WELLINGTON: New Zealand’s Inland Revenue has issued guidance to employers on how a backdated payment to correct errors in holiday pay is to be treated for tax purposes.
The guidance has been released because It was identified recently that for a number of years some employers have been underpaying their employees’ holiday pay entitlement. The guidance is intended to assist those employers that are undertaking an exercise to remedy this by calculating and repaying the shortfall to the affected employees and former employees in a lump sum payment.
The statement said that a backdated remedial payment of holiday pay is employment-related and should therefore be treated as an extra pay from August 18, 2017. This treatment also applies to a remedial payment made to a former employee.
It said the remedial payment should be taxed at the current tax rates, and deductions made from the remedial payment should be recorded in the Employer Monthly Schedule (EMS) at the time of payment. There is no requirement to adjust the EMS for the past periods to which the entitlements relate, it said.
Pay as you earn (PAYE), as well as other deductions such as student loan repayment and KiwiSaver contributions, should be deducted at the time of payment, the guidance concludes.
