Good morning and thank you for inviting me to your 20th Annual Payroll Conference. It is a pleasure to be here.
You’ve asked me to talk about how Inland Revenue’s ‘Making Tax Simpler’ is progressing and how advice and feedback from payroll professionals like yourselves shaped the proposals in the forthcoming Bill.
I’ll talk to you about the current PAYE proposals- what they cover, how they’ll be implemented and how we used your feedback in their development.
But first, I think it’s useful to look at the background and provide some context for the development of these proposals.
As you’re aware, through the Business Transformation programme, Inland Revenue is investing in a complete overhaul of the tax system: involving customers, staff, policy, processes and replacing aging technology.
The objective is to take advantage of modern digital systems to make tax less onerous and to integrate tax requirements into normal business processes.
In doing so, we want to enable businesses to spend more time focusing on growth and innovation – developing productive opportunities and not be tied down with compliance requirements.
Put simply, it’s about Making Tax Simpler. Making it easier for people to deal with Inland Revenue and get it right from the start.
This transformation is a multi-staged process, taking place over several years. While we’re working at pace, we need to ensure it’s meeting the needs of New Zealanders, so we’re being very deliberate in our approach.
We want to ensure it is manageable and successful for all parties while minimising risk to this critical part of our economy. And it’s already delivering solid gains.
The first stage has gone live with a number of core processes and filing GST direct from accounting software has been possible since early 2016.
Of course GST isn’t a payroll issue, but the success and positive feedback these significant changes have received shows that the changes are working and delivering benefits. While there have been a few technical issues to work through (as was expected with such a large change) we can have real confidence as we move forward with PAYE and other future initiatives.
For example, last year, following the introduction of direct GST filing from software, Inland Revenue asked more than 4000 SMEs what had changed for them since 2013 and found that on average:they’re spending 25% less time on tax, their in-house costs have reduced 24% and around half say tax isn’t stressful!
Along with the key Transformation goals of time saving and reducing tax costs, we are also endeavouring to reduce ‘tax stresses for SMEs, so that’s a great start.
Further to that, the recent, February 7 “Stage 1 cut-over” included additional GST improvements which will take full advantage of the efficiencies technology can provide. Amongst other things the new capabilities enable customers to more easily amend returns and track payments and refunds on line.
So the key Government objective, taking advantage of modern digital systems, making tax a less onerous part of taxpayers’ lives and integrating tax requirements into normal business processes, is being achieved with GST.
We recognise that issues and opportunities around PAYE are very different to GST but I’m confident we can achieve similarly positive results.
Last November, my predecessor, Michael Woodhouse, outlined a number of proposals aimed at making tax a less onerous part of the payroll process. The PAYE proposals focussed primarily on how you do it – process improvements.
The proposals are designed to provide significant efficiencies and better integrate tax into your core business processes. Our objectives are:to update PAYE processes so that employers using software can get more value out of it. to make providing PAYE information part of the payday process rather than on a separate timetable to suit Inland Revenue
Rather than reiterate the detail of these, of which you will largely be aware (and which you can discuss in IRD’s presentation later today), I thought you may be interested in how your submissions informed the proposals.
Firstly, can I thank you for the nearly 90 written submissions and 1,000 comments we received on the original proposals through the Making Tax Simpler consultation.
The advice and feedback from you, the payroll professionals, and other experts has been carefully considered.
This feedback has helped shaped the Government’s decisions which are reflected in the Taxation bill which I am proposing to introduce very shortly.
Effective from 1 April 2019, we are proposing to replace the requirement for an employer monthly schedule with ‘payday’ reporting of employee information. So as part of the payroll process, you can integrate the next step, the provision of PAYE information to Inland Revenue. Do it all at once, direct from the payroll software, on the payday timetable your business has established, not a date set by Inland Revenue. Specifically:employers using payroll software, payroll intermediaries and those above the electronic filing threshold will report their PAYE information within 2 days of payday those below the electronic filing threshold and not using software will have 7 days after payday to report.
This proposal also has benefits for the wider community. Providing this information on a payday basis will help IRD improve how they administer such things as Working for Families, Child Support and Student Loans. Payday reporting and faster processing will reduce the likelihood that employees will miss out on entitlements or incur debt.
The current delays in receiving and processing the information in the current system mean it can be months before issues get picked up and corrected. Correcting employee information more quickly will be a significant win and importantly, should reduce the queries you have from employees about issues with their tax or other deductions.
Although the proposal is that payday reporting of PAYE information will be required from 1 April 2019, Inland Revenue is working on providing payday reporting for early adopters who are keen to use the system sooner.
So how did your feedback help shape this Payday Reporting?
Submissions were generally positive from employers with large payrolls, their representatives such as Business New Zealand and from the payroll software industry.
A common area of comment raised was around the processes for error correction and adjustment and access to already filed information.
I am told that you will have better access to already filed information and further consultation is proposed on processes for error correction and adjustment - these are aimed at largely automating the process. The objective is that when you correct information in your payroll system, it should generate the information Inland Revenue requires - making these requirements a natural by-product of your own process.
Submissions from employers with small payrolls were mixed. Some who were using payroll software thought that everybody should and supported the proposal to be able to file PAYE information directly from software.
However, a number voiced their concern about all employers being required to use payroll software – 45,000 New Zealand employers have only one staff member and some employers felt that they were just too small to justify payroll software.
The proposals in the bill that I am introducing to Parliament will not require employers to use payroll software. But it will require all employers to file information relating to each payday. Employers not using software will be able to file their PAYE information through Inland Revenue’s website and an updated version of myIR.
The smallest organisations will be able to file on paper if they prefer although we are hoping that the new digital services will convince many to go online.
Reduced threshold for electronic filing PAYE information
A reduced threshold for electronic filing of PAYE information was proposed. In 1999, a threshold of $100,000 a year of PAYE and ESCT was set for electronic filing. Employers above this threshold need to send their PAYE information to Inland Revenue electronically, organisations below the threshold can file on paper. This hasn’t changed since 1999, but business practices certainly have.
Today, most organisations are connected to the internet. They do their banking, and a multitude of other normal business activities, online. Just over 91% of payments made to Inland Revenue are made electronically.
Feedback on the reduced threshold was mixed. Over 63% of those below the current electronic filing threshold already file electronically and the number filing electronically is increasing each year. Despite the mixed feedback, because electronic filing is less costly to administer and administration costs fall on taxpayers, the Government is proposing to reduce the electronic filing threshold.
The proposed new threshold of $50,000 a year of PAYE and ESCT will still exempt the smallest organisations. As an indication, it would require an employer with four full time employees at the average wage (or ten full timers at the minimum wage) to file through Inland Revenue’s website or through payroll software. And there will be an exemption from electronic filing for any employers who cannot access digital services.
Paying PAYE at the same time you pay your staff
We also listened to your feedback on the proposal that employers pay PAYE to Inland Revenue at the same time you pay your staff. While some commented that this would reduce compliance costs, a number of businesses were concerned about cash flow. It’s worth noting that this money doesn’t belong to the employer and is effectively held in trust until it is time to pay it to Inland Revenue. Paying it to Inland Revenue on payday could:further reduce compliance costs, potentially reduce the likelihood that the money is used for other purposes and enable PAYE and deductions of KiwiSaver contributions, student loan repayments and child support payments to be passed on more quickly.
In light of the submissions, the Government decided not to require employers to pay their PAYE and other deductions to Inland Revenue on payday. The current payment obligations, either twice monthly for the largest employers and payroll intermediaries or monthly for the rest, will remain the same. (However, if employers want to take advantage of doing everything at the same time including paying Inland Revenue on payday they will be able to do so.)
Ending Current Payroll Subsidy
In line with the more widespread use of electronic services, the Government has also decided to end the current payroll subsidy from 1 April 2018.
In the early days of electronic filing, the subsidy helped improve the quality of PAYE information transmitted to the IRD, by encouraging employers to use listed payroll intermediaries. But time and technological advances have overtaken the subsidy and we believe there is no longer a case to subsidise (a maximum of $10 a pay run) one type of payroll service over others.
Not surprisingly, many submissions suggest the subsidy should be extended or that Inland Revenue should make payroll software available for free. The Government has not accepted those suggestions. Through the changes I have outlined this morning it is instead proposing to invest in making the system better for all employers.
Some final thoughts
Earlier I mentioned that Inland Revenue’s Business Transformation is being managed in stages. While this means that risk is being managed prudently, it also means that some of the benefits might be staggered. For example, the benefits from increased processing speed won’t be completely realised until all PAYE information is fully processed in the new computer system - that is not expected to be until late 2019.
The changes from Inland Revenue’s Business Transformation will open up a fully digital system for those who want to eliminate paper interactions with Inland Revenue.
Our new software will make changes more quickly but, as mentioned, technology is only part of the solution, both business and Inland Revenue will need to change processes and continue to look for and share improvement opportunities.
Government recognises that the requirement to change processes will involve some costs in the short term but as evidenced by the GST example, real compliance cost reductions are achievable by updating our tax systems.
So, those are the main PAYE proposals arising from last year’s public consultation. Feedback in the consultation phase was hugely valuable and was critical in their development – again, my sincere thanks for your contributions.
Please also be assured that you are welcome to comment during the select committee stage. If you don’t know how to do that I suggest you Google “How to make submissions to a select committee” there is a handy guide available and submissions can be made electronically.
I know these proposals involve changes and change can always be a bit daunting… but what I’ve outlined today is intended to help make the PAYE component of your jobs a little easier and a little smoother. They should also help businesses by making their processes a little less costly and assist individuals by helping to make their tax affairs more accurate.
Thank you again for inviting me to speak to you today. I very much look forward to continuing to work together and looking for improvements.