of IRD numbers in relation to dividends and Māori authority distributions due to capability concerns, and because Inland Revenue is unable to determine the extent of the non-declaration problem in relation to these types of income until after Inland Revenue begins to receive detailed recipient information. This makes it very difficult to make a satisfactory analysis of the compliance cost versus the benefit at this stage.
Example
Laura is a single mother with sole custody of her two children. She earns $50,000 a year and has a student loan. She invested some money from an inheritance which returns her $5,000 income a year. She has not provided her IRD number to her investment income payer. As a result, Laura would receive $1,352 per year more in Working for Families than otherwise entitled, and pay $600 less off her student loan per year than otherwise required, if she did not return this income.
Aim of proposed changes
The proposed changes should encourage people to provide their IRD numbers so that income is allocated to the relevant taxpayer, ensuring the taxpayer pays the right amount of tax, and receives the correct amount in social policy entitlements, and pays the correct amount in social policy obligations.
Having one non-declaration rate for all New Zealand-resident recipients of interest income is easier to understand for taxpayers and may reduce the compliance burden for payers of investment income.
The level of non-declaration experienced by PIEs is much lower than the level of non-declaration for interest. As such the IRD number requirement suggested during consultation has been proposed rather than proposing a higher non-declaration rate for PIEs.
Consultation highlighted numerous problems with imposing a 45% non-declaration rate for PIEs, such as the unfairness of applying it to retirement savings (which are not taken into account for social policy purposes) and whether the savings would be returned to the taxpayer’s retirement account once the overpaid PIE tax was subsequently recovered. The potential for investors subject to the non-declaration rate receiving PIE losses cashed out at 45% was also concerning.
ENCOURAGING ELECTRONIC FILING
(Clauses 212, 269 and 275)
Summary of proposed amendments
An amendment is proposed to require all investment income payers to file their investment income information electronically, unless they receive an exemption from the Commissioner.
An amendment is also proposed to the non-electronic filing penalty, to ensure it applies to payers who fail to provide their investment income information in a prescribed electronic form.
Application date
The amendment compelling payers to file electronically will come into force on 1 April 2020, but from 1 April 2019 for payers who voluntarily provide monthly information.
The changes to the non-electronic filing penalty will come into force on 1 April 2020.
Key features
Payers of the following types of income will be required to provide their investment income information to Inland Revenue electronically:
| Type of income | Proposed new section |
|---|---|
| Interest | 25F |
| Dividends | 25G, 25L (in relation to emigrating companies) |
| Royalties paid to non-residents | 25H |
| Māori authority distributions | 25I |
| Attributed PIE income | 25J and 25K[4] |
| Income paid to persons with RWT exempt status | 25M |
| Interest with no withholding obligation that is allowed as a deduction | 25N |
| Financial arrangements | 25O |
Proposed new section 25Q (clause 212) provides that the Commissioner may grant an exemption from electronic filing if the investment income payer would experience unreasonable compliance costs or other hardship as a result of the requirement to file digitally. In considering whether to exercise her discretion, the Commissioner must have regard to:
- the capability of the investment income payer;
- the nature and availability of suitable digital services; and
- the compliance costs involved with complying.
The Commissioner will publish guidelines on how the exemption will apply.
Clause 269 amends the non-electronic filing penalty, so that it applies to payers who fail to provide their investment income information in a prescribed electronic format.
Clause 275 provides that this penalty is due 30 days after the end of the month in which the payment of investment income was required to provide the information in the prescribed electronic form to the Commissioner.
Background
The majority of current investment income returns are paper-based. For returns that are able to be filed electronically, there is no electronic filing threshold to require payers of a certain size to file electronically. Paper filing is slower, more expensive in terms of compliance costs for payers of investment income and administrative costs for Inland Revenue, and more prone to errors.
This amendment is intended to ensure that everyone, other than those who are genuinely unable to access digital services, files electronically. This will not require payers to purchase software as payers will be able to enter the relevant details into an online form through MyIR. Having to apply to the Commissioner for an exemption may encourage people who may be able to file digitally, but would otherwise choose not to, to do so.
IMPROVING THE ADMINISTRATION OF RWT EXEMPT STATUS
(Clauses 161, 163, 172(21), (51), 220 and 224)
Summary of proposed amendments
Amendments are proposed that will change the terminology for RWT exemptions from a person “having an RWT exemption certificate” to “having RWT-exempt status” and will ensure that persons that have RWT-exempt status will be included in an electronic register maintained by Inland Revenue. Investors with RWT-exempt status will have to notify their investment provider of their status and payers of investment income will be able to confirm that investors have RWT-exempt status on the electronic register.
Recipients of investment income that are exempt from tax under another Act will need to apply for RWT-exempt status and will then be included on the electronic register if they wish to continue to be treated as being exempt from RWT. The income would still be exempt income so if the recipient did have RWT deducted they could apply to Inland Revenue for a refund of the deducted RWT. This amendment is intended to make it easier for payers of investment income to determine whether the recipient has current RWT-exempt status.
Application date
The amendments will come into force on 1 April 2020.
Key features
Clauses 161, 163, 172, 220 and 224, which propose changes to sections RE 27, RE 29 and section YA 1 of the Income Tax Act 2007, and sections 32H and 32L of the Tax Administration Act 1994, codify the changes in respect of RWT-exempt status. A number of other clauses include changes to change the terminology from “RWT exemption certificate” to “RWT-exempt status” and have not been specifically covered in this Commentary.
The table below outlines the provisions of these sections and highlights the changes that are proposed to the extent that the changes are more than just terminology changes from RWT exemption certificate to RWT-exempt status.
Changes at a glance
| Current section | Proposed change |
|---|---|
Section RE 27 – sets out rules regarding applying for RWT exemption certificates, when a certificate expires and obliges the holder of a certificate if they become aware that they no longer meet the requirements to hold a certificate. |
Clause 161 (amending section RE 27) provides that a person who has RWT-exempt status must notify their investment provider of their status and of any change in their status. This means that investment providers will be prompted to confirm the persons RWT-exempt status on the electronic register to be provided by the Commissioner and then to treat the person as exempt from RWT. It also means that the person holding RWT-exempt status would have to inform their investment providers if their RWT-exempt status expired or was cancelled. |
Section RE 29 – sets out the ways available to a person to establish whether another person is a person holding an RWT exemption certificate. These include:
The section also sets out requirements about notices of cancellation published in the Gazette and several other requirements. |
Clause 163 (proposed section RE 29) provides that a person may establish whether another person has current RWT-exempt status by searching the electronic register provided by the Commissioner. This change simplifies the process for determining whether a person has RWT-exempt status and whether that status is current. |
Section YA 1 – definition of “exempt interest”. The definition of exempt interest in section YA 1 sets out a range of types of interest that are excluded from being resident passive income under section RE 2(3)(a). The definition includes interest that is exempt income under section CW 64 (Exemption under other Acts). |
Clause 172 (21) removes income that is exempt under other Acts from the definition of “exempt interest”. This means that recipients of investment income that are exempt under other Acts will need to apply for RWT-exempt status (which they are eligible for) in order to be treated as exempt from RWT. They will then be included on the electronic register discussed above. The income will still be exempt from income tax so even if the recipient did not apply for RWT-exempt status and RWT was deducted the RWT would be refundable. |
Section YA 1 |
Clause 172 (51) inserts a new definition of “RWT-exempt status”. The definition refers to the status applied for under section RE 27 by eligible persons. |
| Section 32H – sets out the rules around providing exemption certificates and replacing lost or destroyed certificates. | Clause 220 replaces existing section 32H and requires the Commissioner to add a person who meets the requirements and has applied for RWT-exempt status to the electronic register of persons with RWT-exempt status and to notify the person that they have been issued RWT-exempt status (and the start and end date as applicable). This obligation on the Commissioner to add successful applicants to the electronic register means that the register should be kept up to date and should be a reliable source of information for payers of investment income. |
Section 32L – sets out the rules regarding the cancellation of RWT exemption certificates and includes a requirement to publish a list of cancellations in the Gazette. |
Clause 224 replaces existing section 32 L. It removes the requirement to publish a list of cancellations in the Gazette and instead requires the Commissioner to publish on the electronic register a list of persons whose RWT-exempt status has been revoked. It also provides that a person with an existing RWT certificate of exemption will be treated as having RWT-exempt status if their name appears on the electronic register of persons with RWT-exempt status. This allows persons with existing RWT exemption certificates to be transitioned on to the register and to have RWT-exempt status without having to go through the application process again. |
Background
Currently, Inland Revenue issues certificates of exemption, and the holders of the certificates then provide copies of the certificates to their investment provider. These certificates can be cancelled on the basis that they have expired or been revoked. Information on the issues and cancellations of RWT exemption certificates is published quarterly in the New Zealand Gazette. Recipients of investment income who are exempt from tax under other Acts can also request their investment providers to treat them as exempt from RWT without needing to get a certificate of exemption.
The Gazette process is infrequent and causes some problems for payers of investment income. Payers have issues determining whether a recipient is still exempt and can also have problems determining whether a recipient who informs them that they are exempt under another Act is actually exempt.
REMOVING SOME REQUIREMENTS TO PROVIDE END-OF-YEAR WITHHOLDING TAX CERTIFICATES
(Clause 211)
Summary of proposed amendments
Under the proposed amendments the requirements to provide end-of-year withholding tax certificates to recipients of interest (or dividends treated as interest and dividends subject to section RE 9(2)) will be limited to recipients that have not provided their IRD number to their investment income payer.
Application date
The amendments will come into force on 1 April 2020.
Key features
Clause 211 proposes amendments to section 25 of the Tax Administration Act 1994 (and renumbers section 25 as section 26C) to remove the requirement to provide RWT withholding tax certificates to interest (or dividends treated as interest and dividends subject to section RE 9(2)) recipients that have provided their IRD number to their investment provider. Instead, the investment providers will only have to provide end-of-year certificates to recipients who have not provided their IRD number.
Background
Currently, payers of interest (or dividends treated as interest and dividends subject to section RE 9(2)) that have made payments to recipients and have deducted RWT are required to provide a tax certificate to the recipient (typically after the end of the tax year). There are a number of specific pieces of information that are required to be included on the certificates and a number of financial institutions face significant time pressure to send out the certificates. As Inland Revenue will be getting investment income information more frequently and making it available on the person’s MyIR account there is no longer a need to have such tight requirements around sending out tax certificates. If payers want to continue to provide year-end tax information they will still be able to do that but they will not be required to do it.
The exception is for people that have not provided their IRD number to their investment provider. As the investment income paid to these people may not be able to be associated with their tax records there will still be a requirement to provide them with year-end withholding tax certificates. This will also help to highlight to these people that they are being subjected to the higher non-declaration rate which may prompt them to file a tax return (which would involve providing their IRD number).
Payers of dividends and taxable Māori authority distributions will still need to send shareholder dividend statements or Māori authority distribution statements (as applicable) to the recipients of these types of income as they are likely to be paid sporadically and it would be useful for the recipient to be informed at the time of the payment.
CORRECTION OF ERRORS IN INFORMATION PROVIDED
(Clauses 122, 123, 212 and 283)
Summary of proposed amendments
Amendments are proposed that will make it easier to correct errors when the payer has not deducted enough withholding tax in the following tax year. The ability to make adjustments in the following tax year will be subject to a threshold, and the payer will be required to notify Inland Revenue of the correction. Subject to meeting the requirements, the correction will not be subject to penalties or interest.
Application date
The amendments will come into force on 1 April 2020 or on 1 April 2019 for payers who choose to apply the new investment income information rules before they become compulsory.
Key features
The proposed changes mean that errors will still be able to be corrected in the year that they occurred in, but in addition, they will be able to be corrected in the following year if they are under the threshold for error correction. The payments made to correct the error would be treated as having been made in time and as such would not be subject to penalties or interest.
Where tax has been withheld at a higher rate than it should have been, the additional tax credits will be pre-populated into the recipient’s tax records and will be able to be refunded by Inland Revenue if it results in the recipient’s income tax being overpaid.
These changes also broaden the application of the error correction provisions and apply to all forms of income subject to RWT or NRWT.
Background
Currently, errors where the payer has not deducted enough withholding tax from interest subject to RWT or non-resident passive income that is subject to NRWT can be corrected in the same tax year by payers of investment income but where the errors are not discovered until the following tax year the correction must be done by amending a prior year return. The proposed amendments are intended to make it easier for payers to correct errors where the correction is made within a reasonable length of time. The error correction provisions do not change the obligation to provide correct returns initially and are only available to correct errors as opposed to allowing payers to choose to defer the payment of withholding tax.
Detailed analysis
Clauses 122 and 123, which propose changes to sections RA 11 and RA 12 of the Income Tax Act 2007 and clauses 212 and 283, which propose new sections for the Tax Administration Act 1994, codify the changes on error correction.
The table below outlines the provisions of these sections and highlights the changes that are proposed.
Changes at a glance
| Current section | Proposed change |
|---|---|
Section RA 11 – sets out the rules regarding error correction where there is an underpayment of RWT (in respect of interest or dividends treated as interest) or NRWT caused by a failure to deduct enough from a payment made to a recipient. The section allows the error to be corrected in the same year by subtracting the amount from a later payment to the recipient or recovering the amount from the recipient. The later payment can only be a payment of interest, a dividend treated as interest or a payment of non-resident passive income. |
Clause 122 provides that the error correction can be made in respect of any payment subject to RWT or NRWT. The correction can be made by subtracting an amount from a subsequent payment to the payee (no restriction on the type of payment) or by recovering an amount from the payee directly provided the correction is made in the same year. The error can also be corrected by deducting an amount from a subsequent payment to the payee made in the following year provided that the tax being corrected is no more than the greater of $2,000 or 5 percent of the payer’s RWT or NRWT withholding liability (as applicable) for the year in which the error occurred. For example, if the payer paid $1,000,000 of RWT in the year of the error an RWT error of up to $50,000 could be corrected in the following year. Proposed section RA 11(5) provides that a correction made that meets the requirements set out above will be treated as being made on the due date for the withholding tax and as such it would not be subject to interest or penalties. A requirement to notify the Commissioner of the adjustments made in the following year is also included in the clause. This notification would be expected to be made separately to the main withholding tax information being filed to allow Inland Revenue to have a correct understanding of the recipient’s tax positions for each income year. |
Section RA 12 – sets out the rules regarding error correction when there is an overpayment of RWT or NRWT because the payer has in error withheld too much tax. The error can only be corrected by the payer in the same year (before the relevant certificate has been sent out or if the certificate has been returned and cancelled). Section RA 12(5) requires that the Commissioner must refund the payment if the excess amount has been paid to the Commissioner. |
Clause 123 allows the payer to pay the excess amount to the recipient at any time before the 20th of April after the end of the tax year provided the payer has not reported to the payee via a RWT withholding certificate, shareholder dividend statement, or Māori Authority distribution statement. If the relevant certificate has been sent out, the payer will need to inform the Commissioner and the payee of the amount that needs to be refunded to the payee. This means the payer can make the correction up to the point that the final withholding information for the year is provided to the Commissioner/or the payee when the certificate has been sent out earlier. Once the year-end information has been provided to the Commissioner the information will be pre-populated into the recipient’s tax records and if the excess tax puts the recipient’s overall income tax position into a refund position the recipient will be able to claim a refund from Inland Revenue. |
| Clause 212 inserts proposed section 25P, which effectively directs withholding tax payers to the error correction sections at sections RA 11 and RA 12. | |
| Clause 283 introduces proposed section 227E, which gives transitional provisions for early adopters of the new investment income information rules. Section 227E(2) provides that early adopters who choose to apply the new rules in the period between 1 April 2019 and 31 March 2020 can also apply the new error correction rules. |
1 Note, it is also proposed that multi-rate PIEs that are not superannuation schemes or retirement savings schemes provide their investment income information by 15 May rather than 31 May, see section in this Commentary on bringing forward due dates for provision of information by PIEs.
2 Refer to paragraph 78 of the RIS titled “Changes to the tax administration of investment income information”.
3 The information will still be due by the end of the second month after that in which the PIE’s corresponding income year ends, if the PIE has a corresponding income year that ends after the end of the tax year or by the end of the third month after that in which the PIE loses PIE status, if the cessation occurs in the corresponding income year.
4 Note that electronic filing is already a requirement in relation to PIE returns.