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Taxation Annual Rates for 201718 Employment and Investment Income and Remedial Matters Bill

Making Tax Simpler – other items

EXEMPTIONS FROM ELECTRONIC FILING REQUIREMENTS

Clauses 200, 212 and 231

Issue: Clarifying the reasons for granting an exemption

Submission

(Matter raised by officials)

Concerns have been raised with officials that the wording in proposed sections 23G(3) and 36BD did not obviously include taxpayers for whom it would be unreasonable to expect electronic filing of returns, for example, because of the unreliability of their broadband access, their lack of digital skills or a handicap.

Comment

Officials agree that each of the above reasons could be grounds for an exemption under proposed sections 23G(3) and 36BD and note that it is intended that guidance will be included in the Tax Information Bulletin to assist taxpayers to understand how the exemption provisions would be applied.

Officials agree, however, that the current wording is unclear and could deter taxpayers from applying for an exemption and recommend that the provision is clarified. A reworded provision would require the Commissioner to have regard to the nature and availability of digital services, including the reliability of those services, the capability of the person relating to the use of computers and whether the costs the taxpayer would incur in complying with a requirement to file electronically would be unreasonable in the circumstances.

Recommendation

That the submission be accepted.

Issue: Specifying the status of the exemptions granted

Submission

(Regulations Review Committee)

The Bill should be amended to clarify whether exemptions from electronic filing granted by the Commissioner under the proposed new sections 23G and 36BD are disallowable instruments or not.

Comment

The Bill contains proposed requirements for taxpayers over a threshold to file tax information electronically. The threshold can be set or amended by Order in Council. The Commissioner may grant exemptions from the legislative requirement to file information electronically. Officials consider the relevant exemptions are administrative in character and do not extend or vary the scope of the Tax Administration Act 1994. Officials recommend that the Bill be amended stating that these exemptions are not disallowable instruments.

Recommendation

That the submission be accepted.

Issue: Statement of reasons for exemptions granted

Submission

(Regulations Review Committee)

The Bill should be amended to require that any exemption granted under the proposed new sections 23G and 36BD include a statement of reason as a safeguard to the exercise of the power to make an exemption.

Comment

Both proposed sections 23G and 36BD set out criteria for the granting of exemptions and further guidance as to the factors the Commissioner has to have regard to in determining whether to exempt a person or class of persons from an electronic filing requirement. However, they do not currently require a statement of reason. Officials agree with the submission and recommend that the Bill be amended to require that any exemption granted under the relevant provisions give a reason as to why the exemption was granted.

Recommendation

That the submission be accepted.

Issue: Expiry of exemptions after a specific period of time

Submission

(Regulations Review Committee)

The Bill should be amended to provide that any exemption granted under the new sections 23G and 36BD expires after a specified period of time.

Comment

Officials partly agree that exemptions from an electronic filing requirement should have a specified time limit in some circumstances. However, requiring this of any exemption from electronic filing is not warranted and may impose undue administrative and compliance costs in situations where the exemption is granted because of circumstances that are not or are not likely to change over time – for example, religious or disability reasons.

Officials therefore recommend that the Bill be amended to give the Commissioner the discretion to limit exemptions to a specific period of time. It is also recommended that the Bill be amended to state that any exemption is valid until the Commissioner gives notice cancelling it, with a minimum of 6 month period from the notice until the cancellation takes effect. This is similar to the current provisions for removing the authorisation to file an employer monthly schedule by non-electronic means for employers who are currently required to file these electronically.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Aligning the non-electronic filing exemption for investment income information

Submission

(Matter raised by officials)

Proposed new section 25Q in clause 212 should be amended to ensure the language used is consistent with the electronic filing exemptions for employment income information and Goods and Services Tax information in clauses 200 (proposed new section 23G) and 231 (proposed new section 36BD).

Comment

Proposed new section 25Q provides that the Commissioner may discharge a payer from the requirement to deliver their investment income electronically, and sets out factors that the Commissioner must have regard to in determining whether or not to discharge the payer. Clauses 200 and 231 provide exemptions from electronic filing for employment income information and GST registered persons, but the wording and factors to be taken into account by the Commissioner are slightly different. All three exemptions are intended to be subject to the same standard; therefore it is proposed that the electronic filing exemption for investment income is amended so that it is consistent with the exemptions for employment income and GST purposes.

Recommendation

That the submission be accepted.

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

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

Issue: Support for the proposal

Submission

(Chartered Accountants Australia and New Zealand, KPMG, PwC)

Three submitters expressed support for the proposal.

Chartered Accountants Australia and New Zealand support this proposal as a compliance saving measure. (Chartered Accountants Australia and New Zealand)

PwC support the proposal mainly for the reasons outlined in the Commentary on the Bill, particularly around the fact that the current treatment can cause financial hardship for certain groups of employees, and the fact that the new option can result in a more accurate amount of tax being withheld. (PwC)

Recommendation

That the submitters’ support be noted.

Issue: Alternative proposal

Submission

(EY)

Advance payments of holiday pay (or salary or wages) should be taxed as if the payments were paid over the pay periods to which they relate, and not as an extra pay. EY believes the treatment proposed for future payments is overly complex and would likely give rise to unnecessary payroll system complications for employers. Any future payments made for the pay periods to which the leave relates should be treated in the same way as regular salary or wages. The exception to this treatment should be where the employee is receiving a payment in addition to holiday pay, in which case the payment should be treated as an extra pay.

Comment

It has been the Commissioner of Inland Revenue’s published operational position since 17 November 2015 that holiday pay paid to an employee in a lump sum before their leave starts should have PAYE deducted using the deduction method for extra pay.

The proposed amendment follows current law and would allow employers to continue to treat advance payments of holiday pay as an extra pay. The proposed amendment, however, would allow employers the option of applying a more accurate withholding method, which is based on how some payroll software operated in practice, prior to the Commissioner publishing her operational position. The proposed amendment would allow payroll software developers to code their software to apply this more accurate withholding method once again.

The proposal does not require employers to apply this more accurate, but more complex, method. If their payroll system is not capable of applying it, they could choose to apply the method of treating advance payments of holiday pay as an extra pay. Officials consider that this is not an overly complex calculation and is required in relation to other types of extra pays such as a bonus.

EY’s alternative proposal would often result in under-withholding of PAYE, because for pay periods that are not taken entirely on leave, but partially taken on leave and partially worked in, there will be two payments made to the employee. Each of these payments (which are each only part of the employee’s salary or wages for the pay period) would be assumed for the purposes of calculating PAYE to be all of the employee’s salary or wages for the pay period.

Recommendation

That the submission be declined.

Issue: Inland Revenue should provide examples for employers

Submission

(PwC)

PwC notes this proposal results in a complication to the current landscape, rather than a clarification or simplification. As such, it is paramount that Inland Revenue provides clear examples outlining the proposed options available to employers.

Comment

Guidance on the options available to employers will be provided in a Tax Information Bulletin item that will be published shortly after the Bill’s enactment. The proposed amendment will allow employers (payroll software developers) to adopt a more accurate method which operated in practice, prior to the Commissioner publishing her operational position in November 2015.

Recommendation

That the officials’ comments be noted.

Issue: Need for payroll systems to have the functionality to enable employers to easily switch between options

Submission

(PwC)

Payroll systems will need to have the functionality to enable employers to easily switch between the options for taxing advance payments.

Comment

Payroll software would not necessarily need to have the functionality to switch between the options for taxing advance payments; that would be a matter for payroll software developers to decide. Payroll software developers, who decide to code their software to apply the more accurate method, might quite reasonably decide it would not be beneficial to also provide employers with the option to apply a less accurate method of calculating PAYE that is more suited to employers without payroll software.

Recommendation

That the officials’ comments be noted.

APPLICATION OF LEGISLATED RATE AND THRESHOLD CHANGES

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

Issue: Support for the proposal

Submission

(Chartered Accountants Australia and New Zealand)

Chartered Accountants Australia and New Zealand agrees the appropriate PAYE deduction should be set by the rates and thresholds in force on the date the income payment is made.

Recommendation

That the submitter’s support be noted.

Issue: ACC earners’ levy alignment

Submission

(Matter raised by officials)

The Accident Compensation (Earners’ Levy) Regulations 2017 should be amended, with effect from 1 April 2018, so that the rule for determining the amount of ACC earners’ levy an employer must deduct from an employee’s earnings is aligned with the rule for the income tax component of PAYE, following a change to rates or thresholds.

Comment

Proposed amendments to the Income Tax Act 2007, the KiwiSaver Act 2006 and the Student Loan Scheme Act 2011 included in the Bill 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.

The PAYE deductions employers are required to make from their employees’ earnings comprise the ACC earners’ levy and income tax. The ACC earners’ levy rate and the maximum liable annual earnings threshold are prescribed by regulations made under the Accident Compensation Act 2001. Currently, the prescribed ACC earners’ levy rate applies “for pay periods ending in the applicable tax year”.

It is particularly important that the rule for determining the amount of ACC earners’ levy an employer must deduct from an employee’s earnings is aligned with the rule for the income tax component of PAYE, following a change to rates or thresholds. However, given the timing of the making of the Accident Compensation (Earners’ Levy) Regulations 2017, it was not possible to include an amendment to these regulations to align the rule for the ACC earner’s levy in the introduction version of the Bill. Therefore, to align with the proposed amendment to the rule for calculating the income tax component of PAYE contained in clause 140 of the Bill, officials recommend that the Accident Compensation (Earners’ Levy) Regulations 2017 be amended, such that the rule for the ACC earners’ levy operates on a pay date (rather than a pay period end date) basis, with effect from 1 April 2018.

Recommendation

That the submission be accepted.

REMEDIAL HOLIDAY PAY PAYMENTS

Submission

(EY)

It would be helpful for the Government to provide legislative clarification around the tax treatment of holiday pay amounts paid in arrears, for example remedial remuneration due under the Holidays Act 2003. A number of employers are currently grappling with the application of the extra pay rules to holiday pay remedial payments, with issues arising in particular for former employees who would not otherwise be required to file income tax returns.

Comment

Officials note that legislative clarification as to the tax treatment of back-dated remedial payments of entitlements under the Holidays Act 2003 was recently provided, through the Income Tax (Employment-related Remedial Payments) Regulations 2017, which declare such a payment to be an “extra pay”.

Officials acknowledge that it is likely that former employees will have tax under-withheld if the standard tax calculation for extra pays is used, which may lead to them being required to file an income tax return and pay any tax owed. However, officials note that there is an existing legislative mechanism by which a former employee could avoid this. Section RD 10(2) of the Income Tax Act 2007 enables an employee to notify their employer of their election to fix their rate of tax on extra pays at their expected marginal income tax rate.

When the legislation was recently clarified, Inland Revenue issued guidance for employers on how back-dated remedial payments of holiday pay should be treated for the purposes of PAYE and other deductions, such as student loan repayments and KiwiSaver contributions.[10]

Inland Revenue also recently updated its guidance for individuals to explain the implications for tax and for Inland Revenue-administered social assistance of receiving a lump sum payment (including of back-paid holiday pay).[11]

The guidance for both employers and individuals specifically refers to an individual’s ability to request that their employer withhold tax from a lump sum payment at a higher rate, which they may wish to do to avoid a potential end of year tax debt.

Officials consider that providing guidance on the existing legislative mechanism is the best solution to the issue raised by the submitter. If a legislative amendment was made to require employers to withhold tax from payments made to former employees at a specific tax rate, that rate would inevitably be either too high, or too low, for many of the recipients.

Recommendation

That the submission be declined.

PENALTIES AND INTEREST AMENDMENTS

Clauses 263, 273, 274 and 276

Issue: Setting a new due date for default assessments, date interest starts and the date an excess credit arises

Submission

(KPMG, Chartered Accountants Australia and New Zealand)

Submitters expressed support for the following proposals:

  • align the treatment for electronic default assessments and non-electronic default assessments so both types are due on the original due date for the payment of tax;
  • reduce the number of working days referred to in the definition of “date interest starts” from 15 working days to 10 working days to reflect the reduced processing times for GST refunds; and
  • alter the date a credit arises in respect of goods and services tax (GST) to reflect when a taxpayer files their return.

Recommendation

That the submitters’ support be noted.

Issue: Aligning the due dates for default assessments – application date for clauses 273 and 274

Submission

(Regulations Review Committee)

Clauses 273 and 274 of the Bill align the due dates for paying tax on default assessments, whether those assessments are raised electronically or manually. This change can only be made once a tax type migrates to the new START system and where incremental penalties have been removed from the particular tax type.

The amendments in the Bill apply on a date appointed by the Governor-General by Order in Council once those two conditions have been met.

The Regulations Review Committee raised concerns with the application date.

The first concern was that the provision for the application should be moved from its current place within the Bill to clause 2 which deals with application dates generally.

Secondly the Regulations Review Committee recommended inserting a “fall back” date where the proposed section 142AB would commence.

Comment

Officials agree with the submission in that the two suggestions by the Regulations Review Committee will provide more certainty to taxpayers around the application date of the provisions.

Recommendation

That the submission be accepted.

Issue: Date interest starts and excess tax is available – application date for clauses 263 and 276

Submission

(Matters raised by officials)

Clause 263 of the Bill 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 change reflects efficiencies in the processing time for GST returns in the new START system.

Clause 276 alters the time that excess tax is able to be transferred within a taxpayers accounts to more closely align the availability with the date a taxpayer files their tax return.

The amendments in the Bill apply from the date of Royal assent.

The current application date of the date of Royal assent is likely to cause issues and uncertainty around the application of the provisions. This will create issues for the application of the changes within the system environment as it may not give sufficient time for changes to be made to the system to adjust the application date. It would be preferable that the application date for this change have a certain date.

Officials recommend that the application dates are amended to GST periods ending after 1 April 2018.

Recommendation

That the submission be accepted.

ELECTRONIC FILING REQUIREMENTS FOR GST RETURNS

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

Issue: Support for the proposal

Submission

(Chartered Accountants Australia and New Zealand)

The submitter expressed support for the proposal to require electronic filing of GST returns above a certain threshold.

Recommendation

That the submitter’s support be noted.

Issue: Imposition of non-electronic filing penalty

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

The focus should be on educating about the advantages of electronic filing (Chartered Accountants Australia and New Zealand) and helping (KPMG) taxpayers to meet their new electronic filing obligations, rather than penalising them for not complying.

Comment

The threshold for electronic filing of GST information is to be set by Order in Council at a later point in time following appropriate and reasonable consultation. In support of the Order in Council, Inland Revenue will ensure that registered persons are made aware of the available exemptions from electronic filing, and that there is a sufficient amount of time for affected registered persons to implement electronic systems or obtain an exemption where appropriate.

Recommendation

That the officials’ comments be noted.

 

10 http://www.ird.govt.nz/resources/e/a/ea3bfec0-424f-43ba-ad3f-06af818dcf1c/CS+17-02+Tax+treatment+of+backdated+remedial+payment+of+holiday+pay.pdf

11 http://www.ird.govt.nz/yoursituation-ind/taxing-lump-sum/