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PAYE changes and tax simplification

 

Inland Revenue (IRD) have recently released proposals and published the eighth discussion document in the Making Tax Simpler series, both of which aim to reduce the cost of tax compliance and administration for NZ businesses and individuals.

Under the current PAYE system, it can be difficult for IRD to collect the correct amount of tax from individuals over the course of a tax year. The nature of the system means that mistakes can be made when selecting PAYE codes, or if a person's income changes unexpectedly the amount of tax withheld over the course of a year is not likely to be accurate, leading to tax refunds or liabilities at the end of the year.

IRD propose increasing the frequency that employers provide information to IRD from monthly to every payday, which could be weekly or bi-monthly for some employees. This will be facilitated by the integration of accounting software with the IRD system, so that employee income and deduction information can be sent to IRD with a simple 'push of a button'. PAYE information will be sent as pay checks are processed, so payroll reporting will become an integral part of the tax process rather than a separate and additional function for employers. This will reduce the tax administration involved with employing staff and ease the compliance burden for businesses.

The proposals recommend that more detailed information will be collected more regularly on individuals' investment income, such as interest, dividends, portfolio investment entity (PIE) income, taxable Maori authority distributions and royalties.

The new rules will require the payer to submit information about individuals to IRD on a monthly basis, or whenever payments are made if the payment frequency is less than a month.

Taxpayers will still be responsible for providing any additional information to IRD, such as rental or self- employed income, however it will be possible for this to be provided via the online 'MyIR' system.

The IRD estimate that an additional $21 – $27 million of income tax revenue will be collected per annum under the new rules, and an additional 185,000 individuals will have their investment income included when determining their Working for Families entitlements, allowing more accurate calculations.

In summary, the proposals aim to use digital solutions to simplify the tax administration process. Both the PAYE changes and introduction of detailed reporting for investment income will give IRD more real-time information and ultimately give the Government greater insight into a taxpayer's financial position. This will 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.