Last year, government and taxation authorities in Australia and New Zealand “pivoted” – to use one of 2020’s most common words – and repurposed two digital systems built originally for payroll reporting and compliance to access accurate information on the labour market.

The move had huge ramifications for both governments’ economic response to the COVID-19 pandemic.

Single Touch Payroll (STP) in Australia allowed the Australian Bureau of Statistics to access real-time payroll data, enabling the agency to update its information on about 10 million jobs each week, broken down by gender, age, industry and location. Under Phase 2 of STP, which will come into effect on 1 January 2022, the same system will be used to obtain an accurate snapshot of business turnover, on a national basis, almost in real time.

In New Zealand, Payday Filing data has given Statistics NZ the same clarity on the economy. Systems built by Inland Revenue have been used to target government assistance payments to small businesses and have been critical in helping New Zealand navigate the pandemic.

It has elevated accounting software providers and payroll companies to a new position of importance.

More than a compliance exercise

The new digital ecosystem includes employers, employees, accountants and tax authorities – and is increasingly reliant on the functionality and compliance features of the software they use. On the face of it, that might create added risk but in practice it has been a success.

Using tools such as Application Programming Interfaces (APIs) to plug directly into tax systems, the Payday Filing and STP initiatives have been more than exercises in better compliance and business process design: they have created a 21st-century digital infrastructure that can be likened to plumbing, the electricity grid and highways.

John Cuthbertson FCA, CA ANZ’s taxation and financial services leader, credits the “reverse engineering” of Payday Filing with a critical role in delivering the fiscal stimulus which kept many businesses afloat.

“It just made the COVID response so much easier,” he says. “In the US, they are still writing cheques and processing things manually. Our GST system carried on as if nothing had happened, and the payments to business were almost instant.”

Picture: John Cuthbertson FCA.

“It just made the COVID response so much easier. In the US, they are still writing cheques and processing things manually.”

The role of Payday Filing in the pandemic, says Cuthbertson, illustrates the resilience and the flexible design of a system which, when it was originally introduced in 2018 as part of a digital transformation for Inland Revenue, was viewed with some suspicion, particularly by smaller businesses.

Several years on and Cuthbertson confidently judges Payday Filing as a “win-win”, not just for its repurposed role during the pandemic but for the benefits it has delivered both to the taxation process and to businesses.

The system has done what was intended: lightened the reporting and compliance burden for business, given tax authorities better and updated information flows, and – for the accountancy profession – freed up time from mundane tasks. It has also helped accountants in the transition from a compliance role to a value-added advice model.

All this has been built on standardising reporting and combining processes to eliminate duplication, but even more crucially on the exchange and flow of data.

NZ Payday Filing recap

The first point of compliance is not in paying money to tax authorities, but in supplying them with information on which the Payday Filing system is based.

“Under the previous system [in New Zealand] it didn’t matter how you did your payroll,” says Cuthbertson. “You would pay your staff and then do a separate monthly schedule that would go off to Inland Revenue.

“There were all sorts of opportunities for transposition errors, for getting names and numbers wrong and that would create re-work, and there was no point to that other than you were supplying the right information to IR.”

Inland Revenue now has to intervene in only 3% of the filings, and after a new upgrade to the system which will better match names with IR numbers, the forecast is that accuracy will improve in the next few months to a point where only 0.1% of filings need intervention.

Smaller businesses, particularly those owned by couples or families, has been the hardest nut to crack.

As in Australia, many of these businesses have lumpy cash flow and are reluctant to move away from paper-based systems, which means that, initially at least, Payday Filing adds to their pain rather than alleviating it.

Of New Zealand’s 176,000 businesses, Cuthbertson says that only about 2000 are today filing on a “paper basis.”

“But that number is coming down all the time, and it helps that any new employer setting up a business has the option of reporting by paper for the first six months,” he says.

Australia’s Single Touch Payroll – where to from here?

In Australia, it is the smaller businesses and those which are closely held by owner employees that are also the last on the Australian Taxation Office’s (ATO’s) list.

After several delays and grace periods, during which businesses have been allowed to prepare and make the necessary process changes, these closely held smaller businesses will finally need to comply with Single Touch Payroll when mandatory Phase 2 reporting begins from 1 January 2022, six months after the transition begins.

In addition to finally making it mandatory for the smallest businesses to comply, the expansion of STP will also widen the type of information that must be reported beyond the basic wages information of the Phase 1 regime, which was introduced in 2018.

Phase 2 will capture much more granular data, including bonuses and commissions, directors’ fees, paid leave, salary sacrifice, overtime and other allowances.

STP will also capture whether an employee is full-time, part-time or casual, tax treatment for PAYG purposes, and the reason for separation when employees leave an organisation.

Susan Franks, senior tax advocate for CA ANZ in Australia, says Phase 2 will bring STP closer to the original vision of a “one-stop shop” for reporting.

“This is what we are all after in terms of getting information to multiple government departments with just one reporting exercise for business,” she says.

The ATO points to a whole raft of improvements enabled by STP beyond reporting including increased transparency for employees on their pay and superannuation, early intervention to support businesses struggling with debt, and more data being available to employees earlier to pre-fill their tax returns.

According to an ATO spokesperson, 808,000 employers currently report information on 13.7 million employees in Auistralia.

One small business that has benefited from the new payroll system is Sydney children’s furniture company Incy Interiors.

Founded by mum and interiors enthusiast Kristy Withers in 2011, Incy Interiors has since grown into a A$7 million company with eight staff.

“We started transitioning to STP in May 2020 and the experience was super easy,” says Withers in a case study supplied by the ATO. “We had no challenges or hurdles. Our accountant contacted me and said that it was about to happen and we just clicked the button.

“The benefit of STP for us, or for me in particular, is not having to do payment summaries at the end of the year and everything reporting automatically,” she says.

Connecting to the social security system and Services Australia, which is being talked about as a future development, will add a new dimension to STP, while there are suggestions STP could be used by the states to simplify payroll taxes.

How STP helps transform accounting

The big winners from these changes, adds CA ANZ’s Susan Franks, have been accountants.

In among the talk about the profession changing from one based on reporting and compliance to one driven by advice and strategy, STP and Payday Filing have been the key innovations which have helped move the dial and drive change.

“There is definitely less drudgery for accountants,” says Franks. “The digitalisation of information is having a huge impact on the profession, and once STP Phase 2 comes in they won’t be doing things like separation certificates, reporting on child support and garnishing notices, all of which are fairly low-value work.

“There is definitely less drudgery for accountants and once STP Phase 2 comes in they won’t be doing things like separation certificates, reporting on child support and garnishing notices, all of which are fairly low-value work.”

“It all means that accountants will be looking to value-add to their clients, and there are certainly a lot of opportunities there in the business environment post-COVID for accountants to do that.”

Solving the wage theft problem

Going one step further, Small Business and Family Enterprise Ombudsman Kate Carnell has been vocal in suggesting that STP can be part of the solution in addressing the burgeoning problem of wage theft, which was largely the result of confusion and omission rather then deliberate actions by employers.

In the past few years in Australia, 7-Eleven, Woolworths, Bunnings and countless others have been found guilty of underpaying staff. In November 2019, PwC released modelling using Fair Work Ombudsman (FWO) data that estimated up to 13% of the total Australian workforce had been underpaid A$1.35 billion a year.

“The rollout of Single Touch Payroll provides an opportunity to calculate award wages and entitlements through an algorithm integrated into accounting software such as Xero, MYOB, Quicken and other software systems,” Carnell says.

“This payment algorithm could be owned and updated by the Fair Work Commission to ensure wages and entitlements are correct and up to date.”

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