Bringing workers to New Zealand? Taxing rules to be modernised
Tax Alert - September 2022
By Jayesh Dahya & Mila Robertson
A common gripe for businesses bringing workers from offshore is that the New Zealand tax rules are difficult to comply with and expensive to get wrong, particularly non-resident contractors tax (NRCT). Consequently when Inland Revenue consulted on a range of improvements last year there was hope that these issues would be resolved. What we have in the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill (“the Bill”) is a range of proposed changes which aim to simplify the issues and complexities involved with cross-border work and improve certainty, efficiency, and fairness in the tax system. While the aim of the reform is positive, we’d describe the proposed law changes as a bit of a “mixed bag” which does not solve all problems.
PAYE, ESCT and FBT proposals – increasing flexibility
Sending employees to work in New Zealand can be an expensive exercise, especially if advice is not taken and managed upfront. Foreign employers may not understand their New Zealand employer tax obligations or may rely on exemptions that do not apply. This often results in backdated tax obligations which are costly to correct.
Our tax system should not deter foreign employers from entering New Zealand and should not impose excessive compliance costs. To simplify the PAYE, FBT and ESCT rules that apply to foreign employers, the Bill proposes the following changes:
- A 60-day grace period that would enable an employer to meet or correct their PAYE, FBT and ESCT obligations where they have taken reasonable care to manage their employment obligations. This will assist employers who have employees present in New Zealand where there has been a breach of either the:
o 92-day rule that exempts employment income derived by non-resident employees during short term visits to New Zealand tax; or
o The 183-day rule provided for under a double tax agreement (‘DTA’).
- To allow employers of cross-border employees to apply for bespoke PAYE arrangements. This would apply in “special circumstances”. Inland Revenue have noted that they will develop guidance on what constitutes “special circumstances”. This may be useful for non-resident employers with short term business travellers who have irregular travel patterns in and out of New Zealand, as this would allow PAYE to be settled once a year.
- Repeal of the PAYE bond system as this is rarely used.
Safe harbour for non-resident employers
Readers may recall on 1 December 2021, Inland Revenue published Operational Statement “OS 21/04 Non-resident employers’ obligation to deduct PAYE, FBT and ESCT in cross-border employment situations”. This imposed a “sufficient presence test” which was discussed in our February 2022 Tax Alert. A safe harbour has now been proposed if the non-resident employer has incorrectly determined they do not have an obligation to register as an employer in New Zealand. No penalties and interest will be imposed if:
- Either two or fewer employees are present in New Zealand at any point in the income year, or the non-resident employer pays $500,000 or less in employment related taxes in New Zealand for the income year; and
- The non-resident employer arranges for their employment related obligations to be met by another person, either a related entity or the employee themselves.
FBT for remote workers and employees of non-residents
Where a non-resident employer does not have a requirement to register for PAYE, FBT or ESCT, the obligation to account for PAYE falls to the employee and the tax is paid via registering as an IR56 taxpayer. Currently there is no obligation for those employees to account for FBT or ESCT.
Inland Revenue are clarifying that if a non-resident employer is not required to register as an employer in New Zealand, the PAYE, FBT and ESCT obligations transfer to the employee. This will mean that if remote workers receive fringe benefits or employer contributions to New Zealand superannuation schemes, the employees will need to shoulder the responsibility of understanding our FBT and ESCT rules and how to value benefits received. Employees will need to be aware that they will have to pay the FBT and ESCT arising, which are ordinarily costs that would be met by their employer.
Contributions to foreign superannuation schemes
The Bill proposes that contributions to foreign superannuation schemes (including contributions to sickness, accident, or death benefit funds) will be subject to PAYE, rather than FBT.
This may be favourable for employers who currently have a FBT filing obligations solely due to foreign superannuation contributions. Foreign superannuation contributions will therefore need to be grossed up for New Zealand PAYE and other applicable payroll costs. For those employers, currently paying FBT a change in process will be required to ensure these payments are captured via their payroll systems.
Non-Resident Contractors Tax (NRCT)
New Zealand businesses often find themselves at odds with the NRCT rules. Many contractors looking to work in New Zealand are not aware of the tax, and often contractual arrangements will impose the liability to pay it on the New Zealand business. This makes exemptions from the tax more important, but also means the rules create a real headache for businesses when an exemption which was expected to apply does not. The Bill proposes the following changes to the NRCT regime which are aimed at reducing the compliance costs:
- A 60-day grace period for a payer to meet or correct their NRCT obligations where at the time a payment is made, it is not clear that NRCT withholding is required and a liability to NRCT subsequently arises. This will operate in a similar manner to the grace period for PAYE discussed above.
- Allowing nominated taxpayers to meet the NRCT obligations of a non-resident contractor. This is intended to simplify compliance for non-residents who may have activities in New Zealand through different businesses. Each person, however, would be jointly and severally liable for the amount of tax due under such an arrangement. For the purposes of obtaining certificates of exemptions, a nominated person can establish a good compliance history for the non-resident contractor.
- Introducing a “single payer view”. This would mean the payer would only have to consider their contracts (and contracts with related entities) with the non-resident contractor in determining the days a non-resident contractor is present in New Zealand for the purposes of the 92-day presence rule or determining the total value of contracts under the $15,000 rule. Currently, payers are required to obtain details of all contracts the non-resident contractor has undertaken in New Zealand and in practice this has been difficult for payers to manage.
- Allowing certificates of exemption to have retrospective effect by allowing payments made before the exemption is issued to be covered. This would only apply to payments made 92-days before the person applied for an exemption.
Increased NRCT reporting requirements
With the good comes the not so good. New reporting requirements have been proposed that are likely to increase compliance costs for payers of NRCT. If enacted, this would require payers to provide the Inland Revenue with the following information:
- The names of the payer and payee;
- The date on which the schedular payment is made;
- Whether the schedular payment is paid within a grace period (detailed above);
- The contract address of the payer and payee, whether in NZ or otherwise;
- The tax file number of the payee of their foreign tax identification number;
- The gross amount of the schedular payment;
- The amount of tax withheld from the schedular payment;
- Whether an exemption applies in relation to the schedular payment;
- Whether a threshold applies in relation to the schedular payment; and
- The start and end dates of the contract under which the schedular payment is made.
The above information would potentially be required to be provided by electronic means on the 15th of each month following the commencement of a contract, a payment being made and the contract ending.
Overall it is positive to see reform to what is a deceptively complex area of tax, and incremental improvements are better than nothing. We hope that through the submission processes, some of the rougher edges can be taken away, particularly in relation to NRCT reporting requirements. Please get in touch with your usual Deloitte advisor if you’d like to understand more about how these proposals could impact your business.
September 2022 - Tax Alerts
- Dual resident companies get some relief under proposed tax changes but watch out! There may also be tax to pay!
- Insights from Inland Revenue’s International Questionnaire campaign. Are you in the expected normal range?