Section 221 Levy Failure Explored

This page explores the failure of the Accident Compensation Corporation to levy and compensate Self-Employed PAYE Schedular Earners since the 1st of April 2008. Here we will see a testimony of breath taking incompetence and corruption at the core level of the Corporation. The system failure in 2008 resulted in the Corporation introducing corrupt and unlawful legal and accounting practices in response to the glaring anomalies that began to appear in the levy / entitlement process in question post the 1st of April 2008.

 

On the 1st of April 2008 "employers" became liable to levy all PAYE earner classes under Section 221 as described in Schedule 4 of the Accident Compensation Act 2001 at the time PAYE Income Payments were made to said "employee". The issue is that ACC did not hit the on switch for the Section 221 levy process leading to massive anomalies in the levy and compensation processes for self-employed PAYE Schedular tax payers. The result of this failure has resulted in incalculable financial and political liability for the Corporation.

 

Before 2005 there were two types of "earnings" that were available for assessment for compensation. They were earnings received as a Self-Employed Person and PAYE Salary and Wages. Self-employed people were compensated on their taxed and expense deducted earnings in the previous "relevant" financial year. ACC did not assess self-employed "income" it assessed self-employed "earnings". So if a business had an income stream of $100000 and the claimant had only paid himself $10000 in "earnings" then he would be compensated on the $10000.

 

This made a lot of sense. Otherwise a claimant who had been underpaying themselves to avoid tax liability could present the "income" of the business to obtain a higher amount of compensation on an income the claimant had every intention of claiming expenses on and actually paying themselves as little as possible. However this led to unjust outcomes in two areas. A self-employed earner who had received earnings in the current tax year but had no earnings in the relevant year would have earnings present but could not have them calculated. Also if the claimant had previous PAYE Salary and Wages from permanent employment they had left to start their business in the same tax year of incapacity, those earnings were cut off from the calculations despite the earnings being levied in that financial year.

 

Then in 2004 Windle v ACC was heard in the District Court and the Judge noted the unfair outcomes for self-employed claimants who had other earnings and asked ACC to go to Parliament to get the matter sorted out. The legislators responded in a comprehensive way. It was evident that the protections ACC had in place to ensure the validity of earnings claimed on was inefficient and unjust. Additionally IRD itself was struggling with the self-employed spending their taxes before the end of the financial year.  People from overseas could leave before tax was due denying IRD their tax payments. There was also the matter of the dreaded Provisional Tax system.

 

It was clear the legislators intended on addressing all these issues and to do so made Schedular Payments a class of earnings under the umbrella of PAYE Income Payments as listed under the Income Tax Act 2007 RD3. The Income Tax Act required that commission sales people had their tax deducted by their "employer" at the time the commission was paid as PAYE Schedular tax payments. Over the years IRD has expanded this requirement to various other types of worker such as building laborers. So now these workers are paying tax much the same way as a salary wage earner except the Schedular tax payer can claim expenses at the end of the financial year as a self-employed person.

 

The issues had now been resolved at the IRD part of the consideration. The legislators then set out to capture this new class of PAYE earner requiring ACC to compensate all PAYE Income Payment recipients. Salary and Wages, Schedular and Extra Pay under the Income Tax Act RD3 were now to be assessed under the blanket consideration of PAYE Income Payments. This makes good sense. Why would the legislators legislate a separate process for three classes of "earnings" when the considerations could be consolidated under the consideration of PAYE Income Payments?

 

But of course up until then ACC did not consider self-employed income it only assessed earnings. To resolve this PAYE Income Payments as a legislative consideration and the requirements that applied were added to the legislation on the 1st of April 2008. For example:

 

Section 6 (1) PAYE income payment: inserted, on 1 April 2008 (effective for 2008–09 income year and later income years, except when the context requires otherwise), by section ZA 2(1) of the Income Tax Act 2007 (2007 No 97).

 

The PAYE Income Payment consideration was added to Section 6 and Schedule 4 of the Accident Compensation Act 2001 on the 1st of April 2008. It was on this date that Employers became legally liable to levy Schedular tax payers at the date of payment to the "employee" which would then make this class of tax payer entitled to weekly compensation for those earnings under Clause 38 of the Act. ACC did not activate the process. Instead ACC adopted unlawful accounting and legal practices and bent the system to fit the considerations as they stood before the amendments in 2005 and 2008.

 

In doing so not only did the Corporation defeat every provision the legislators added to the legislation to make the outcome fair for self-employed earners it actually made it worse than it was before the system was changed in 2008.

 

Important Note: There is considerable confusion on what constitutes an employee. Under the old tax system an employee was a salary wage earner. Schedule 4 22 requires that all applicable meanings are the meanings as found in the Income Tax Act 2007 and not the more limited interpretation of employee provided by Section 6. The Income Tax Act 2007 has the now expanded applicable meaning of employee under YA1.

 

YA1

 

employee—

 

(a) means a person who receives or is entitled to receive a PAYE income payment:

 

Once again we see the PAYE Income Payment consideration.

 

Section 6

 

PAYE income payment has the same meaning as in section RD 3(1) of the Income Tax Act 2007

 

RD 3 PAYE income payments

 

Meaning generally

 

(1) The PAYE rules apply to a PAYE income payment which—

(a) means—

(i) a payment of salary or wages, see section RD 5; or

(ii) extra pay, see section RD 7; or

(iii) a schedular payment, see section RD 8:

 

We see here that under Section 6 Definitions PAYE Income Payment literally means any of the three types of PAYE earnings as described in RD 3 of the Income Tax Act 2007.

 

Schedule 4

 

1 Subject to this schedule, the PAYE rules of the Income Tax Act 2007 (the PAYE rules) apply, with all necessary modifications, with respect to—

(a) any amount included in the earnings as an employee of an employer as if such amount were a PAYE income payment (or, as the case may require, salary or wages under section RD 5 of the Income Tax Act 2007) of the employee for the purposes of the PAYE rules; and

(b) the levy payable by any employee under this Act as if such levy were income tax; and

(c) the deduction required to be made under section 221 as if such deduction were an amount of tax, which amount is—

(i) on account of income tax; and

(ii) made or required to be made for the purposes of the PAYE rules; and

(d) any employer under this Act as if such employer were an employer for the purposes of the PAYE rules; and

(db) a PAYE intermediary as defined in section YA 1 of the Income Tax Act 2007; and

(e) any employee under this Act as if such employee were an employee for the purposes of the PAYE rules;—

and every employer, PAYE intermediary, and employee must comply with the requirements of the PAYE rules, to the extent to which the PAYE rules apply by virtue of this schedule.

 

Self-employed earners who receive Schedular payments are referred to as "employees" for the purposes of the PAYE rules. The meaning of "employee" has been expanded under the Income Tax Act 2007 and this is reflected in the Accident Compensation Act 2001 when the PAYE Income Payment definition came into force on the 1st of April 2008.

 

Summary: ACC was meant to level all PAYE Income Payments as the time of payment to the employee by Section 221. The process that applies to this and provides the context for all the levy and entitlement considerations is found in Schedule 4. This has not occurred and for the last ten years the entire system has been fatally flawed. The legislation requires it as demonstrated. So the question now is has ACC being levying those Schedular payments? Not according to ACC and we will know look at the evidence that demonstrates this fact.

 

 

 

Evidence

 

ACC does not levy schedular payments made to Self-employed earners whose earnings are earnings as an employee for the purpose of the PAYE rules.

 

Evidence:

 

ACC Invoice to Self-Employed Earner in receipt of a schedular payment received immediately before incapacity. Invoice clearly states the following:

 

“Your invoice has been calculated based on Schedular payments declared by your employer. Schedular payments are treated as self-employed earnings because no ACC levy is deducted.”

 

IRD Document stating the earnings the invoice refers to are PAYE earnings, not considered "self-employed income" (note: the earnings are being treated as employee PAYE earnings for the purposes of the PAYE rules as they apply to the current tax year of incapacity.) The IRD document has a field to record the amount of the Section 221 PAYE levy payment. The document field states: 0.00

 

 

 

ACC Invoice Evidence