Outsourcing payroll compliance overseas? Beware the risks

By Mike Williams and Conor Gates

As companies look to rationalise and leverage greater efficiency in back office processes, it has become  common for many of the HR and finance functions of New Zealand businesses to be provided by the HR or finance team of a foreign entity.  In some cases, this will be an outsourced function of the business set up specifically to deal with the back office functions on a global basis.  For New Zealand businesses, this service is often carried out by an Australian parent of the New Zealand business.  The functions undertaken vary from company to company, however we commonly see the New Zealand entity’s payroll, GST returns, FBT returns and even corporate income tax returns being prepared by a centralised back office function based overseas. 

It may seem a good idea to rationalise such functions given the tax regimes in each country may seem similar.  With the help of New Zealand specialised software, how hard can it be for the foreign team to complete the work?  Well, in reality it can be much harder than first anticipated and does come with some risk.  While the withholding and reporting regimes may be similar in name or in nature, particularly in Australia, and while the software employed can do most of the work, there are fundamental differences in New Zealand’s rules and requirements that offshore preparers are often not aware of.  This leads to an exposure that returns are prepared and filed incorrectly and reporting is either incomplete or incorrect.

We have become aware that Inland Revenue has recently turned their attention to New Zealand entities outsourcing its tax compliance processes to an overseas entity.  In particular, Inland Revenue has been focusing its audit activity on Australian prepared GST and FBT returns.  While Australia has both GST and FBT regimes, the tax rules within these regimes are fundamentally different in some respects.  It is common for a preparer to assume a certain tax treatment based on Australian tax rules, but which is the completely incorrect treatment in New Zealand.  This creates a real risk that the returns being submitted to Inland Revenue are inaccurate. In times gone by, this may not have been an issue as the detection rate was relatively low. 

Anecdotal evidence and recent activity we have seen indicates Inland Revenue is very focused on this area currently.  Furthermore, Inland Revenue is having significant success in finding discrepancies in the audited GST and FBT returns of New Zealand companies that have been prepared in Australia. 

On top of this, Inland Revenue’s audit and analysis practices are becoming more sophisticated and commercialised.  Where a discrepancy is identified in a particular taxpayer, Inland Revenue is seeking to find other taxpayers with a similar profile or who are in the same industry to provide a much more effective and directed approach to identifying audit targets. 

Based on the success of Inland Revenue’s current initiative regarding GST and FBT returns prepared from Australia, we think it highly likely that audit activity will extend to Australian prepared payroll as it is becoming increasingly common for the New Zealand payroll function to also be carried out in Australia.  Like GST and FBT, New Zealand PAYE is similar to its Australian counterpart (the PAYG regime) however there are specific New Zealand rules around Holiday Pay, KiwiSaver and ACC levies which can easily trip up preparers who are not familiar with these rules.

If you are concerned that you may fall in Inland Revenue’s sights, we recommend that you seek advice regarding the preparation of your New Zealand GST and FBT returns.  A review of the relevant tax type can help you to identify where you may have current exposures and what steps may need to be taken to ensure that any future exposure is mitigated.  If a current or historic exposure is identified, you may wish to consider preparing and submitting a voluntary disclosure to Inland Revenue before Inland Revenue identifies any underpayments of tax. 

Although taxpayers that file a voluntary disclosure will generally be subject to interest charges, penalties are in most cases fully remitted.  In addition, Inland Revenue generally view both the commissioning of an independent review and the submission of a voluntary disclosure as good indicators that a company has a history of good practice and a desire to be low risk in terms of its compliance obligations.

Having just rolled past 31 March, now is a good time to focus on returns due in May.  The next GST returns are due for most GST filers on 7 May 2016, with the final quarter and annual FBT calculations due on 31 May 2016.  This presents an ideal opportunity to consider compliance under the relevant regime and a chance to take any remedial steps if needed. 

Specifically for FBT, we would also like to remind our readers of the dangers of using the final quarter FBT calculation as an opportunity to ‘wash-up’ the treatment of any fringe benefits provided to employees throughout the year.   As discussed on our article The danger of washing up FBT in the final quarter Inland Revenue’s view is that only adjustments with a tax impact of less than $500 can be made in the final quarter return.  Where taxpayers make more significant adjustments in the final quarter there is a risk that they will be exposed to shortfall penalties and interest.

If you wish to speak to specialists in either GST or FBT please contact your usual Deloitte advisor.

Tax Alert April 2016 Contents:

• Outsourcing payroll compliance overseas? Beware the risks
• GST on “remote” services
• The rise of holiday pay woes
• A step in the right direction – relaxation of the bank account requirements for IRD number / GST applications
• FBT errors – we are only human after all, right?
• Use of money interest rates to reduce