The Earner Levy Rate for the 2017 tax year will decrease from $1.45 to $1.39 for every $100 of liable earnings. This applies to all pay periods ending on or after the 1st of April. The effect of this is that employees can expect a small increase in take home pay as a result of the decrease.
The maximum liable earnings for the ACC Earner levy will increase from $120,070 to $122,063 for all pay periods ending on or after the 1st of April. Any income above $122,063 will not be subject to the ACC Earner Levy.
Inland Revenue has been aware of some uncertainty by employers on the correct tax treatment of holiday pay and so issued an Operational Position late last year (http://www.ird.govt.nz/technical-tax/op-positions/op-position-calculating-paye-holiday.html) to clarify their position. A payment of holiday pay can be either treated as “Salary and Wages” in which normal PAYE tax tables apply or as an “Extra Pay” which requires rates for extra payments to be applied. The method used depends on the circumstances in which the holiday pay is paid.
Inland Revenue distinguished 5 different scenarios:
1. Holiday pay paid in substitution of the employee's ordinary salary or wages when the employee takes annual paid holidays. Treated as “Salary and Wages” normal PAYE tax tables.
2. Annual holiday entitlements paid as a lump sum on the termination of an employee's employment. Taxed at “Extra Pay” rates.
3. Annual holiday entitlements paid as a lump sum before the holiday is taken (holiday pay paid in advance). Taxed at “Extra Pay” rates.
4. Annual holiday pay paid as a lump sum payment on the termination of employment where either there is no entitlement (employment terminated within first 12 month of employment), or before a further entitlement has arisen. Taxed at “Extra Pay” rates.
5. Holiday pay paid as part of an employee's regular pay at the rate of 8% of the employee's gross earnings. Treated as “Salary and Wages” normal PAYE tax tables.
Datacom sought further clarification on these scenarios as this treatment has not been widely adopted by payroll providers and contradicts certain IRD publications. Inland Revenue acknowledged the confusion and agreed that this change would apply from 1 April 2016 prospectively and will not apply any resources to correcting incorrect deductions made by an employer prior to 1 April 2016.
Fortunately there is nothing that you need to do differently when using Datacom Payroll software. We will make changes that will apply the amended rules for leave payments that happen in pay periods on or after 1 April 2016. However, you may receive questions from employees asking why tax on their annual leave has changed slightly.
Employees that are paid their annual leave in the pay period in which it would normally be paid (i.e. in substitution to their normal salary and wages) will notice no difference to the way they have been taxed in the past.
As long as the payment of leave is in the pay period in which it would normally be paid, then normal tax rules will apply. This scenario would include leave requests that have been set to pay in advance, where various pay packets are created in multiple pay periods, but are all paid out before the employee goes on leave.
However, leave payments that should be included in a future pay period, but are instead paid in the current pay period along with the employee’s normal salary and wages will be taxed using “Extra Pay” rates. Often, it has been the practice to simply add the leave in with the normal pay and have the system tax over multiple periods, to allow for the tax to be calculated based on the actual time this pay relates to. The practise of increasing the number of taxable periods to spread the payment over for tax purposes will no longer be available.
With regards to termination payments, any payments that are received after the employee’s last day of service, including all leave being paid out (but not taken) will be taxed at “Extra Pay” rates. The practise of increasing the number of taxable periods to spread the payment over will no longer be applied.
Other Legislative Changes
Should you require any assistance in regards to any of the above, please contact the Datacom HelpDesk on 0800 856 856 between 8:30am and 5:30pm Monday-Friday, where one of our consultants will be glad to help.