Compliance Cost Impact
The preferred option has three separate elements which may cause compliance costs: 1) lowering of personal tax rates, increasing thresholds, and the IETC; 2) repeal of the R&D tax credit; and 3) changes to KiwiSaver.
Each of these components should be assessed separately for their compliance costs; although there may be some reduction in aggregate compliance costs through economies of scale if firms and individuals are able to make these changes at the same time.
Personal tax changes
The personal tax changes (including the IETC) will have implications for employers and employees. The IETC will be delivered through the PAYE system. This minimises the associated compliance costs for employers and employees.
The delivery of the tax credit through the PAYE system will necessitate new tax codes being used by employers. There will be a one-off compliance cost in understanding and processing these new tax codes. This cost will be mitigated by using standard tax change procedures with which employers are already familiar. There should be no significant differences for small and medium-sized enterprises and large businesses in this regard.
Employers will not need to collect new information from their staff, or make substantive systems changes. Similar compliance impacts will occur in relation to the self-employed and contractors, who will need to ensure they understand the new rates and changes, and where applicable, the IETC. There will be some additional compliance costs for people that have not received the correct amount of IETC during the year. These people may be required to file a personal tax summary with Inland Revenue in order to determine their final tax liability.
Although exact costings are not available given time constraints, overall the compliance costs for these changes are considered minimal.
Repealing the R&D tax credit
The R&D tax credit currently entails compliance costs for firms and organisations who are seeking the credit in respect of work that falls within the eligible expenditure criteria. These firms incur compliance costs in the form of specialist assistance in calculating tax credit claims, and in the form of systems modifications in order to collect the required information. There are indications that substantial resources have been diverted within New Zealand advisory and consulting firms to assist taxpayers in claiming R&D tax credits. The repeal of the credit would remove these compliance costs on an ongoing basis. There will be a minimal compliance cost for firms and their advisors in understanding these changes, but no system or process changes will need to be made as a result, so this will be a minimal one-off compliance impact. Therefore it is expected that the repeal of the tax credit will, on balance, and on an on-going basis, decrease compliance costs for these firms. The minimal costs of understanding these changes can be mitigated by an effective communication programme which is being developed.
Many firms undertaking R&D and advisors to these firms are likely to have incurred significant set-up costs in relation to the implementation of the R&D tax credit, particularly in relation to large R&D projects. As the R&D credit has not yet been in operation for a full income year, data on these costs is not available. However, the aggregate benefits associated with tax reductions are expected to substantially outweigh these costs.
KiwiSaver Changes
The KiwiSaver changes will have compliance costs for employees, employers and providers.
Compliance costs faced by employees (including those who will become employees in the future) will be in understanding the changes, and responding to these when the changes are introduced (for existing members), or when they enter the KiwiSaver scheme (e.g. when the enter the workforce, or become members later on).
Existing employees will need to consider the changes to the minimum contribution rate, and notify their employer if they wish to use the lower 2% contribution rate. In addition, on an ongoing basis, employees will be able to consider whether they wish to change their contribution rate, as is permitted under the scheme every three months unless an employer allows a more frequent change.
In relation to employees who become members of KiwiSaver in the future, as part of the automatic enrolment process, unless the employee notifies the employer of a contribution rate, the employee will be defaulted to the new 2% rate. An employee will be able to elect a higher rate by notifying their employer of that higher rate. If an employee who is already a member starts new employment on or after 1 April 2009 and does not notify the employer of a contribution rate, that employee will default to the new 2% rate. The compliance costs are unlikely to be higher for these employees than the previous arrangements, unless they were familiar with the prior arrangements, in which case they will have to ensure they understand the revised arrangements. As for existing members, new members will be able to reconsider their contribution rate at three-monthly intervals, unless their employer allows more frequent changes.
Removal of the fee subsidy will impact on KiwiSaver members who have account with small balances and no contributions and inadequate returns as their account balances will erode overtime.
While there is insufficient data to accurately quantify these compliance costs, overall it is expected that the impact on employees will be minor, and will largely occur on a one-off basis; although there will be minimal ongoing costs.
The KiwiSaver changes will also impact employers. Employers will be affected by the minimum member contribution changes, removal of the employer tax credit, reduction in the minimum employer contribution rate, and the change in the ESCT rules.
The change in the minimum member contribution rate will cause one-off costs to employers. Employers will need to action requests from their existing employees to adopt the new 2% contribution rate. For those employees that default to the new 2% rate, employers may need to action requests to adopt a higher rate. The impact will depend on the number of requests received. Payroll systems may need adjustment to allow for a 2% contribution rate and the default rate from 1 April 2009 being 2%.
The proposed matching compulsory employer contribution cap of 2% will have minimal impact on employers, as the current compulsory rate is 1% and was due to increase to 2% on 1 April 2009. Employers who currently contribute more than 2% voluntarily will be able to continue to do so although they may now want to reassess given that the previous requirement for employers to eventually contribute at the 4% rate will not proceed. These compliance costs will be minimal.
The reduction in the ESCT exemption will only impact on those employers who are making an employer contribution of more than 2%. For these employers it will require them to become familiar with ESCT rules for the first time. It will also require them to split their contributions between the taxable amount and the exempt amount and deduct ESCT from the taxable amount and pay that tax to Inland Revenue as part of the PAYE process. These compliance costs will be one-off, in understanding the changes, and making decisions about how to respond to these changes, and if they choose to continue contributing at a higher rate, will also be ongoing. There is a possibility that employers currently offering more than a 2% employer contribution may reconsider their KiwiSaver offer to minimise these compliance costs.
The discontinuation of the employer tax credit will mean that some employers will face a real increase in remuneration costs. In addition, once the changes are implemented, employers will need to change their payroll systems to remove the employer tax credit. The cost of removing the ETC would fall heavily on firms in labour intensive industries, where there are large numbers of KiwiSaver members. While the cost could potentially be offset through lowering tax rates and harmonising tax rates for different forms of investment, there could be some transitional issues, particularly for firms that are just breaking even. Such firms would be unlikely to fully benefit in the short term from a reduction in tax rates because their taxable income would already be low - having to incur the full cost of theETC could result in hardship for these businesses. However, the personal tax cuts will also help fund fiscal stimulus from which these employers will benefit in tightening economic conditions.
Early notification, and good communication, of these changes will mitigate these compliance costs to an extent as employers will be able to adjust in advance. A communications strategy is being prepared.
Therefore the compliance costs for employers in relation to the KiwiSaver are moderate. These changes are likely to impact more heavily on small and medium enterprises that will have to invest comparatively more time implementing these changes. These compliance costs have not been quantified due to insufficient data and time. In addition, employers have faced prior changes to KiwiSaver, which may increase the degree of frustration with these changes and the perceived compliance costs.
A third group that will face compliance costs from these proposals are KiwiSaver providers. This will be a one-off cost, as the proposal will require KiwiSaver providers to amend their investment statements and documentation to reflect: 1) the 2% employee contribution rate; 2) the compulsory employer contribution rate of 2%; and 3) the discontinuation of the fee subsidy. This will require providers to redraft and reprint their investment statements incurring both legal and printing costs. To minimise these compliance costs, a limited regulatory exemption is recommended so that existing investment statements continue to be valid for a period of time to allow the new documentation to be drafted, printed and available for issue.
Therefore, although quantification is not possible, compliance costs for providers will be a one-off cost of amending their documentation. This will impact more heavily on smaller providers.
