Cross-border and remote workers – NRCT reporting rules out, taxpayer favourable rule changes in

Cross-border and remote working arrangements can lead to New Zealand tax liabilities for both employees and employers. Our experience shows that these liabilities are often misunderstood or are not clear to both employees and employers at the start of a new working arrangement.

These tax liabilities can take the form of NRCT (Non-Resident Contractor Tax), PAYE and FBT (fringe benefit tax) on employer-provided benefits as well as ESCT (employer superannuation contribution tax) on contributions to employees’ superannuation schemes.

Our Tax Alert article from September 2022 highlighted a number of proposed changes in the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill to simplify the complexities involved with cross-border work. The consultation and submission process has now been completed, with a number of fairly significant changes in this space. The following changes were enacted with varying application dates. 

PAYE simplification:

Recognising that foreign employers may not fully understand their tax obligations in New Zealand, which can result in backdated tax obligations, the following changes have been made for cross-border workers:

• Introducing a 60-day grace period: Employers now have a 60-day grace period to correct their PAYE obligations if they have taken reasonable care to manage their employment obligations. This change aims to assist employers who have employees present in New Zealand and there has been a breach of the 92-day rule that exempts employment income derived by non-resident employees.
• Ability to apply for bespoke PAYE arrangements: Employers can now apply for bespoke PAYE arrangements in "special circumstances." Although Inland Revenue has yet to develop guidance on what constitutes "special circumstances”, this change is expected to benefit employers who have cross-border work arrangements in place, such as business travellers with irregular travel patterns, to settle their taxes more efficiently.
• Repeal of the PAYE bond system: The PAYE bond system, which was rarely used, has been repealed.
  

These changes are positive and introduce a degree of pragmatism that has been missing for many years. This should result in reduced compliance costs for employers of cross-border workers.

Remote workers:

For non-resident employers who do not have a requirement to register for PAYE, FBT, or ESCT, the obligation to account for PAYE falls to the employee, who pays tax by registering as an IR56 taxpayer.

Originally, it was proposed that the FBT and ESCT obligations would be transferred to the employee, requiring them to prepare FBT calculations, which can be a complex and time-consuming process.

After receiving a number of submissions about the impracticalities of having employees prepare FBT returns for their employers, the following changes have been enacted instead:

• Non-resident employers will now be expected to register as an employer if they provide their employees with fringe benefits or make contributions to a superannuation scheme, unless it is agreed with the employee (in writing) that the employee will meet the tax obligations.
• If an agreement is made, the employer must provide the employee with the relevant information to complete the FBT or ESCT obligations and in this instance:
  • Fringe benefits are treated as taxable income and will be taxed at the employee's marginal tax rate, rather than the FBT rates.
  • Contributions to superannuation schemes can be taxed under the PAYE regime or the ESCT regime. 
    • Where an employee treats these amounts as PAYE, they should note that this will result in increased taxable income and would therefore be included for assessing working for families tax credits, child support, independent earner tax credits and any student loan payments.
      

Safe harbour for non-resident employers:

A safe harbour provision has been introduced for non-resident employers who have incorrectly determined that they do not have a sufficient presence in New Zealand and accordingly have not registered as an employer. To be eligible for the safe harbour, the non-resident employer must meet the following criteria:

• Have two or fewer employees present in New Zealand at any point in the income year, or be liable to pay gross employment-related taxes in New Zealand for the income year of a maximum of $500,000; and
• Have taken reasonable measures to manage their employment-related tax obligations within 60 days of the failure.
  

If these criteria are met, the non-resident employer will be protected from penalties and interest charges on the unpaid tax.

NRCT - no increased reporting requirements!

As a result of numerous submissions on the workability and significant compliance costs of the proposed NRCT reporting requirements, the Finance and Expenditure Committee determined that the proposed changes would be removed from the Bill.

Taxpayers can therefore breathe a sigh of relief that the already complex NRCT regime won’t yet be burdened by onerous reporting requirements. However, NRCT reporting continues to be a matter of interest to Inland Revenue who have gone back to the drawing board to undertake further consultation on this topic.

In the meantime, the following changes have been made concerning NRCT:

• A 60-day grace period for a payer to meet or correct their NRCT obligations where at the time a payment is made, it is not clear that NRCT withholding is required and a liability to NRCT subsequently arises. This will operate in a similar manner to the grace period for PAYE discussed above.

• Allowing nominated taxpayers to meet the NRCT obligations of a non-resident contractor. This is intended to simplify compliance for non-residents who may have activities in New Zealand through different businesses. Each person, however, would be jointly and severally liable for the amount of tax due under such an arrangement. For the purposes of obtaining certificates of exemptions, a nominated person can establish a good compliance history for the non-resident contractor.

• Allowing certificates of exemption to have retrospective effect by allowing payments made before the exemption is issued to be covered. This would only apply to payments made 92-days before the person applied for an exemption.

Concluding comments

The changes should simplify the complexities involved in cross-border work and provide relief for taxpayers. The introduction of a 60-day grace period for PAYE and NRCT, the ability to apply for bespoke PAYE arrangements, and the safe harbour provision for non-resident employers are expected to assist employers in complying with their tax obligations more efficiently.

Remote workers in New Zealand should familiarise themselves with the changes in relation to fringe benefits and ESCT to ensure compliance with the new tax rules.

As always, if you have any questions on how the changes above impact you or could benefit your business, please contact your usual Deloitte advisor.

May 2023 - Tax Alerts