SME tax compliance costs 2009: KiwiSaver compliance costs evaluation report 3

This report looks at small and medium enterprises (SMEs) self-reported KiwiSaver compliance costs provided as part of a 2009 survey measuring 1,728 SMEs tax compliance costs across a range of tax types.

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Executive summary

In 2009, Inland Revenue surveyed small and medium enterprises (SMEs) and tax agents to measure their tax compliance costs.

KiwiSaver, a work-based savings for retirement scheme, was introduced in 2007. KiwiSaver is administered through the pay as you earn tax system (PAYE). All employers, unless given an exemption, are required to enrol new employees, deduct members' contributions through the PAYE system, and pay the employer's contribution. As such, the costs associated with KiwiSaver are viewed as part of business' overall tax compliance costs.

KiwiSaver compliance costs were included in the 2009 survey of businesses. This report is one of a series of reports¹ arising out of the 2009 compliance cost survey and reports key findings of SMEs' KiwiSaver compliance costs answering the following main questions:

1. How much are KiwiSaver compliance costs, internally and externally?
2. What are the psychological costs of complying with KiwiSaver?
3. What factors influence employers' internal and external KiwiSaver-related compliance costs?

Additional questions that this report addresses are:

4. How much time do SMEs spend on KiwiSaver?
5. Which personnel spend the most time on KiwiSaver?
6. How much is this time in dollars?
7. How has KiwiSaver affected PAYE compliance costs?
8. Were there any unusual attributes related to KiwiSaver that resulted in their compliance costs being unusually high or low?
9. How many organisations changed their approach to remuneration as a result of KiwiSaver?
10. How many organisations had an existing workplace superannuation scheme before KiwiSaver started?

The survey

To quantify New Zealand SMEs' tax compliance costs, Inland Revenue conducted a survey in September 2009.

The study population consists of 444,690 SMEs. A disproportionate random sample of 5,000 SMEs was surveyed from the population. Of these, 1,728 (35%) SMEs responded.

Out of the responding SMEs, 1,212 (70%) dealt with PAYE of which 815 (67% of 1,212) had KiwiSaver.

A supplementary survey of 640 tax advisors was conducted to better understand external tax compliance costs. Inland Revenue surveyed the tax advisors of the SMEs that gave their consent to Inland Revenue conducting such a survey. We received 345 usable responses from tax advisors.

The findings have been categorised below in relation to:

• business size
• PAYE
• personnel
• tax compliance activities
• whether or not changes were made to the SMEs' approach to remuneration
• whether or not the SMEs had an existing superannuation scheme prior to the introduction of KiwiSaver
• other factors affecting KiwiSaver compliance costs
• psychological costs.

KiwiSaver compliance costs by business size

In terms of business size:

• 44% of "micro" businesses (1-5 employees) deal with KiwiSaver
• 82% of "small" businesses (6-19 employees) deal with KiwiSaver
• 93% of "medium" businesses (20+ employees) deal with KiwiSaver.

Internal KiwiSaver compliance costs by business size

On average, SMEs that deal with KiwiSaver spent 14.5 hours internally on KiwiSaver activities. This converts to a mean compliance cost of $660: $579 for "micro" businesses, $695 for "small" businesses and $666 for "medium" businesses. Nearly 70% of the internal hours spent on KiwiSaver are by the business owners.

External KiwiSaver compliance costs by business size

Fifteen percent of SMEs which deal with KiwiSaver use a tax advisor to assist with some or all of their KiwiSaver responsibilities at an average annual cost of $291.

KiwiSaver external costs vary by $300 between "micro" and "small" SMEs.

• 18% of "micro" businesses paid for KiwiSaver advice from an external advisor; the average cost was $218;
• 10% of "small" businesses paid for KiwiSaver advice from an external advisor; the average cost was $518;
• 12% of "medium" businesses paid for KiwiSaver advice from an external advisor².

Combined KiwiSaver compliance costs by business size

Combined KiwiSaver compliance costs between "micro" and the bigger ("small" and "medium") businesses are noticeably different. "Micro" businesses dealing with KiwiSaver spend, on average, $623. "Small" and "medium" businesses respectively spend $743 and $721 annually. Overall, regardless of business size, SMEs dealing with KiwiSaver spend $705 annually.

KiwiSaver and PAYE compliance costs

On average, KiwiSaver increases SMEs' payroll compliance cost by 40% to 50% of PAYE costs. The ratio of PAYE to KiwiSaver costs across all business sizes being 1:0.4.

KiwiSaver compliance costs by personnel

As business size increases, paid employees deal with more of the KiwiSaver burden than owners, partners, directors and/or trustees.

For "micro" SMEs, the compliance cost for the owners/partners/directors/trustees group (henceforth referred to as owners) is $513 compared with $236 for "medium" SMEs. The reverse is true for paid employees with compliance costs for employees, ranging from $57 for "micro" SMEs through to $461 for "medium".

KiwiSaver compliance costs and tax compliance activities

The time SMEs spent on learning about tax laws and dealing with Inland Revenue was higher in relation to KiwiSaver than for other tax types:

• 18% of the time spent on KiwiSaver relates to learning about tax laws. This is more than twice the proportion of time spent by GST (6%), income tax (8%) and PAYE (8%) filers. This is not surprising given the relative newness of KiwiSaver.
• 10% of the time spent relates to dealing with Inland Revenue, noticeably more than the proportion of time spent by GST (4%), income tax (5%) and FBT (2%) filers.

Changes in approach to remuneration and KiwiSaver compliance costs

18% of businesses agreed that the introduction of KiwiSaver led to their changing their approach to remuneration.

Businesses, particularly "micro" and "medium" businesses, which had changed their approach to remuneration spent more time on KiwiSaver than those which did not (19.2 hours vs. 13.8 hours). This is mostly due to the higher proportion of hours they spent on dealing with tax advisors, learning about tax laws and dealing with Inland Revenue.

Mean external compliance costs were the same for both groups ($49) while combined compliance costs are higher for those that changed approach to their remuneration ($991 compared with $671).

Existing superannuation schemes and KiwiSaver compliance costs

Two percent of businesses had an existing superannuation scheme prior to the introduction of KiwiSaver.

Businesses with existing superannuation schemes spent more hours on KiwiSaver than those without (20.5 hours vs. 14.5 hours), mostly due to higher proportion of hours spent on dealing with Inland Revenue and tax advisors, and had higher combined compliance costs than those which did not ($865 vs. $717).

In contrast, mean external compliance costs were higher for those that did not have an existing superannuation scheme prior to KiwiSaver ($48 vs. $40).

Other factors affecting KiwiSaver compliance costs

We asked SMEs whether there was anything unusual (eg, temporary closure) during the previous 12 months, which had resulted in their tax compliance costs being unusually high or low. In answering this question, no comment was made that could be related to KiwiSaver obligations.

KiwiSaver psychological costs

Seventy-seven percent of SMEs dealing with KiwiSaver indicated that they find it less than moderately or moderately stressful to do so (including finding the money), compared with the 5% which found compliance extremely stressful.

Conclusion

Higher KiwiSaver compliance costs are seen for:

• SMEs which changed their approach to remuneration, particularly for "micro" and "medium" businesses and
• SMEs with an existing superannuation scheme prior to the introduction of KiwiSaver.

This is mainly due to the relatively longer hours spent by these SMEs dealing with Inland Revenue and tax advisors. In the case of SMEs that changed their approach to remuneration as a result of KiwiSaver, an additional source of higher compliance costs is the higher proportion of hours spent by such SMEs learning about tax laws.

As business size increases, time spent on KiwiSaver shifts from the business owner to paid employees.

SME employers with KiwiSaver responsibilities incur around 40% to 50% additional costs on top of PAYE compliance costs.

 

Date published: 01 Dec 2010

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