As part of its initiative to modernise the tax system, Inland Revenue (IRD) has released a draft bill to reform the PAYE system, aiming to reduce tax compliance and administrative costs for New Zealand businesses.
The proposed changes take advantage of modern digital systems and are likely to be welcomed by both employers and employees as they should lower employer compliance costs and improve the accuracy of deductions for employees.
Alongside the PAYE changes, the draft bill includes provisions to increase the amount of information received by IRD about investment income paid to individual taxpayers. While this may be welcome by some, others may feel uncomfortable about the increased amount of information in IRD’s hands.
The first considerable change that the Bill seeks to implement is shifting the employer’s current obligation to provide IRD with employee income and deduction information on a monthly basis, to an obligation that occurs every payday; this could commonly be weekly or bi-monthly for some employees.
The Bill envisions that accounting software will be integrated with the IRD so that employee income and deduction information would be sent to IRD with a simple ‘push of a button’. In effect this means that PAYE information will be sent to IRD as pay checks are processed, so the reporting should become an integral part of the payroll process rather than a separate and additional activity. This will reduce the tax administration involved with employing staff and ease the compliance burden for businesses.
The other big change is with regard to new and departing employees.
At the moment, when an employee starts a new job they are generally required to complete paper forms for the IRD, which commonly overlaps with information collected by the employer, resulting in a substantial amount of repetition and duplication.
Under the new system, the employer will be responsible for collating all of the relevant information, which can then be submitted electronically to IRD with the next return of payday information.
Providing this is done before the new employee is paid, IRD will check the IRD number and proposed tax code, and communicate back to the employer in near-real time if any changes need to be made or if any other deductions such as child support need to be processed.
This aims to reduce the scope for initial errors that are commonly experienced with new employees, such as incorrect tax rates being used or insufficient deductions being made. Meaning employees have a greater chance of receiving the correct amount into their bank account.
Practically speaking, both of these changes will streamline the PAYE process for employees by making tax obligations part of the routine payroll process, which should reduce compliance and administrative costs for businesses.
Investment income information
In addition to the PAYE changes, the draft Bill proposes the more detailed and frequent collection of information about taxpayers’ income; including interest, dividends, portfolio investment entity (PIE) income, taxable Māori authority distributions and royalties.
At the moment, payers of interest subject to withholding tax (such as banks) are required to provide detailed information about individual taxpayers to IRD, but only after the end of the tax year. Other payers of investment income, such as funds paying dividends and Maori authorities paying distributions, do not have to provide any information at all to IRD about amounts paid to individual taxpayers.
The proposed new rules will require detailed information about investment income to be submitted to IRD on a monthly basis, or whenever payments are made if the payment frequency is less than a month. The information provided to IRD will include the name, IRD number and contact details of both the payer and recipient of investment income, along with the recipient’s tax rate and the amount and type of income paid.
The aim of IRD receiving more frequent information in this way is to help give them a more complete picture about individual taxpayers total income on a real-time basis, to ensure individual’s tax and social policy obligations and entitlements are more accurate during the year. For example, the IR will be able to ensure that entitlements to ‘Working for Families tax credits’ take into account any investment income, so that individuals are not overpaid throughout the year. It will also ensure that taxpayers are returning this investment income.
IRD will also be in a position to advise the taxpayer of the appropriate withholding rate to use, as well as pre-populating tax returns for the taxpayer at year-end.
The pre-population will be a welcome change for most individual filers; it will quicken and simplify the e-filing task and will help individuals get their tax position correct. However these proposed new rules provide IRD with access to more information on individual’s personal finances, which may make some feel uncomfortable.
The IR have estimated that an additional $21 – $27 million of income tax per annum will be collected under the new rules and an additional 185,000 individuals will be required to include their interest income when calculating their Working for Families entitlements.
In summary, the Bill aims to use digital solutions to simplify the tax administration process. Both the PAYE changes and introduction of investment income reporting seek to give IRD more real-time information.
Both of these changes will ultimately give Government greater insight of individual taxpayers overall financial positions, which may open up opportunities to redesign social policies and improve the future administration of other systems such as child support, KiwiSaver, Working for Families and student loans.
All references to Bill refer to Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill unless otherwise stated.