Chapter 1 - Background
1.1 Correcting errors and making adjustments to already filed PAYE information is currently a largely manual process, and imposes significant compliance costs on some employers.
1.2 In late 2015 the Government released a discussion document, Making Tax Simpler – Better administration of PAYE and GST, which contained proposals about how modern digital services could be used to improve the administration of PAYE and GST. The objectives outlined included reducing compliance and administrative costs, and improved administration of social policies such as student loans and Working for Families tax credits.
1.3 The discussion document proposed that employers should file PAYE information each payday and that employers using payroll software could do so directly from their payroll systems.
1.4 For those using payroll software, their payroll system could be used to calculate and transmit the information required to correct errors and make adjustments. The discussion document further proposed that the correction and adjustment of PAYE information would require employers to amend the returns in which the error originally occurred.
1.5 Changes to the administration of PAYE are proposed in the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill introduced to Parliament in April 2017. The changes proposed in the Bill are summarised in the Appendix.
1.6 The Bill proposes a regulation-making power for matters relating to the correction of errors in “employment income information”.[1] It further provides that the Governor-General may make these regulations on the advice of the Minister of Revenue, following appropriate consultation.[2]
Purpose of this consultation
1.7 This consultation is being carried out on behalf of the Minister of Revenue and seeks feedback to help shape the regulations in proposed new section 23M of the Tax Administration Act.
1.8 With the co-operation of providers of payroll software, a largely automated approach to error correction is proposed for employers using payroll software. However it is important that the requirements for error correction also meet the needs of employers who file through Inland Revenue’s website or on paper. Submissions are also invited from these employers.
Summary of potential solutions
1.9 Several design principles have been identified to reduce the need for rework:
- Where possible, processes for adjustment should be automated and allow employers to make adjustments consistent with their payroll practices.
- Employers who use payroll software should be able to use their software to generate the information they require to amend an already filed return.
- Employers should also have the option of accessing filed returns through myIR and self-correcting incorrect returns.
- A paper error correction form will continue to exist, and employers who only need to make simple corrections will be able to do so by telephone.
1.10 The issues paper identifies a number of types of errors and adjustments. The solutions suggested here apply to PAYE and related deductions such as student loan repayments and KiwiSaver deductions. An important consideration will be current practices and the workability of the suggested solutions proposed in table 1.
| Type of error or adjustment | Potential solutions |
|---|---|
| Reporting error: When the return does not reflect what was paid or withheld | Amend the original return. |
| Payroll: Underpayment | No correction required as employees are taxed when the underpayment is paid. |
| Payroll correction: Overpayment | When the amount is repaid (or there is agreement to repay), this correction can be made either:
If legally able to and with the agreement of the employee, by reducing the gross income in a subsequent pay period and reporting the reduced figures in a subsequent return. Inland Revenue will not be able to accept negative values in returns until early 2020 but after that it is proposed that they should be accepted. If the overpaid amount is not repaid it should continue to be taxable as PAYE income, no adjustment is required, and there would be no refund of PAYE and related deductions. If the overpaid amount is partially repaid, the sum not repaid remains taxable as PAYE income. If the employer has made an adjustment based on the agreement to repay, a further adjustment would be required to add back the amount not repaid. |
| Interpretation errors: When there is a mistake with the tax treatment | A limited ability to correct the error in a subsequent return is suggested. The error may be corrected in a subsequent return:
|
| Errors or corrections that cross tax years | We are interested to hear what issues would arise if employers were able to correct overpayments and interpretation errors relating to a previous tax year in a subsequent return. |
1.11 Error correction often involves a trade-off between accuracy and cost. The suggested solutions would allow different approaches for reporting errors, overpayments and interpretation errors. An employer concerned about the complexity of distinguishing between different error types could, however, choose to correct reporting errors, overpayments and interpretation errors by amending the returns that contained the errors.
1.12 The issues paper also suggests that employers should report the amount of employer superannuation contribution tax (ESCT) withheld, at an employee level.
1.13 The solutions suggested relating to overpaid income would require a clarification of the law so that overpaid PAYE income that is not repaid remains taxable as PAYE income. A further clarification is proposed to ensure that the time an employer allows an employee to repay overpaid income does not create a liability for fringe benefit tax on an interest-free loan.
1.14 When “employer” is used in this paper it should generally be read as including “payroll intermediary”.[3] The proposals for error correction in employment income information also apply to non-employees such as contractors who are paid schedular payments from which PAYE must be withheld.
1.15 No special rules have been put forward in relation to the correction of errors in employment income information relating to non-resident employees and non-resident contractors. Some specific issues are, however, being worked through separately, to address specific concerns raised in relation to non-resident employees and non-resident contractors.
How to make a submission
1.16 Officials invite submissions on the suggested changes and points raised in this issues paper. Submissions can be sent to [email protected] with “PAYE error correction and adjustment” in the subject line.
1.17 Alternatively, submissions can be addressed to:
PAYE error correction and adjustment
c/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140
1.18 The closing date for submissions is 15 September 2017.
1.19 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.
1.20 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this.
1 The Bill uses this term to refer to the information that will be required from employers each payday and information required about new and departing employees.
2 Clause 200 proposes to insert new subpart 3C to the Tax Administration Act 1994. This section includes proposed new section 23M, which includes the proposed regulation-making power.
3 Payroll intermediaries already have access to an automated error correction process and are required to file electronically.