Non-resident employer’s obligations to deduct PAYE, FBT and ESCT
Inland Revenue have released a draft operational statement OS 20/0X “Non-resident employers’ obligations to deduct PAYE, FBT and ESCT in cross-border employment situations”. This document is open for consultation, with submissions closing on 1 September 2020 (see further information here).
In summary, the draft statement provides that non-resident employers only have an obligation to withhold PAYE or return Fringe Benefits Tax (FBT) and Employers Superannuation Contributions Tax (ESCT) if:
- The employer has sufficient presence in New Zealand to be subject to New Zealand tax law; and
- The services performed by the employee are attributable to the employer’s presence in New Zealand.
The draft statement also provides that no PAYE withholding obligation arises on non-resident’s foreign sourced income or if the employee’s income is exempt under a provision in the domestic law or a Double Taxation Agreement.
While we welcome a practical approach put forward by Inland Revenue in the draft operational statement and the associated reduction in compliance costs for non-resident employers, we would be cautious about relying on the guidance as it is currently written.
Under the current law, the presence of an employee in New Zealand who receives PAYE income payments is sufficient to require an employer to register for employment taxes. This is regardless of whether or not the employer has a taxable presence in New Zealand.
The draft statement differs to the above as it states that in the absence of other factors creating a presence for an employer in New Zealand, the presence of an employee in New Zealand who chose to relocate for personal reasons will not create a registration obligation. Employers would need to consider each situation on a case by case basis to determine if the employee created a taxable presence in New Zealand.
Given the inconsistency of the draft statement with the current law, and the fact that such statements are not binding on the Commissioner, it would be difficult to rely on the statement with any certainty unless a change to the underlying tax law was also made.
Further, the statement appears to allow non-resident employers without a sufficient connection to New Zealand to provide non cash benefits to employees with no FBT impact. This would afford non-resident employers an advantage over domestic employers who would not have the same ability to structure remuneration packages in a tax efficient way. There is also no way to shift the FBT burden onto an employee under the current rules and again, for this to occur, there would need to be a law change as FBT is an employer tax only.
COVID-19 tax updates
With the borders to many countries re-opening to citizens and permanent residents, individuals who were sheltering or stranded in New Zealand can, where flights are available, return to their usual country of residence.
For those who choose to stay in New Zealand after they are no longer practically restricted from travelling, the COVID-19 tax concessions will not apply. This means individuals may become subject to New Zealand tax and (subject to the comments set out in the section above) their non-resident employers may be required to register as an employer with Inland Revenue and account for PAYE withholding tax, FBT and ESCT. These obligations would be backdated to the first day the employee was present in New Zealand unless an exemption is available under the domestic law (such as the short-term visit exemption) or a Double Tax Agreement.
Where no exemption applies, and the non-resident employer does not want to register with Inland Revenue, the IR56 taxpayer regime may be of interest. This regime allows the employee to take on the responsibility of the payroll reporting to Inland Revenue instead of the employer.
Where employees have become subject to tax in New Zealand from an earlier point in time, consideration needs to be given as to how to best manage the employer tax obligations where filing and payment deadlines may have already passed.
Previously, the ATO had announced that non-resident employers did not need to register for PAYG withholding where employees were working in Australia solely as a result of COVID-19 and they intended to leave Australia by 30 June 2020. Employees were still required to self-assess whether they were tax residents of Australia and if they needed to lodge a 2020 income tax return.
Updated guidance has been released by the ATO (refer to KPMG Australia’s Flash Alert) advising that from 1 July 2020 non-resident employers will need to register and withhold PAYG withholding tax where their employees are liable for tax. Superannuation Guarantee contributions and State Payroll Tax obligations will also need to be reviewed.
Whether an employee is liable for tax in Australia will depend on their personal circumstances. Employers and employees should seek advice regarding their tax obligations in Australia as a result of this announcement to ensure they are proactively managing their tax obligations.
It is important for employers to be aware of their tax and withholding obligations, particularly with the increasing prevalence of individuals working remotely, in many cases, in a different country to their employer. This is a relevant consideration not only because of COVID-19 but because this type of flexibility from employers may be expected going forward in order to retain and attract the best employees.
If you require any further information regarding employer tax obligations or assistance with future workforce planning from a tax perspective, please contact us.