Other making tax simpler items

• Setting a new due date for default assessments
• The date interest starts
• The date an excess credit arises
• Tax treatment of advance payments of holiday pay or salary or wages
• Application of legislated rate and threshold changes
• Tax treatment of a retrospective increase in salary or wages
• Electronic filing requirement for GST returns

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SETTING A NEW DUE DATE FOR DEFAULT ASSESSMENTS

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(Clauses 273 and 274)

Summary of proposed amendment

Currently, section 142A of the Tax Administration Act 1994 sets different due dates for payment of an Electronic Default Assessment (EDA) and Non-electronic Default Assessment (NDA). There are also different treatments for any tax payable from a subsequent amendment to that default assessment.

The amendments bring the two different types of default assessment under the same rules to reduce confusion and simplify the rules around default assessments.

Application date

The amendments will apply on a date appointed by the Governor-General by Order in Council, and one or more orders may be made appointing different dates for different tax types and purposes. The new rules will only apply to taxes that have migrated to Inland Revenue’s new computer system, START, and do not have incremental penalties applying.

Key features

Amendments to section 142A align the due date for payment of tax for default assessments. Currently there are different treatments between default assessments that are made by electronic means and those that are made manually.

There is no reason why these treatments should be different, and taxpayers can be confused about which payment rules apply.

The amended rules will only apply when the default assessment relates to a tax type that has been migrated to the new START system and when incremental penalties do not apply to the particular tax type.

Background

Section 142A sets different due dates for payment of an EDA and NDA.
For an EDA:

• The amount payable from the default assessment is due on the original due date for the tax type and period. This means that if the EDA is made after the original due date, as is always the case for GST, late payment penalties will be immediately applied, back-dated to the original due date.
• When the EDA is amended, a new due date will be set that is at least 30 days following the notice advising the taxpayer of the new amount to pay. Therefore, any late payment penalties applied to the EDA will be reversed, and the taxpayer will not be penalised further unless they do not pay any amount due by the new due date.

For an NDA:

• The amount payable from the default assessment is due at least 30 days from the notice of assessment.
• If the assessment is subsequently amended, then the taxpayer is only given a new due date for any amount payable that is greater than the amount previously payable from the NDA. This new due date will also be at least 30 days after the notice advising the taxpayer of the additional tax to pay.

Detailed analysis

Proposed new section 142AB of the Tax Administration Act 1994 will apply from the date appointed by the Governor-General through Order in Council, and one or more orders may be made appointing different dates for different tax types and for different purposes. It is intended that as tax types are migrated to Inland Revenue’s new START system the new rules will apply.

The new rules will also only apply to tax types where incremental penalties have been removed. The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 contains provisions that remove incremental penalties from goods and services tax (GST), income tax and Working for Families tax credits.

Section 142AB will apply to set a new due date for certain assessments. Section 142AB will not apply to assessments made in the absence of a return and to which section 106(1) applies. Section 106 deals with the issue of default assessments, both electronic and non-electronic.

Section 142A, which applies to tax types that proposed section 142AB does not apply to, has application to assessments other than EDAs made in the absence of a return and to which section 106(2) applies, which relates to EDAs only. Section 142AB removes this distinction entirely so that no new due date is set for any default assessment, manual or automatic.

In addition, proposed section 142AB does not set a new due date for an increased assessment from a default assessment. This will mean that any subsequent amendments to a default assessment will be due at the original due date. This change reflects the fact that no return was originally filed and removes a benefit to those who do not file compared with those who do file returns and pay tax on time.

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THE DATE INTEREST STARTS

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(Clause 263)

Summary of proposed amendment

This amendment reduces the number of working days referred to in the definition of “date interest starts” from 15 working days to 10 working days because of the migration of GST to Inland Revenue’s START system. This will mean taxpayers who have a GST refund and file early will have use of money interest (UOMI) calculated on that refund earlier than is the current rule. This reflects efficiencies in processing time for GST returns in the new START system.

Application date

The amendments will apply from the date of enactment.

Key features

Section 120C of the Tax Administration Act 1994 outlines the date on which UOMI is calculated from. Specifically, in the definition of “date interest starts”, paragraph (c) outlines the date on which a GST refund begins to accrue UOMI. With the migration of GST to Inland Revenue’s START system, and the efficiencies this creates, it is now possible to reduce the time before UOMI begins to accrue on GST refunds from 15 working days to 10 working days.

Background

Under the current rules the definition of “date interest starts” in section 120C(c) outlines the date at which interest commences to accrue on a GST refund. This is the latest of the following dates:

(i) The day after the earlier of –

(A) the 15th working day after the taxpayer provides a tax return for the return period to which the GST refund relates; and

(B) the original due date for payment of output GST in respect of that return period; and

(ii) the day after the day on which the tax return is provided; and

(iii) the day after the date on which the payment is made.

The 15 working days was originally designed to give Inland Revenue time to review and process the GST refund before interest would accrue.

Because of efficiencies in processing GST returns through Inland Revenue’s business transformation it is now possible to reduce the 15 working day delay in paying interest in section 120C(1)(c) which will enable taxpayers to earn UOMI sooner when a refund is delayed.

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THE DATE AN EXCESS CREDIT ARISES

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(Clause 276)

Summary of proposed amendments

There are currently rules within section 173L, and in particular section 173L(2), which outline the earliest date that taxpayers are able to transfer all or part of an excess credit. The current rules do not appropriately deal with taxpayers who file their returns early or late. The proposed amendment alters the date a credit arises in respect of goods and services tax (GST) to better reflect when a taxpayer files their return as this is the date that establishes the amount of the credit.

Application date

The amendments will apply from the date of enactment.

Key features

The date that a credit arises for a taxpayer in respect of GST will change to more closely reflect the date the taxpayer files their return, as this is the day that the amount of the credit is established. For taxpayers who file their GST return on time there will be no change from the current position and the credit will arise the day after the end of the GST return period in which the refund arose.

For those taxpayers who file their return before the due date, the refund will be available on the earlier of:

• the day after the date on which the return is filed; or
• the day after the end of the GST period to which the refund relates.

For taxpayers who file after the due date, the refund will be available on the day after the date the return is filed.

Background

The current rules around when excess tax is available to be transferred, does not reflect the date on which a taxpayer files a GST return. The filing of a return establishes the amount of the credit which is available to the taxpayer to use or be refunded.

For taxpayers who file their GST return early this can cause a delay in obtaining a credit when they may be closing down a business or require the funds for other liabilities. Conversely, for taxpayers who file their return late a credit can be available at a date that is earlier than the amount of the refund has been calculated.

Detailed analysis

To more closely align the calculation of the refund with its availability to taxpayers, the proposed change alters the current rules around when the excess tax is available to be used by a taxpayer by moving this date closer to when the return is filed.

For most taxpayers who file their GST return on time, the proposed new rules will not change the current date on which a credit is available. These new rules will only affect taxpayers who file their returns early or late.

For taxpayers who file early the date the excess tax becomes available will be the earlier of:

• the day after the date on which the return is filed; or
• the day after the end of the GST return period in which the refund arose.

This will mean that a GST credit will be available to a taxpayer on the day after a GST return is filed if that return is filed before the end of the taxable period. This situation will be rare but may be when a business is closing down and files a return until the date of cessation.

In this situation the credit will be available to the taxpayer the day after the return is filed or the end of the GST return period, whichever is the earlier.

Conversely, for taxpayers who file after the due date, the credit arising will only be available to them once the credit has been established, which is when they file their return for the GST period in question.

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TAX TREATMENT OF ADVANCE PAYMENTS OF HOLIDAY PAY OR SALARY OR WAGES

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(Clauses 142, 294(1) and 306(1))

Summary of proposed amendment

To strike a balance between the desire for more accurate withholding of PAYE and the impact on compliance costs, a proposed amendment to the Income Tax Act 2007 will give employers the option to tax holiday pay (or salary or wages) paid in advance as if the lump sum payment was paid over the pay periods to which it relates, or under the existing extra pay method.

Application date

The amendments will apply from 1 April 2018.

Key features

Proposed replacement section RD 13 will allow employers to tax holiday pay (or salary or wages) paid in advance as if the lump sum payment was paid over the pay periods to which it relates, or under the existing extra pay method.

Employers who choose, under section RD 13, to treat the lump sum advance payment as if it had been paid over the pay periods to which it relates will be required, if they make future payments for these pay periods, to calculate PAYE based on all earnings for the pay period, less PAYE already deducted for the pay period.

Background

The tax treatment of holiday pay depends on whether the holiday pay is a lump sum payment (in which case it should be treated as an extra pay), or is included in an employee’s regular pay or paid in substitution for an employee’s ordinary salary or wages when annual paid holidays are taken (in these cases it should be treated as salary or wages).

In the case of holiday pay paid in advance (for example, where an employee takes four weeks’ annual leave and receives a lump sum payment of holiday pay covering the four weeks in advance), extra pay tax treatment has a tendency to result in over-withholding of PAYE. This is because extra pay tax treatment essentially over-taxes the leave payment by using the employee’s marginal rate (for a payment that does not represent an increase in total annual earnings), while the payments made in each of the subsequent periods that have only part of the earnings are under-taxed.

More accurate withholding outcomes could be achieved if PAYE was deducted as if the lump sum payment was paid in its normal cycle over the pay periods to which the leave relates (the alternative approach). Feedback received from the Government’s Making Tax Simpler: Better administration of PAYE and GST consultation suggested it was common practice to apply this alternative approach for end of (calendar) year holiday pay paid as a lump sum. Anecdotally, it is common for employees in some industries to work longer hours in the lead up to Christmas, which can exacerbate the over-withholding if the extra pay formula is used. This, combined with receiving no income during the following weeks when the holiday is taken, may cause financial hardship. Moreover, prior to Inland Revenue clarifying its operational position on the correct tax treatment of holiday pay in November 2015, some payroll software applied the alternative approach described above to holiday pay paid in advance, and some payroll software providers expressed a desire during consultation to be allowed to use this more accurate alternative withholding method.

This alternative treatment would, however, be more complicated for employers to apply than treating the payment as an extra pay. This is due to the need, when future payments are made for pay periods to which the leave relates, for employers to calculate PAYE based on all earnings for the pay period, less PAYE already deducted for the pay period. This will occur for pay periods that are not taken entirely on leave, but partially taken on leave and partially worked in. This makes the alternative method too complex to be suitable for employers who do their payroll manually to be required to use; extra pay tax treatment remains appropriate for them.

A similar issue arises in the situation of salary or wages paid in advance.

Detailed analysis

Proposed replacement section RD 13 will apply when an employee receives:

• an advance payment of salary or wages; or
• a lump sum payment of holiday pay made before the employee takes their holiday, if the employee’s employment is continuing. That is, section RD 13 will not apply to a lump sum payment of holiday pay made on termination of employment. Employers will continue to be required to tax lump sum payments of holiday pay made on termination of employment as extra pays.

When section RD 13 applies, an employer may choose, for the purposes of withholding PAYE, to treat the lump sum payment:

• as an extra pay; or
• as if it had been paid in its normal cycle for the pay periods to which it relates.

If an employer chooses that latter option, the employer would calculate the amount of PAYE to withhold from the lump sum payment by:

• apportioning the lump sum payment to the pay period or pay periods to which it relates based on the employee’s usual hours of work; and
• calculating the amount of PAYE for each portion of the lump sum, as if the portion were the only salary payment they made to the employee for the particular pay period; and
• adding together the PAYE amounts for each portion.

If an employer, subsequent to making a lump sum payment to an employee where PAYE was calculated using the proposed new method, makes a salary payment to the employee for one of the pay periods to which the lump sum relates, the employer will be required to calculate the amount of PAYE to be withheld from the salary payment by:

• adding together the salary payment and the portion of the lump sum that relates to the pay period; and
• calculating the amount of PAYE that would be required to be withheld from this aggregate amount, as if that amount were a single payment of salary paid by the employer to the employee for the pay period; and
• subtracting the amount of previously withheld PAYE for the portion of the lump sum that relates to the pay period.

The proposed amendment to section 67(3)(a) of the KiwiSaver Act 2006 specifies that proposed replacement section RD 13 of the Income Tax Act 2007 does not apply for the purposes of calculating employee KiwiSaver contribution deductions.

The proposed amendment to schedule 2 of the Student Loan Scheme Act 2011 specifies that proposed replacement section RD 13 of the Income Tax Act 2007 does not apply for the purposes of calculating student loan deductions from payments of salary or wages.

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APPLICATION OF LEGISLATED RATE AND THRESHOLD CHANGES

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(Clauses 140, 144, 152, 293, 301 and 304)

Summary of proposed amendment

Proposed amendments to the Income Tax Act 2007, the KiwiSaver Act 2006 and the Student Loan Scheme Act 2011 align the rules about how legislated rate or threshold changes are applied across the different types of PAYE income payments and social policy initiatives administered through the PAYE system, such that the rates and thresholds to be applied are those in force on the date the payment is made.

Application date

The amendments will apply from 1 April 2018.

Key features

Proposed new section RD 10C of the Income Tax Act 2007 provides that, when a tax rate or threshold change occurs that affects the amount of tax for a PAYE income payment, the rates and thresholds to be applied to determine the amount of tax to be withheld are those in force on the date on which the PAYE income payment is paid. If the PAYE rules treat a PAYE income payment as paid on a particular date (which may differ from the actual date of payment), the rates and thresholds to be applied are those in force on the date on which the PAYE income payment is treated as paid.

Section RD 14 of the Income Tax Act 2007, which sets out the current rules for determining the amount of tax to be withheld from a payment of salary or wages when a change occurs to tax rates or thresholds, is proposed to be repealed.

Proposed new section RD 67B of the Income Tax Act 2007 provides that, when a tax rate or threshold change occurs that affects the amount of tax for an employer’s superannuation cash contribution, the rates and thresholds to be applied to determine the amount of tax to be withheld are those in force on the date on which the PAYE income payment to which the contribution relates is paid. If the PAYE rules treat a PAYE income payment to which the contribution relates as paid on a particular date (which may differ from the actual date of payment), the rates and thresholds to be applied are those in force on the date on which the PAYE income payment is treated as paid. Where an employer’s superannuation cash contribution is made that is not tied to a particular PAYE income payment, the rates and thresholds to be applied are those in force on the date on which the contribution is paid to the superannuation fund or under the KiwiSaver Act 2006 to Inland Revenue (whichever applies).

Proposed new section 64(3B) of the KiwiSaver Act 2006 provides that, when a change occurs to the minimum employee KiwiSaver contribution rate that affects the contribution that must be deducted from a payment of salary or wages, the rate to be applied to determine the amount of the contribution is the rate applying on the day on which the salary or wages are paid.

Proposed amendments to section 101D of the KiwiSaver Act 2006 provide that the compulsory employer contribution rate to be applied in calculating the amount of a compulsory employer KiwiSaver contribution to be made for a payment of gross salary or wages is the rate applying on the day on which the salary or wages are paid.

Proposed new section 37(3B) of the Student Loan Scheme Act 2011 provides that, when a change occurs to the rate at which student loan deductions are required to be from a payment of salary or wages, the deduction rate to be applied is the rate applying on the day on which the salary or wages are paid.

Background

At present, different types of PAYE income payments and social policy initiatives administered through the PAYE system have different rules about what is to be done when there is a legislated rate or threshold change during a pay period, or if there is a legislated rate or threshold change between the date the payment is made and the pay period to which the payment relates. The rates and thresholds that apply are sometimes based on the pay date, sometimes pay period end-date or pay period start-date, while sometimes apportionment applies. This creates complexity and confusion for employers, in particular for pays that occur in the period around the end of one tax year and start of the next, when there has been legislated rate and/or threshold changes. This adds to employers’ compliance costs and increases the risk of errors.

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TAX TREATMENT OF A RETROSPECTIVE INCREASE IN SALARY OR WAGES

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(Clause 134)

Summary of proposed amendment

The de minimis rule in section RD 7 of the Income Tax Act 2007 relating to the tax treatment of a retrospective increase in salary or wages is to be repealed, as it is now redundant.

Application date

The amendment will apply from 1 April 2018.

Key features

The proposed amendment to section RD 7 repeals the de minimis rule in relation to the tax treatment of a retrospective increase in salary or wages.

Background

Under the PAYE rules, a retrospective increase in salary or wages is treated as an extra pay. This is subject to a de minimis provision, so only applies where the total salary or wages a person earns in a week (including the increase) is more than $4. If a person earned less than $4 for the week, the payment would be treated as salary or wages.

This restriction has been part of the PAYE rules since PAYE was introduced in 1958, with the only change to the provision being when it changed to $4 from its original £2 upon the change to decimal currency in 1967.

Given that the current adult minimum wage is $15.25 an hour and the current starting-out and training minimum wage is $12.20 an hour, it is extremely unlikely anyone earning salary or wages in New Zealand would receive less than $4 in a week. Therefore, the existing restriction is effectively redundant.

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ELECTRONIC FILING REQUIREMENT FOR GST RETURNS

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(Clauses 187(18), 227, 231, 232, 269(3), (7) and 275(1))

Summary of proposed amendments

The Bill proposes an electronic filing requirement for some GST-registered persons over a taxable supplies threshold. The threshold will be set by Order in Council following appropriate consultation. A limited exemption will be provided in some circumstances. A penalty will apply to registered persons required to file their GST return electronically but who fail to do so.

Application date

The proposed amendments will apply from the date of enactment. However, it will only affect registered persons once a threshold for the electronic filing requirement is set by Order in Council at a later point in time.

Key features

Proposed section 36BD will provide for the setting of a threshold above which GST-registered persons are required to file their GST return with Inland Revenue electronically in a prescribed format. The threshold will be set separately by Order in Council.

Subsection (1)(a) of section 36BD preserves the option for GST-registered persons below the threshold to voluntarily file electronically. As currently, registered persons who choose to transmit their return electronically must do so in a format prescribed by Inland Revenue.

There will be an exemption to the electronic filing requirement available for registered persons who do not have sufficient digital services available to them, and if the cost incurred in complying with the electronic filing requirement would be unreasonable in the circumstances.

The Commissioner of Inland Revenue will publish guidelines on how the exemptions will apply.

To encourage taxpayers to file electronically and to recover the additional costs of administering paper returns it is proposed that a penalty of $250 applies for taxpayers who are, in the future, required to file in an electronic format and who fail to do so.

Section 142G is being amended to set the due date for the payment of the penalty 30 days after the end of the month in which the registered person is required to provide the return to the Commissioner electronically.

Background

Currently GST-registered persons have a choice whether to provide Inland Revenue with their GST return on paper or electronically. The use of electronic channels for filing GST returns has increased over recent years. Electronic transfer of GST returns compared with paper returns has the long-term benefit of reducing compliance and administrative costs and transcription errors.

The proposed changes will enable further encouragement of electronic filing, if necessary, in the future.