pwc.co.nz Tax Tips September 2018 In this issue: Inland Revenue s business transformation what does it mean for you? Inland Revenue releases draft guidance on the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018
Inland Revenue s business transformation what does it mean for you? Inland Revenue s business transformation is broader than a technology upgrade. Rather, it involves a complete rethink as to how New Zealand s tax administration system can be modernised and simplified for businesses, individuals, and social policy recipients. The Government has consulted on a wide range of tax administration changes since 2015, and in February 2017 we saw the first tranche of changes being released, including moving GST into MyIR Secure Online Services so returns and payments can be made at the same time. The second tranche of changes in April this year focused on business income taxes and included the introduction of the accounting income method (AIM) for paying provisional tax. In addition to the system changes, the Government has also made a number of more substantive legislative changes. The key focus of these changes is to modernise and simplify tax administration for taxpayers including enabling real-time provision of income information. In our view, some of these changes will have a significant impact on businesses. It is therefore important to start preparing for these. We discuss these changes in more detail below. Payday reporting From 1 April 2019, all employers will have to move away from the current practice of filing the Employer monthly schedule (IR348) once a month and adopt payday reporting, which effectively requires employers to provide income information of employees on a real-time basis. It is critical that all employers consider the changes that are required and start executing them now to ensure they are able to comply with the new rules, which are compulsory from 1 April next year. Summary Currently, employers file an Employer monthly schedule (IR348) with Inland Revenue monthly. Depending on the size of employer, they will also file an Employer deductions (IR345) form once or twice a month, which accompanies their payment. The new rules move away from monthly reporting to payday reporting. The intention is that the provision of information will simply become part of an employer s general payday process rather than an additional task that is required to be undertaken separately at a later date from processing the payroll. However, payment dates remain unchanged. This means that employers will continue to pay their PAYE as they currently do. Further, in the short-term, employers will be required to file employer deduction forms until Inland Revenue s system developments have been fully completed. There are also changes to the information that employers will have to provide to Inland Revenue about new and departing employees. 2
Detail The new rules divide employers into three groups with different requirements applying for each. Therefore, it is important for employers to determine which group they belong to. The online group The online group is the default group. Most employers will fall into this group. Payroll intermediaries are also included in the online group. This group of employers must electronically report employment information within two working days after each payday (except for special payments). The Commissioner can exempt some employers in this group from the requirement to deliver their employment income information electronically. The non-electronic group An employer will be included in the nonelectronic group if: they withheld less than $50,000 of PAYE and employer s superannuation contribution tax (ESCT) in the previous tax year (or have an exemption from the online group); and they submit their employment income information on paper. The new employer group New employers have a six month transitional period in which they can apply the non-electronic group rules. The non-electronic group (including the new employer subset) have the option to either: report employment information within ten working days after payday (except for special payments); or treat the 15th and the last day of the month as their paydays, then report within ten working days of those dates. This group must file their information on paper, and if they choose to file online, they will move into the online group (and have to report within two working days of payday). To reiterate, anyone who files online will be in the online group, regardless of whether they are below the $50,000 threshold. What is a payday? A payday is the day on which an employer makes a PAYE income payment to an employee. This is the day the employer instructs the bank to make the funds available to employees. For an employer in the online group, this would mean that they have to report employment information within two working days of each time they make a PAYE income payment to an employee. However, the rules do provide some concessions to reduce the compliance costs for reporting special types of pay (special payments). Special payments are: out-of-cycle pays schedular payments payments to employees on shadow payrolls, and employee share benefits. Out-of-cycle pays Out-of-cycle pays may occur, for example, where timesheets have been received late or an employee s employment is terminated. For an employer in the online group, the options are to report: within two working days of the out-ofcycle payment; or with the next regular payment of salary and wages. However, the option to report with the next regular payment of salary and wages is only available where the out-of-cycle payment will be reported within the PAYE payment period. Schedular payments Schedular payments include payments made to certain classes of contractors, company directors, and commission sales people. Many organisations often pay these individuals outside of the payroll system, and may pay them irregularly throughout the month. For an employer in the online group, the options are to report: within two working days of the schedular payment; or twice monthly this allows the employer to report payments made between the 1st and the 15th of the month as if they had been made on the 15th of the month. For the second half of the month, the payments can be reported as if they were made on the last day of the month. Shadow payrolls and employee share benefits For both shadow payrolls and employee share benefits, employers are allowed a 20 day deferral period which means that their reporting happens 20 actual days after the taxing point (on the deferral date). An employer in the online group then has the option of reporting: within two working days of deferral date (e.g. up to 22 days after the taxing point); or twice-monthly using the deferral date (in the same way as for schedular payments). The rules for each of these special payments can be complex. We urge employers to consider how they will use and implement the concessions. 3
Employee information Employers will be required to provide Inland Revenue with prescribed information on new and departing employees. This is to ensure that new employees are set up correctly from the beginning, and also to prevent Inland Revenue from contacting employers about former employees. Employers will be encouraged to provide new employee information as early as possible, but are not required to provide it until the first time payday information is filed for each new employee. Similarly, information on departing employees is required at the time of the last payment to the employee, but it can be supplied in advance. Those employers in the online group will provide this information electronically, but paper forms will still be available for the non-electronic group to communicate this information. Penalties The penalty regime will remain largely the same, and the late filing and nonelectronic filing penalties will remain monthly. As such, an employer will not be penalised for filing late or nonelectronically more than once in a month. For example, an employer with weekly paydays who files late twice in any given month will pay the same late filing penalty as an employer who has a monthly payday and files late. Where to from here The onus is on employers to ensure that they will be ready for these changes. You should be considering the changes and the impact they will have on your business. Below are some questions that will help you assess your readiness for the payday reporting changes: Have you reviewed your current PAYE reporting processes and considered how these will need to change? Is there someone responsible for managing the change? Have you been in contact with your payroll provider on this? If you have purpose built software, have you started working on the required updates? Do you know when the updated payroll software will be ready? Have you considered early adopting? How does this fit in with year-end, etc? Are you willing to leave this until it becomes mandatory? Do you make any special payments, and have you considered how you will report these? Have you reviewed the employee onboarding process and considered what the changes will mean for this? Further, at a minimum, by now you should have: identified a driver responsible for managing the change; and been in contact with your payroll vendor. As noted above, there are penalties for non-compliance with the new rules. However, non-compliance could also result in additional Inland Revenue scrutiny over your payroll. We can help We have been assisting a number of our clients to ensure they are ready for payday reporting including an assessment of their readiness, development of new processes and procedures and assisting with technology build. Please get in touch with our payroll specialists, Phil Fisher and Josie Goddard or your usual advisers if you have any questions. Phil Fisher T: +64 4 462 7159 E: phil.j.fisher@pwc.com Josie Goddard T:+64 4 462 7160 E: josie.r.goddard@pwc.com 4
Other changes In addition to employment income information, real time reporting is also required from 1 April 2020 for investment income. The changes relate to improving the frequency and level of information in relation to distributions, including electronic filing and improving the administration of RWT exempt status. These changes will impact payers of interest, dividends, royalties, PIE income, and taxable Māori distributions. In summary, the key changes are: Payers of interest (including interest on domestically issued debt subject to the approved issuer levy), dividends, and taxable Māori authority distributions to provide investment income information to Inland Revenue by the 20th of the month following the month in which the income was paid. A multi-rate PIE that is not a superannuation fund or retirement savings scheme will be required to report investment income information to Inland Revenue yearly by 15 May after the end of the tax year. A transitional measure: payers of income subject to RWT and NRWT (apart from royalties) are to report the required year-end information by 15 May, rather than 31 May, for the tax years ending 31 March 2019 and 31 March 2020. An investment income payer paying more than $5,000 of interest will only need to withhold RWT and report monthly on payments of interest where the payments relating to a taxable activity exceed $5,000, notwithstanding if total interest payments made by the payer (i.e. including payments not made in the course of a taxable activity) exceed $5,000. Proposed changes to tax administration for individuals The Taxation (Annual Rates for 2018 19, Modernising Tax Administration, and Remedial Matters) Bill proposes changes to simplify the way individuals engage with the tax system. The provision of income information on a timely basis underpins the proposals that are contained in the Bill. At a high level, the proposed changes, if enacted, should achieve the following: help to ensure individuals are taxed most appropriately through the tax year by ensuring the correct amount of tax is withheld on income received. make year-end obligations as simple as possible including pre-populating accounts and assessing all individuals, with varying levels of engagement required from the individual. We discussed the proposed changes in our Tax Tips released last month. Our comment All of these changes result in Inland Revenue having more timely information that enables them to better interact with taxpayers. However, in our experience, many organisations are not aware of the impending changes and therefore minimal actions have been undertaken to date to ensure they are ready to implement the required changes come 1 April next year (which is only 7 months away). We strongly urge all taxpayers to consider the impact Inland Revenue s business transformation will have on their business and plan adequately as implementing any changes at short notice can be extremely disruptive. 5
Inland Revenue releases draft guidance on the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 Inland Revenue has released draft guidance on the recently enacted Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, which introduced significant changes to New Zealand s tax regime for cross-border relationships and transactions. The materials are divided into draft reports on (i) hybrid and branch mismatches, (ii) transfer pricing, (iii), permanent establishments, (iv) interest limitation rules, and (v) administrative guidance. In the August edition of Tax Tips, we shared the six things you need to know about the new rules, including unexpected outcomes we have observed. The majority of the new rules apply for income years beginning on or after 1 July 2018. and other submitters emphasised the need for comprehensive guidance throughout the submission process given the complexity of the new rules and its effects on various existing tax regimes. We are pleased to see the release of over 150 pages of guidance. We are reviewing these insights and examples in the light of the scenarios that we have been discussing with Inland Revenue and, in particular, where queries were raised to clarify when situations are intended to be captured. Inland Revenue has invited feedback on the draft guidance. Taxpayers now have the opportunity to assess whether sufficient clarification has been provided or whether further explanation is still required. The closing date for feedback is 28 September 2018. The final version of the guidance will be issued early next year. It is encouraging that some concerns related to applying the rules have now been addressed. However, the rules themselves remain complex even with guidance. We encourage you to seek advice from your usual adviser to confirm how your business may be affected. 6
Contributors Phil Fisher T: +64 4 462 7159 E: phil.j.fisher@pwc.com Peter Boyce T: +64 9 355 8547 E: peter.boyce@pwc.com Helen Johnson Director T: +64 9 355 8501 E: helen.n.johnson@pwc.com Sandy Lau Director T: +64 4 462 7523 E: sandy.m.lau@pwc.com Briar Williams T: +64 9 355 8531 E: briar.s.williams@pwc.com Erin Venter T: +64 9 355 8862 E: erin.l.venter@pwc.com Briar Paterson Director T: +64 9 355 8236 E: briar.k.paterson@pwc.com Josie Goddard Senior Manager T:+64 4 462 7160 E: josie.r.goddard@pwc.com Laura Lee Senior Associate T: +64 9 355 8346 E: laura.e.lee@pwc.com Connect with us Follow us on Twitter @_NZ Visit us online at pwc.co.nz Email us tax@nz.pwc.com 2018 Legal. All rights reserved. refers to the Legal member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.