Large enterprises update (formerly Corporates contact) - 2008

Large enterprises update - Number five: November 2008

• 2008 income tax filing season
• Imputation credit accounts (ICAs)
• Reminder - provisional tax due dates
• Using the "GAP" payment code
• EMS non payment penalties
• Royalties paid to non-resident associates-a quick health check
• Checklist for employer monthly schedules (EMSs)
• Making sure your IR345s and IR348s add up
• Show PAYE amounts clearly on payslips
• Completing paper forms correctly
• Risk review for large enterprises
• Kiwisaver update
• From the editor

2008 income tax filing season

Filing 2008 returns is now well under way. Here are some ideas to help speed up the process and improve the accuracy of our data (or make it more trouble-free).

• Use the correct 2008 version of the returns as the key-points change from year to year.
• Make sure losses carried forward are correctly entered.
• Your IR4S must have complete details of losses or shareholder salaries from IR4 returns.
• Put staples in the top left-hand side of the form instead of the middle (data can't be easily keyed in when the staples are in the middle).
• Only losses can be negatives.
• Please show a valid IRD number on all returns.
• Only accounts should be placed inside returns. Attach all correspondence to the top of the return so it can be detached and lodged in our correspondence system. This includes special transfer requests, provisional tax elections, loss letters, etc.
• Don't show your tax agent's street or postal address on the return, otherwise it will be updated and may overwrite the correct details on your account. Changes to agent linking/delinking must be done by INFOexpress, phone, or IR795 forms.
• Please don't tick Box 36L for IR3 or Box 30F for IR4 for refund by cheque if you have a bank account loaded by us. If you do, it'll override all our bank account details.
• If a company has changed its name, don't enter the change in Box 3, because our system will update it as the company's trade name - give us a phone call instead. All staff have access to the Ministry of Economic Development Companies website for company changes.

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Imputation credit accounts (ICAs)

If your IR4 company return results in a tax refund, your credit UOMI (use-of-money interest) is calculated on your ICA (imputation credit account) balance if this is less than the amount of your refund.

The relevant legislation is section MD 2(1) of the Income Tax Act 2004 and section 120M of the Tax Administration Act 1994.

Please note the law applies to Maori authorities in the same way.

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Reminder - provisional tax due dates

The due dates for provisional tax and GST were combined from the beginning of the 2008-09 tax year. For customers with a standard 31 March balance date, this change took effect from 1 April 2008.

The information below will help you to identify the provisional tax due dates for standard and non-standard balance dates. Look at the letters in the diagram below first because these show which columns to refer to in the table. The table provides the due dates for different balance dates.

The numbers in the diagram below refer to the months during the income year.

Compulsory provisional tax instalment due dates

Provisional tax instalment
Month of balance date	A	B	C	D	E	F
October	28 Jan	28 Mar	28 May	28 Jul	28 Sep	28 Nov
November	28 Feb	7 May	28 Jun	28 Aug	28 Oct	15 Jan
December	28 Mar	28 May	28 Jul	28 Sep	28 Nov	28 Jan
January	7 May	28 Jun	28 Aug	28 Oct	15 Jan	28 Feb
February	28 May	28 Jul	28 Sep	28 Nov	28 Jan	28 Mar
March	28 Jun	28 Aug	28 Oct	15 Jan	28 Feb	7 May
April	28 Jul	28 Sep	28 Nov	28 Jan	28 Mar	28 May
May	28 Aug	28 Oct	15 Jan	28 Feb	7 May	28 June
June	28 Sep	28 Nov	28 Jan	28 Mar	28 May	28 Jul
July	28 Oct	15 Jan	28 Feb	7 May	28 Jun	28 Aug
August	28 Nov	28 Jan	28 Mar	28 May	28 Jul	8 Sep
September	15 Jan	28 Feb	7 May	28 Jun	28 Aug	28 Oct
Schedule 3, Part A, Income Tax Act 2007.

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Using the "GAP" payment code

If you pay your taxes electronically, it's important to code your payments correctly.

Please use the GAP code only when you're paying your GST and provisional tax together. If you're paying them separately, use the GST and INC codes.

If you choose the wrong code, there may be delays in crediting your payments to the right account.

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EMS non-payment penalties update

Legislation was introduced on 1 April 2008 which penalises employers if, after receiving notice of a late payment, they don't make their employer monthly schedule (EMS) payments by their due date. This makes it fairer for the majority of customers who do make their EMS payments on time.

This change took effect from November 2008.

Employers who've made full EMS payments between 1 April and November 2008 won't be affected. But employers with outstanding EMS payments when the system is introduced may receive a notice and then a penalty.

As employers, you are still responsible for making your EMS payments on time. So, please contact us right away if you think you may have problems making a payment.

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Royalties paid to non-resident associates - a quick health-check

In common with other tax administrations, we have been spending more time on issues involving the inbound licensing of intangibles.

We thought the following checklist might be useful to companies involved in licensing arrangements with offshore associates:

1. Is there an up-to-date licensing agreement in place?
   
2. Does the agreement clearly identify the intangible property being supplied and accurately reflect the commercial arrangement for the New Zealand market, or is it a standard document used in many markets?
   
3. Does the intangible property add significant and substantial value to the New Zealand business operations, taking into account existing valuable goodwill, monopoly position, local know-how or other domestic intangibles?
   
4. If a royalty is paid for using the intangible property, has a standard global/regional rate been used or has the rate been customised to the circumstances of the New Zealand business?
   
5. Some activities of the licensee may not require use of the intangible property – have these been excluded from royalty computations?
   
6. Has the 25% rule been used as a cross-check? Many licensing executives use this rule of thumb: 25% of earnings before interest, tax and royalties is generally considered at the top end of sums payable to a licensor absent unusual circumstances.
7. If royalties are high, relative to earnings derived from the intangible property, has consideration been given to renegotiating the terms of the licence? If not, why not?
   
8. For annual royalty payments of $1 million or more, is transfer pricing documentation available to support the royalties charged?
   
9. Has NRWT been deducted, and at the correct rate?
   
10. Has any additional assistance been provided from offshore in connection with the supply of scientific, technical or commercial knowledge or information? Such assistance may also be subject to NRWT.
    

Remember, it's the responsibility of local management to ensure a company's transfer prices are in accordance with the arm's length principle. Where substantial royalties are incurred to offshore associates, we suggest you seriously consider the possibility of working cooperatively with Inland Revenue and getting an advance pricing agreement.

If you have any queries about the above, please call one of our national advisors, Transfer Pricing:

Keith Edwards 09 984 4340
Robyn Rakete 09 984 4409
Mike Spelman 09 984 4327

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Checklist for employer monthly schedules (EMSs)

You may be aware we have at times been able to reverse incorrect employer monthly schedules, but this causes problems for all staff with child support deductions, student loan repayments and KiwiSaver deductions. From now on we will only be able to reverse an incorrect EMS for special cases.

Before filing your employer monthly schedule, please check the following:

• You are only filing one EMS each month (the period end date is located under your company IRD number). If your company is restructuring we still only require one EMS per month with complete details. If you have already filed your EMS and now want to add extra employees or change any existing details you need to use an Employer monthly schedule amendments (IR344) form, or an Excel spreadsheet in the same format, including ETC adjustments.
• Check your EMS has the correct period, including correct month and year, as well as all new and existing employees.
• You can only file one EMS per employer's IRD number. If your company has more than one branch, the file must be merged before submitting it to us, or alternatively, if you need an additional Branch IRD number, please contact us.
  
  

Make sure you have included all the pay days for the full month. For example, in the table opposite there are two Employer deductions (IR345) required but only one EMS.

Large employer due dates
Period PAYE deducted	Payment due date Employer deductions (IR345)	Due date Employer monthly schedule (IR348)
2 October 2008	20 October 2008	5 November 2008
9 October 2008	20 October 2008	5 November 2008
16 October 2008	5 November 2008	5 November 2008
23 October 2008	5 November 2008	5 November 2008
30 October 2008	5 November 2008	5 November 2008

If you're changing employer IRD numbers, please ensure the schedule is submitted for the correct IRD number. For example, if your company is bought out and the new owner combines both company payrolls into their existing IRD number, please ensure the EMS is submitted for the correct IRD number. Don't file a nil EMS if staff were employed and paid for that month.

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Making sure your IR345s and IR348s add up

When we receive your Employer deductions (IR345) form/s (see "Note" below), your Employer monthly schedule (IR348) form and your payment, we have to make sure these add up to the same amount, so please take care when completing these forms.

If the three don't balance it can lead to a debit or credit on your account, or may mean your employees' details may also be incorrect. For example, if a student loan payment is not the same on the IR345 form as on the EMS, the amount will show as a debit or credit on your account.

When we receive forms which don't balance, we may have to contact you to amend them and, in some cases we have difficulty doing them. For example, for large employers where the employer tax credit (ETC) is more or less than the employer contribution (CEC) amount we are having difficulties altering the figures in period 1 (1st-15th of the month), and may have to make the changes in period 2 (16th-end of month). This means the money owed to you or that you need to pay to us is available not on the 20th of the same month but on the 5th of the following month, so you may be charged a penalty for late payment and/or use-of-money interest.

The fastest, most convenient and secure way to file your employer deductions form and EMS is at "Get it done online".

If you do file online, please don't send in a paper copy of the forms as well.

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Show PAYE amounts clearly on payment slips

We've had a few queries about small employers (under $100,000 threshold) being changed to large employers in our system.

This can happen if the PAYE figures from an IR345 payment slip have been keyed incorrectly. For example, if a PAYE amount of $2,071.52 is keyed as $207,152.00 it will change your status from a small to large employer.

It's important you write the PAYE amount clearly on the IR345 payment slips you send us so we can key your PAYE correctly.

You are a large employer if your gross annual group PAYE and ESCT (employer superannuation contribution tax - see "Note" below) deductions are $100,000 or more.

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Completing paper forms correctly

Our imaging system scans all documents sent to us and it can't differentiate between the ways complete dollar amounts are shown eg, $170.00, or $170.

The correct way to fill out the cents column on your paper forms is:

$170.00 or $170.12

This will reduce errors and minimise delays in processing.

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Risk review for large enterprises

Each year, corporate groups with a turnover exceeding $300 million are subject to a risk review process. You can read more about this process in previous bulletins (December 2006, July 2006). This year, we improved our best practice for risk assessment through feedback from tax managers. Changes included:

• making specialist staff available to analyse all tax adjustments and effective tax rates
• ensuring risk assessment is more robust by "hot-housing" potential risks
• improving our questionnaires by only asking questions where the answers are not known or are uncertain
• completing the majority of reviews by the end of September
• managing risk through one channel for faster results.

We use a range of reviews depending on the group's size, perceived risk, and depth of previous reviews. At a minimum, we analyse financial statements and returns, have discussions with tax managers, complete a high-level risk assessment and identify specific issues. We always welcome feedback on our risk review process. If you have comments, queries, or suggestions you can email us at ri.large.enterprises@ird.govt.nz.

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KiwiSaver update

800,000 + KiwiSaver members

Just over a year after KiwiSaver began, it has 800,000 members. Nearly 30% are under 25. This is a fantastic effort by both employers and members. The Treasury is now budgeting for KiwiSaver numbers to reach one million in the first half of 2009. This compares with the original forecast of 855,000 KiwiSaver members by 30 June 2017.

Employees over 60

An employee joins KiwiSaver between 60 - 65 years

The employee must be a KiwiSaver member for a minimum of 5 years, and during that time:

• they must have KiwiSaver deductions made from their salary (unless taking a contributions holiday)
• they will qualify for member tax credit for the five year period.

You, the employer:

• must pay compulsory employer contributions, for those five years, provided the member is still required to have deductions made from their pay. If they aren't, you're not required pay either.
  Note: You can still pay voluntary contributions if you want to.
• can claim the employer tax credit on your contributions, including any voluntary payments, up to the relevant threshold.

An employee joins KiwiSaver before turning 60

• Both employee deductions and compulsory employer contributions stop when the employee turns 65.
• Both you and the employee can continue to pay voluntary payments to KiwiSaver after they turn 65. But, after the employee turns 65, they won't qualify for the member tax credit and you won't qualify for the employer tax credit.

KiwiSaver and employees under 18

New and existing employees can join KiwiSaver by choosing and dealing directly with a KiwiSaver scheme provider. Once an employee under 18 is accepted by the scheme provider, we'll ask you to start deducting member contributions if they nominated you as their employer in their application. We'll give you the employee's contribution rate, their name and IRD number.

If they're under 18 you'll still need to deduct member contributions even though they may be under the earning threshold to have PAYE deducted. You're not required to make compulsory employer contributions for employees under 18 and you can't claim the employer tax credit, but you can make voluntary employer contributions.

Employees under age 18 can't be automatically enrolled in KiwiSaver. Check the eligibility chart on page 9 of your KiwiSaver employer guide (KS4) to work out whether a new employee should be automatically enrolled.

Don't know your employee's age?

An employee can refuse to give you their date of birth. If this happens and you don't make KiwiSaver deductions we'll advise you the date you were required to automatically enroll them. We'll make deductions for the employee when we receive your EMS including that employee for the first time. We won't penalise you if an employee refuses to supply information or supplies false information.

KiwiSaver deductions

Please tell us if you make a mistake deducting member contributions or making compulsory employer contributions. We may refund any contributions made in error. You can amend KiwiSaver information by completing an Employer monthly schedule amendment (IR 344) form. But, if you have just a few amendments, call us on 0800 443 773 and you can update them over the phone.

Failure to make deductions when required to do so

We'll work with you to meet your KiwiSaver obligations. There are penalties for not making correct KiwiSaver deductions when required to. Employee deductions aren't backdated, because a lump sum payment can be a financial strain. They can still make extra contributions, which should be paid to either Inland Revenue or their provider direct. Please call us if you think you haven't met your KiwiSaver obligations.

Late payment penalties and use-of-money interest

From 1 April 2009 employers who don't comply will be subject to the penalties that apply for the non-compliance of other PAYE-type tax obligations. Compulsory employer contributions (CECs) will also be subject to late payment and shortfall penalties from 1 April 2009. This will include any assessment for any short or unpaid backdated CEC entitlement. Interest may not be charged on unpaid employer contributions, including backdated compulsory employer contributions.

Opting out of KiwiSaver

Just a reminder that if a new employee decides they want to opt out and gives you a New employee opt-out request (KS10), you can only stop making deductions when they've been employed between the 14th and 56th day of their employment. You can either refund any contributions that haven't been passed on to us or send them to us with your next EMS and we'll refund the employee directly, including interest.

We'll also refund your employer contributions with interest, less any employer tax credit claimed.

Contributions holidays

When KiwiSaver members have been contributing to KiwiSaver for a year they can start to take contributions holidays. This is a break in contributions of between three months and five years.

Members can apply for a contributions holiday by going to the KiwiSaver website, by calling us or sending us a Contributions holiday request (KS6). If they identify you as an employer, we'll send you a letter asking you to stop KiwiSaver deductions. We'll also send the member confirmation of their holiday. Don't stop KiwiSaver deductions until either you receive a letter from us or your employee shows you their contributions holiday confirmation letter.

Remember, if an employee isn't having contributions deducted from their salary or wages while they're on a contributions holiday, compulsory employer contributions aren't required.

If you stop making employer contributions, you can't claim the employer tax credit. If you continue to make employer contributions, you can continue to claim the tax credit. The contributions holiday is very flexible so employees can ask you to restart contributions while they're still on a contributions holiday.

The contributions holiday can be ended early or renewed, and if the member has several employers they can ask the holiday to be applied to some employers but not others. If an employee asks for contributions to be restarted/stopped less than three months since they restarted/stopped, they need your agreement. When a contributions holiday expires, we'll ask you to restart KiwiSaver deductions for that employee.

Treatment of ESCT (employer superannuation contribution tax) in calculating your employer tax credit (ETC)

You may be required to pay ESCT on employer contributions to KiwiSaver schemes or complying funds – see our KiwiSaver Employer's guide (KS4) under "Forms and guides".

If this is the case, you'll need to look at section RD 65 of the Income Tax Act 2007 to calculate how much you need to pay for any particular pay period.

What is ESCT?

ESCT (formerly SSCWT) is a tax on any monetary contribution to a superannuation fund that is paid by an employer for an employee's benefit. Employer contributions to KiwiSaver schemes and complying funds are exempt from ESCT up to a capped amount. You can calculate ESCT in three ways. Find out more about ESCT.

Fringe benefit tax (FBT)

Employer contributions subject to ESCT are not liable for FBT.

How does ESCT relate to ETC?

You can claim a tax credit up to $20 per member per week if you contribute to KiwiSaver schemes or complying funds on behalf of your employees.

If you pay ESCT on employer contributions to KiwiSaver schemes or complying funds, you're entitled to claim the ETC based on the combined amounts of the employer contribution and the ESCT paid.

We're currently working with payroll software providers to ensure that payroll packages are performing this ETC calculation correctly. If you use a payroll software package you may want to check how this calculation is being made and whether there is an upgrade available to ensure the ETC calculation is correct.

If you believe your ETC has been calculated incorrectly in previous months or you may not have been paying ESCT correctly, you can contact us to get it sorted out. Please call us on 0800 443 553 and have the following information on hand for each of the affected periods:

• total KiwiSaver employer contributions
• total complying fund employer contributions (if applicable)
• total ESCT paid
• KiwiSaver ETC amount claimed at the time
• corrected KiwiSaver ETC claim amount
• complying fund ETC amount claimed at the time (if applicable) corrected complying fund ETC claim amount (if applicable).
  

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From the editor

Disclaimer

Large Enterprises Update comments generally on topical tax issues relevant to large enterprises. While every attempt is made to ensure that the law is correctly interpreted, articles are intended to be a brief overview only and are not a full commentary or analysis of the law. The examples provided are not intended to cover every possible factual situation.

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Date published: 13 Feb 2009

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