Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill

Members, that brings us to Part 3, which is a debate on clauses 186 to 284 and schedule 2.

I am pleased to speak about Part 3 of this very important bill. It’s the part of the bill that deals with PAYE and how employers pay PAYE. I think it’s a really interesting part of the bill, because it’s one where the Finance and Expenditure Committee worked together very hard to ensure that the pretty good changes which have been proposed under the bill were actually improved a little to make it easier for business.

There’s a really old principle in tax law, set up first by Adam Smith in his great book, The Wealth of Nations, published in 1776. One of his principles for a really good tax is that “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the [taxpayer].” When it comes to PAYE—that’s the tax that all of us pay on our salary and wages if we are salary and wage earners—it is pretty convenient for us as salary and wage earners because our employer is the person who does all the work around the tax. So, as ordinary people, they kind of almost have nothing to do with the calculation of tax, but employers have to do it on their behalf.

One of the interesting things that’s going on with the big Business Transformation project of the IRD is that they are working really hard on working with employers and using that Business Transformation project to make it more convenient, to make it easier, for employers to calculate and pay their PAYE. So as part of that, there have been a whole set of changes to the Tax Administration Act to make it easier for employers to pay tax—in particular, now, employers are going to be asked to calculate PAYE on a payday basis. So every time they’re running a payroll, they’ll run the PAYE at the same time, and that information will get sent over to the IRD. That was the change in the original bill, but one of the interesting things that came out of the Finance and Expenditure Committee was that some employers found that wasn’t going to be so convenient after all. In fact, for some employers having to report the PAYE information every single payday was going to be very inconvenient.

It turned out that those employers were in fact the very small employers—the people who were perhaps still working with paper, the people who had only one or two employees. So one of the changes that the select committee has suggested is that, in fact, some of those very small employers, the ones who have a payroll maybe of about $200,000 a year, maybe one or two or maybe three employees, they can still continue—and if they’re working on paper, instead of doing those calculations and paying it up and sorting it out with IRD every payday, they can elect to do it twice a month instead. So, in other words, the number of times they have to communicate with IRD is reduced, that reduces their compliance cost, and it makes paying the tax more convenient for them. That’s a change I really recommend that has come through from the Finance and Expenditure Committee.

Look, there was another change, and, at first glance, this does look pretty bad. There’s a payroll subsidy for small employers. Very small employers who are working through what we call a PAYE intermediary—someone who would calculate the PAYE for them—could get a subsidy for that. It wasn’t a very large subsidy, but it was enough to make it a bit easier for small employers to calculate and pay PAYE. Now, in the original version of this bill, that subsidy was removed altogether, but, as it turned out in the submissions which came in, a lot of small employers made the case, saying, actually, it was still pretty hard for them to calculate tax; actually, they still needed a hand with it; actually, it would make life easier for them if they could still access that subsidy through a PAYE intermediary. So that is exactly the change that the select committee has recommended. The change we’ve proposed is that employers who have less than $50,000 of PAYE deductions each year—so that’s going be about $200,000 of salary and wages; one, two, or three employees—they can still get that payroll subsidy.

So that’s something that select committee has suggested. I recommend it as an example of making PAYE much more convenient, much easier for employers to calculate and pay.

Thank you very much, Madam Chair, and, I must say, the introduction to tax legislation on the Finance and Expenditure Committee has been a surprising pleasure of my time in Parliament. It was, I must say, interesting to sit on that select committee and just understand some of the tensions in tax law and the real need to balance the department’s demands for efficiency against the public’s need for workability and simplicity. I must say, the select committee received some very good advice that was really well-balanced, and, as we go through this Part 3 of the bill, it has some technical aspects, but, in fact, really, what it’s about is assisting the IRD with its Business Transformation project and ensuring that they have information which is timely and accurate so that the tax is paid as accurately and as timely as possible, in a way that’s most likely to be paid.

Having said that, it’s clear that in some cases, that provision of information is an undue burden, and it’s quite right that we identify where the costs, whether they be costs in time or money, are balanced against the usefulness of that information on time. So we look, for example, at the reporting of tax information on paper or via the internet on myIR, the internet platform, and the fact that for some people, using myIR simply isn’t feasible. In those kinds of situations, the reporting at regular intervals on payday is really not appropriate because it simply takes too much time, it’s too cumbersome, and it’s much easier, in fact, to do it after the event. So at select committee that was one of the important changes which were introduced. Similarly, and perhaps more technically, employers with shadow payrolls—overseas employers who, in fact, are employing New Zealanders—indeed, were not required to do reporting on a payroll basis. So there’s another example.

Also the transition, the payroll subsidy—the idea that payroll agents who provide that information are able to be subsidised. It’s only a few cents per employee, but nevertheless it’s some millions of dollars that the revenue forgoes—the idea that that be not taken away immediately but that it be reduced over time, because some of those small employers are going to have to learn how to put those returns in in a timely basis. So, firstly, that threshold is going to be lowered down to $50,000 rather than $500,000 in terms of PAYE, and the time for implementation is being pushed out, ultimately, to 2020. But, having said that, this is part of the transformation project; I do think it’s really important in this transformation project that we don’t leave behind those people who still struggle with electronic filing and so on. We’ve got to have a tax system which accommodates everyone.

This part of the bill also deals with resident withholding tax, and tax on dividends and interest income. One of the important changes is, in fact, the increase of the non-declaration rate to what is, essentially, in our tax framework, a penal rate of 45 percent. That’s to make sure that people actually do give their banks or the companies who are paying them dividends their IRD number so that that matching process can go on and we can follow people’s overall income. So that’s an important move as well.

The other area in respect of resident withholding tax was the requirement of payers of interest and dividends to report. Now, this is a pretty well-known requirement. We know that our banks report to the IRD. But, in fact, what became clear was that there were numerous transactions where interest would be paid, perhaps through family loans or other modest arrangements, where the tax would be only a few hundreds, or perhaps thousands, of dollars. In fact, the liability for that, along with the cost and, in fact, the fact that the person receiving or paying that income may not even know that it was captured by the Income Tax Act meant that it was entirely inappropriate. So a threshold of $5,000 for investment income was placed on that. So it’s not required to declare or to provide that information to the revenue.

So, overall, obviously, this is a bill which is intended to improve the Income Tax Act. It’s really an administrative bill to make it work better, but it’s good to see that through that select committee process, we’ve managed to soften the hard edges of it, make it more workable, and this certainly will improve this piece of legislation. Thank you, Madam Chair.

Thank you, Madam Chair. Can I thank the Finance and Expenditure Committee for the work that they’ve done on this part of the bill, which, as other speakers have said, reforms the administration of the PAYE system. The first point I would make to the committee is that these changes are intended to reduce compliance costs by, essentially, aligning the Act with what is modern computerised practice enabled by computerised PAYE systems.

PAYE systems are now set up being able to electronically forward the data to the Inland Revenue Department at the same time as the payments are made to employees, more often than not on a fortnightly basis. Most people are paid fortnightly; some are paid weekly. It’s inconvenient to employers to have to do that on a monthly basis when their computer systems are spitting it out on the pay period when people are actually paid, and it’s easier for them if we align their obligation to make their returns to the Inland Revenue Department when they’re making the payment. There is no unfairness to employees here. The employer isn’t paying the money; they’re deducting it from the wages of the person who is in their employ. Instead of paying that part of the wages to the employee, they are deducting it at source and handing it on to the Inland Revenue Department, and now that technology enables this to be done virtually instantly with no inconvenience to the employer—and, indeed, with greater convenience to the employer—what this part of the bill does is make that the new norm so that in future the PAYE reporting obligations of employers will be occurring at the time they pay their employees and make the deduction. So requiring this to do this seems eminently sensible to me.

In respect of the Finance and Expenditure Committee (FEC) recommendations, they do make a recommendation in respect of out-of-cycle payments, which is an amendment to allow employers to include reporting on out-of-cycle payments of employment income with their next regular payday report except where this would carry information over beyond the end of the PAYE payment. As introduced, the bill would have required out-of-cycle payments to be reported on a per payday basis, and as a consequence the FEC has come up with what seems to be a practical change to that proposal.

In respect of late filing and non-electronic filing penalties, amendments are being made as recommended by FEC to give inland revenue discretion in applying late filing and non-electronic filing penalties during the transition to the new payday reporting requirements. I think that’s sensible. There is a period here when parties will be transitioning to the new regime, and I, for one, am very happy to trust the wisdom of the officials at inland revenue to give them a discretion to waive penalties so that their focus can be on education, as we transition into this new, more efficient scheme, rather than punishment for early non-compliance. That seems sensible to me, and I think the FEC can be congratulated.

There’s another practical change. There is an amendment to allow a regulation-making power to enable transitional regulations to be made for correcting errors in employment income information so that they can be made from the date of the Royal assent, rather than having to wait for the new empowering provision to come into effect. If there’s a need for a transitional regulation-making power and it’s identified earlier, it seems sensible to me that we get that regulation in place from the date of Royal assent rather than from coming into force, so that by the time it comes into force those regulations can be in place, and the operation of the regime is more practical and simpler for those who are collecting tax on behalf of the Government.

It is with some trepidation that I stand to speak on the amendments to the Tax Administration Act, following, as I am, Drs Webb and Russell with their in-depth knowledge of this topic. One wonders where one can go after such great in-depth knowledge and work. Then, of course, the Hon David Parker stood to fill any gap that did exist, with his vast knowledge and experience.

But I look at Part 3 and I then dig deep into my own experience with tax, having been in charge of quite a large company for several years. I look down through these provisions and look at just how commonsensical they are, just how much they will improve the whole system and the efficiency of the system. I would like to congratulate the Finance and Expenditure Committee for the work they’ve done and I comment on the fact that it is, obviously, done—with one serious exception—with cooperation between the parties.

But I look at the requirement for employers to provide the Inland Revenue Department with information about their employees’ income on deductions on a payday basis rather than on the current monthly basis. I just reflect on how much sense that really does make. So many workers these days—the employers are approached and are under some pressure to advance to their workers because so many of them do actually struggle to make ends meet, and payday looms large as something that is going to make a major difference to their families and themselves. So payday to payday is where so many people, so many workers—and, subsequently, the employers—are living their lives. So this proposal requiring of employers information about income on a payday basis rather than the current monthly basis does make sense, and I certainly commend that, as I do when I look at the information about new and departing employees.

One thing that any system, tax or otherwise, when we look at employment—is to make ease of employment at a time when certainly our Government is focused on ensuring we get as many people into work as possible, and it’s incredibly important that we make that as seamless as we can. As many people who haven’t worked for some time come back in, anything—something relatively simple—can provide something of a barrier to them and confusion, and can impact on not only their work performance but also their very confidence in the system. So when I look at the information about new and departing employees, requiring employers to provide inland revenue with that information, again I reflect on how much common sense—and we’ve spoken before about the work done by that committee, and I congratulate them that they’re able to come up with such sense.

I look at another provision there: the declaration of entitlement to work in New Zealand. Well, again, something of a confused area, particularly when we saw the vast increase in the number of those who were coming into New Zealand in recent times—so, again, an area that’s absolutely essential that we give those who’re involved in the workforce, both employer and employee, clear rules around that. Repealing the requirement for an employee, when advising their employer of their tax code, also to declare their entitlement to work in New Zealand—well, again, now we’ve seen where that has left employers vulnerable, taking the work. It would be nice if we lived in a world where we could always believe everything we were told. I think employers now will be very complimentary of the system, because it makes it quite clear that really the existing requirement is not needed for tax purposes and actually the obligation is on employers to determine that prospective workers are legally entitled to work for them. So actually repealing that requirement for the employee—again, it makes considerable sense.

Also again, as I go through these provisions, I’m amazed that just something that starts—and when one looks at it, one can actually be somewhat glassy-eyed, but as I dig deep, so much of this actually applies to so many of us. Again I congratulate the committee—the changes to the collection of investment income information. I look at how many, come tax return time, when we’re looking at how many of our dividends were imputed, just putting things together—[Time expired]

I move, That the question be now put.

Motion agreed to.

The question was put that the amendments to Part 3 set out on Supplementary Order Papers 13 and 16 in the name of the Hon Stuart Nash be agreed to.

Amendments agreed to.