On 1 April 2025, the way extra pay is calculated regarding a termination was changed to look at 2 pay periods rather than 4 weeks, for the annualisation part of the extra pay calculation to determine the rate to use for extra pay.
NZPPA bases all training and PayTech AdviceLine, in part, on the guidelines set in the IRD Payroll Calculations and Business Rules specifications. At the same time this year, the IR335 Employer Guide was revamped.
A conflict has been identified between these two documents that is causing confusion.
The Issue – When multiple extra pays are being paid in the same pay period how are they treated?
- The IRD Payroll Calculations and Business Rules specifications (Example 3 page 56 – 57) states they are added together and calculated as a total,
Whereas:
- The updated IR335 (P38) states they are to be calculated separately for each extra pay being made.
This has been raised with IRD, and they responded immediately (excellent support); see below:
| There is an internal debate going on at the moment regarding the interpretations and it is being escalated to the Tax Counsel Office to determine which interpretation is correct.
The advice that I have been told to give software developers, is to continue to calculate as per the payroll specifications and combined them. For those Employers that don’t use software, they will have the IR335 or the IR website as their guide, so will get a different calculation to those using software. It is not ideal as it is different tax treatment, however until an agreement is come to by IR, unfortunately I can’t say which is the correct application. This decision will also need to consider the impact of change if it is determined that the Payroll specification is incorrect, as this calculation has been the same for decades for software developers. I don’t have a timeline of when this will be settled, however those involved are aware of the importance of this. |
So, for payroll, follow what your payroll software is doing presently until we know which method has been decided on by IRD. If your system does not do extra pays (a manual activity), then do it the new way.
As soon as we know more we will get this information out to you.
Regards
NZPPA PayTech AdviceLine
If NZPPA members have any questions, please email: [email protected]