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Reporting changes have been introduced for not-for-profits (NFPs) reporting under the Tier 3 and Tier 4 frameworks, and are effective for periods beginning on or after 1 April 2024 for the year ending 31 March onwards.

As 31 March 2025 approaches, it’s time for most businesses across New Zealand to get their financials in order – an often time consuming and stressful task. Whether you’re a small business owner or running a larger operation, with a bit of planning, you can wrap up the financial year smoothly and set yourself up for success in the next one.

New Zealand residents pay tax in Aotearoa on world-wide income. Simple enough. But what about people who only live here sometimes, or intend to move to another country?

The External Reporting Board (‘XRB’) has recently published a new standard, NZ IFRS 18 ‘Presentation and Disclosure in Financial Statements’. It replaces NZ IAS 1 ‘Presentation of Financial Statements’ and will impact every reporting entity currently reporting under New Zealand equivalents to International Financial Reporting Standards.

Prevention is better than cure: That’s Inland Revenue’s perspective on tax compliance for multinationals. It wants to make compliance easy and non-compliance difficult, by helping customers early, providing clear guidance and keeping costs down.

These Example Financial Statements illustrate financial reporting by an entity engaging in transactions that are typical across a range of non-specialist sectors.

Many Kiwi businesses eventually outgrow their systems and processes. Their financial, governance and management systems were a perfect fit when the business was smaller – but now, they’re hindering growth, not helping it.

There’s new GST legislation in place for online marketplaces, which includes short-term accommodation platforms like Airbnb, ride-sharing platforms like Uber and delivery services like Uber Eats. These online platforms must now collect 15% GST and return it to Inland Revenue. This ‘app tax’ came into effect on 1 April 2024, and it’s already having an impact on the market.

The External Reporting Board (XRB) has released updated reporting thresholds for public benefit entities (PBEs): Tier Old criteria New criteria Tier 1* Total expenses greater than $30m Total expenses greater than $33m Tier 2 Total expenses less than $30m Total expenses less than $33m Tier 3 Total expenses less than $2m Total expenses less than $5m Tier 4 Total operating payments $140,000 No change *Note; an entity is also required to apply Tier 1 if it has “public accountability”. This decision is welcome as many PBE entities will see a reduction in reporting requirements and compliance costs. These thresholds have not been updated since 2012; in that time, various new pieces of legislation have been introduced and inflation has pushed many entities from Tier 3 to Tier 2 reporting without becoming any larger or more complex. Several new PBE standards have also been issued over the last decade, causing concerns that the costs of reporting exceeded the benefit to users under the previous size thresholds. Research by the XRB on the expenditure of PBE entities shows there is substantially less clustering around the $5 million threshold, compared to the $2 million threshold. In total there are 33 entities with total expenditure between $4.8 million and $5.2 million, while there are 115 entities with total expenditure between $2.8 million and $3.2 million. When does this change apply? The new thresholds are mandatory for periods beginning after 28 March 2024, which impacts 31 March 2025 balance dates onward. However, the change can be applied for periods that end after the standard takes effect (28 March), so those preparing reports for 31 March 2024 balance dates onward are also eligible. This news is timely for Incorporated Societies applying XRB PBE reporting standards for the first time under the Incorporated Societies Act 2022, as more Incorporated Societies will also now have lower reporting requirements. Determining your expenditure Total expenses for the purpose of determining a reporting threshold include all of an entity’s operating expenditure. This includes grants or donations made by an entity, but does not include capital expenditure (assets) or loan payments. How does it work in practice? If you now find yourself eligible to apply a lower reporting tier due to this change, it can be implemented immediately. However, you need to consider future expenditure as you may end up transitioning back quickly if this grows year on year. It’s also important to think about consolidation requirements if your entity sits within a group, so that a change in reporting tier at the entity level doesn’t interfere with group reporting. PBEs can apply requirements of a higher tier if they want to, so if you are happy to stay at the current reporting tier – that’s fine. For example, we have seen this with recently established PBEs that knew they would exceed the previous $2m expenditure threshold in future years, so they start by adopting Tier 2 rather than waiting until they hit the threshold. If your PBE previously applied Tier 1 requirements and you are transitioning to Tier 2 requirements due to your expenditure, the recognition and measurement accounting policies will remain the same, but there will be less disclosure requirements in the notes to the financial statements. Tier 2 and Tier 3 reporting requirements have some differences, mainly around presentation of revenue and expenses, and accounting for property, plant and equipment, investment property and publicly traded financial investments. Entities that previously applied Tier 2 requirements and are transitioning to Tier 3 can choose to either provide comparative data in accordance with Tier 2 requirements (i.e., leave it as it was) or restate them in line with Tier 3. If your entity is thinking about transitioning reporting tiers, start engaging in the process early so you can navigate this transition which can be deceptively complex at times.

There’s been a period of relative calm in the world of accounting standards in recent years, however they quietly continue to evolve and reflect the dynamic nature of business, and the need for transparency and accuracy in financial reporting. Recently, several important changes have been made to New Zealand equivalents to International Accounting Standards (NZ IAS) to make financial statements clearer, comparable and relevant. Key updates have been made to: 1. material accounting policies for year ends from 31 December 2023 onward 2. accounting for estimates for year ends from 31 December 2023 onward 3. the presentation of current and non-current liabilities for year ends from 31 December 2024 onward Understanding the implications and significance for your business Changes to NZ IAS 1: Disclosure of material accounting policies A shift from the significant to the material The amendment to NZ IAS 1 emphasises the disclosure of material accounting policies. It requires entities to make material accounting policies prominent and easily accessible within financial statements. Previously, businesses were only required to disclose their significant accounting policies. The move to releasing material accounting polices was made to reflect the fact that term and its application is described in detail in accounting standards, where the term significant is not. How will this benefit my organisation and its stakeholders? Transparent disclosure of accounting policies is crucial for stakeholders to comprehend how financial information is prepared and to assess the reliability of financial statements. By explicitly stating material accounting policies, companies provide clarity on significant judgments and assumptions applied in financial reporting, enhancing the overall transparency, trustworthiness and comparability of financial statements for different entities. Investors and other stakeholders can make more informed decisions when they have a clearer understanding of the underlying principles and methodologies used in financial reporting. It encourages companies to critically evaluate their accounting policies, ensuring they accurately reflect the economic substance of transactions and events. Businesses are encouraged to review the significant accounting polices previously disclosed to determine how they stack up against the new guidance to disclose material accounting policies. Changes to NZ IAS 8: Accounting for Estimates More consistency and reliability on the horizon The revision to NZ IAS 8 addresses the accounting for estimates, emphasising the need for consistency and reliability when estimating uncertain future outcomes. Over time, a change in accounting estimates has become confused with a change in accounting policy. The amendment replaces the definition for a change in accounting estimate with the definition for an accounting estimate as monetary amounts that are subject to measurement uncertainty. Enhance the usefulness of your financial statements … Estimates play a crucial role in financial reporting, particularly in areas such as fair value measurements, provisions, and impairment assessments. Ensuring the reliability and consistency of estimates turns your financial statements into a tool stakeholders can use to assess the potential impact of uncertainties on an entity's financial position and performance. … And mitigate risk The revised standard prompts companies to exercise greater diligence and transparency when making and disclosing estimates. By providing insight into significant judgments and uncertainties, you can mitigate the risk of misinterpretation and enhance stakeholder confidence in the reliability of your financial information. Additionally, it encourages robust internal controls and processes for estimating, monitoring, and disclosing uncertainties, all of which improves risk management practices. Changes to NZ IAS 1: Presentation of Current and Non-current Liabilities What is changing? The amendment to NZ IAS 1 focuses on the presentation of current and non-current liabilities, requiring a liability to be classified as current if, among others, the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. The amendments to NZ IAS 1 clarify that the right to defer settlement must have substance, and it also discusses the impact of covenants on this assessment. Why is this important? Clearly presenting your current and non-current liabilities makes your liquidity and solvency position easier to understand. By segregating liabilities based on their maturity, financial statements provide valuable insights into an entity's short-term obligations and its ability to meet them, which helps stakeholders assess liquidity risk and financial health. The amendments state that at the reporting date, instead of considering covenants that will need to be complied with in the future, when considering the classification of the debt as current or non-current, the entity should disclose information about these covenants in the notes to the financial statements. The standard setter introduced these so investors can understand the risk that such debt could become repayable early and therefore improving the information being provided on the long-term debt. What is the impact on my business? The revised standard prompts entities to reassess their classification of liabilities, ensuring compliance with the new presentation requirements. By clearly delineating between current and non-current liabilities, businesses enhance the clarity and relevance of financial statements, enabling stakeholders to make more informed assessments of an entity's financial position and performance. It underscores the importance of effective liquidity management and strategic planning to meet short-term obligations and sustain long-term growth. What’s next? After a period of relative calm, we are expecting to see a minimum of two new accounting standards over the coming year. The first, IFRS 18, will impact the representation and disclosures of primary financial statements. Key changes include: • new required subtotals included in the statement of profit or loss such as operating profit, profit before financing and income taxes, • disclosures around management-defined performance measures (MPMs), and • enhanced requirements for aggregation and disaggregation (i.e., grouping of information). It is important to note that IFRS 18 is subject to consultation before the standard is adopted in New Zealand. We are also anticipating a new standard outlining disclosure requirements for subsidiary, and potentially other entities, who do not have obligations to produce financial statements. When and how this standard might be applied in New Zealand will be subject to XRB consultation.

When you take a sip from a 330ml bottle of Speight’s Gold Medal Ale, you probably don’t consider the 47c in excise tax that was included in the price. And why would you? It would only take the fun out of having a nice cold beer. Unfortunately, if you run an alcohol business in New Zealand, you don’t have the luxury of forgetting about excise taxes. These have risen rapidly in recent years because they are benchmarked to consumer inflation. The rise over the last three years in the consumer price index to as high as 7%, has meant more than $94 million in additional excise tax for the alcohol industry. On top of that, the industry has had to absorb rising ingredient and packaging costs, skills shortages, falling sales and higher interest rates. It’s tough going for our alcohol manufacturers and distributors, many of whom are small privately owned and family businesses. While this is an area of tax legislation that might only affect a small number of businesses, it has a sizeable impact. It’s a challenge to be accurate and compliant, particularly for the smaller craft producers that make up around 10% of our local market. These inaccuracies are an under-recognised issue - get it wrong, and it can be extremely costly. Overpaying could lead to significant unnecessary costs Producers must record alcohol volumes accurately, have correct sales records, and lodge that data by the deadlines set by the New Zealand Customs Service. Because brewing is an art and a science, the level of accuracy required can be tricky to achieve. It’s not uncommon to see brewers make tiny errors that lead to big consequences, and the last thing anyone wants is to be facing thousands of dollars a month in unnecessary tax. It’s also easier to make errors at a smaller craft operation, because it’s less industrialised when compared to the big players like Speight’s or Heineken. Take, for example, a fictitious beer manufacturer – let’s call it Bottle Brewery. One of its best-selling beers is a light lager that should have 4% alcohol by volume (ABV). Unfortunately, the team at Bottle Brewery isn’t equipped to be 100% accurate with its calculation and processes. As a result, its light lager has been leaving the brewery with an ABV of 4.08%. That might sound like nothing more than a rounding error, but it’s just enough to increase the excise tax on the beer. The corresponding increase gets applied across the stock keeping unit (SKU) based on sales per month, and the light lager is selling well, shifting 100,000 units in a month. Applying the additional excise tax adds an extra $2,800 per month for that alcohol SKU alone. Plus, the Bottle Brewery team is a bit slow at filing its returns. With that late fine, and the extra excise tax, the company is unnecessarily paying $3,600 a month. Hopefully Botte Brewery has been more accurate with its other beers or its taxes could be really adding up. Underpaying can be a nasty shock When you’re underpaying tax, you run the risk of an unpleasant shock when you need to backpay the outstanding amounts. Customs carries out regular inspections of New Zealand’s alcohol businesses, walking through production facilities to see how you’re recording your alcohol volumes, checking your systems, and inspecting your reports and declarations. Inspectors will look at everything, even checking to see whether you have alcohol sitting in unlicenced areas of your property – you may need to pay excise tax on it if that’s the case. At a time when niche brewers have been struggling to stay afloat, investing in getting this right is well worth the effort – because the costs of getting it wrong can be disastrous. If Bottle Brewery has been paying its excise tax assuming its light lager is 4%, but Customs discovers it is actually 4.08%, the business may be on the hook for several months of backdated taxes. This could be a considerable cashflow blow for a small brewery that’s already feeling the headwinds of tough economic conditions. It may even face penalties for mistakes or omissions, on top of any tax owed. If Customs decides to do a full audit, that will also take up extra time and resources they can’t afford. Customs is very responsive and helpful, and they do have options under the legislation to remit penalties and offer time to pay arrangements. However, they don’t always have the ability or appetite to offer lenient repayment options, and outstanding excise tax and penalties may need to be paid. The right systems and processes can save you time and money Most breweries use spreadsheets to track their sales and alcohol volumes. Academic research has found that an estimated 94% of spreadsheets contain errors, which shouldn’t fill anyone with confidence. Breweries need to develop and maintain a laser focus on improving the quality of their data, and developing models that help them improve accuracy and file returns on time. Typically this investment quickly pays for itself, often simply by avoiding late filing fees. Improving systems and processes often leads to other increased efficiencies throughout the business, including better stock storage practices and more precise forecasting. When it comes to excise tax reporting, a millilitre of prevention is worth a fermenter full of cure.

This publication is designed to give preparers of IFRS financial statements a high-level awareness of recent changes to International Financial Reporting Standards. It covers both new Standards and Interpretations that have been issued and amendments made to existing ones.

With hopes Covid is now somewhat in the rearview mirror, the pace of change in the transfer pricing space has not slowed down. The OECD continues to drive the base erosion profit shifting (BEPS) programme to minimise tax competition among jurisdictions and ensure multinationals pay their fair share. However, the effectiveness of the programme’s final stages depends on the willingness of countries to implement and enforce these rules consistently. It remains to be seen how tax authorities worldwide will adapt to these changes and if a new era of cooperation will indeed emerge in the global tax landscape. However, with economies around the world still in or coming out of recession, there are questions around whether the 142 countries that have signed up to the BEPS framework remain committed to such a unified approach, or if there will be a shift to a ‘every jurisdiction for themselves’ mentality. As some economists have indicated, there are signs certain economies are shifting away from a focus on globalisation to looking inward and more national economic protectionism. What does this mean for New Zealand-based multinationals? There seems to be a stand-off between countries waiting to see who will jump first. In the meantime, some have implemented the needed regulations, while others – like New Zealand - have also hedged their bets and have legislation waiting as a backup, as demonstrated by the introduction of the digital services tax laws brought in by the Labour Government. The current National-led Government is yet to confirm if this will remain, be repealed, changed or trumpeted, but it has increased resources for Inland Revenue to expand its audit capacity, minimise taxation losses and ensure greater integrity and fairness in our tax system. And it’s likely there will be heightened proactivity in this space so the Government can collect the extra revenue needed to deliver on its election policies. This means change for multinationals could be on the way, and transfer pricing rules may be an area in which Inland Revenue increases audit activity; this may also not be limited to the tax authority of New Zealand but others around the world. The key for potentially affected Kiwi businesses will be to: · review their New Zealand and global transfer pricing policies to ensure they remain fit for purpose · establish suitable governance to implement these policies appropriately · keep management up to date with changes in the transfer pricing space. Countries will be weighing up the benefits of a unified approach against the temptation of self-interest, while businesses grapple with economic uncertainties and transfer pricing rules which will continue to change. As New Zealand and other countries await international unification, internal pressures will continue to mount, setting the stage for a complex interplay between economic recovery, taxation, and the delicate dance of international relations.

If you only make one security tweak to your business, it should be this: turn on multifactor or two factor authentication. Multifactor authentication (MFA) is a simple change that can massively improve data protection. Without it enabled, your business or Not for Profit organisation could be in breach of the Privacy Act depending on the type of information you hold. What is multifactor authentication? Multifactor authentication means accessing a particular app or system requires more than one method of identification. Without MFA, you log on via one device, with a single set of credentials. MFA requires more from users based on three factors: Something you have, like a smartphone or a secure USB key Something you are, like a fingerprint or facial recognition. Something you know, like a password or PIN. For example, to log into Xero online, you enter your email and password. With MFA, you then need to confirm your identity another way – such as on your phone via the Xero app. If MFA is enabled for Microsoft Outlook and you log on using a device that isn’t trusted, you will also need to enter a security code that has been sent to a trusted email account or phone number. Whether it’s a text code, a fingerprint or a phone confirmation, MFA ensures more than one ID method is required to get into your important data. Most platforms and applications give you the option to switch it on through your security settings. It seems inconvenient – why would you bother? Single-factor authentication can make it much easier for a cybercriminal to compromise your bank accounts, accounting software, or business systems from anywhere in the world. All they need is your email address and password, which might have been stolen or leaked, or gained through phishing. With two-factor authentication, it becomes exponentially more difficult for malicious users to get access to your systems. According to Microsoft, there are more than 300 million fraudulent sign-in attempts on its cloud services daily: “All it takes is one compromised credential or one legacy application to cause a data breach.” It estimates that MFA can block more than 99.9% of account compromise attacks. If that seems too high, perhaps it is, but MFA is still highly effective; Google says its implementation of MFA halved the number of account compromises. When you have MFA enabled, it’s less concerning if your password is leaked or compromised. That alone won’t be enough to allow a hacker to gain access. Without MFA, you’re probably in breach of the Privacy Act The Office of the Privacy Commissioner recommends all organisations, regardless of their size to introduce MFA. When a breach occurs, one question often asked is whether an organisation has taken reasonable steps to protect the data they hold. If it is deemed the organisation did not take reasonable steps to protect its data, this could result in a breach of the Privacy Act. What’s reasonable depends on the size of the organisation breached and the scale and sensitivity of data it holds. No matter how small your business or charity might be, it almost certainly holds some personal information. It might be as basic as a list of members’ names, phone numbers and email addresses. Or perhaps it’s a more complex customer management system that includes payment details, health information or biometric data. As such, implementing the MFA is no brainer. Under the Privacy Act, every organisation or individual that holds data must collect it appropriately, keep it safe and allow the people it concerns to be able to access it (for more details, read the Privacy Principles). The Office of the Privacy Commissioner describes two-factor authentication as a bare minimum for small businesses or organisations that hold digital information. Without MFA in place, if someone unauthorised accesses your business data, you are likely to be in breach of the Privacy Act. This could lead to a penalty under the Act starting from $10,000; the most ever awarded is just over $168,000. The risks of a data breach go far beyond penalties, though. Your organisation may also experience potentially huge financial losses, reputational damage, and be forced to shut down. We know of one instance where a small online business experienced a data breach, and the cost of remediation and compliance was so high that dissolving the business was the best outcome. Cyber incursions are such a significant risk it’s hard to overstate their potential impact – yet many organisations are unaware of their responsibilities and risks. It’s all part of everyday risk management Cyber security can feel like a particularly thorny specialist topic that sits outside business as usual. But there’s a better way to think about it – cyber security is simply another risk management activity. It’s not separate or unique or different to other risks in your business, so managing it should equally be an everyday task. This means switching on MFA and getting everybody using it automatically, as well as keeping up to date with software patches and managing passwords effectively. Simple steps like these go a long way to protecting your organisation from breaches. In some cases, you might need to switch platforms to be able to access MFA for your organisation. We also occasionally see small regional organisations in areas that are digitally excluded, which can make this tricky. There may be workarounds available, or alternative platforms that can help. Create awareness and provide training We know that it can feel inconvenient to add MFA to apps you use frequently. If those who use your systems don’t understand the importance of using MFA, they may find this extra effort irritating, or try to switch it off. It’s essential to have all users on board. Education is the key – you need to explain to everyone why MFA is vital and why it is well worth the additional effort. You need to create awareness and provide training. According to research by Verizon, 82% of all cyber attacks “involved a human element”, and phishing scams still dominate social engineering attacks. We know that many small and medium enterprises and Not for Profits, don’t have in house IT and cyber expertise, however, being small or local doesn’t exempt you from the Privacy Act, so you still need to make the effort to not only enable MFA, but to understand your obligations under the Act, establish cyber security policies, and incorporate MFA into your overall approach to risk management.

Why would a business ever choose to invest more time and money in financial reporting? You might think it’s always better to just do the minimum and stick to the usual special purpose reporting that most Kiwi company’s produce. But when your company is serious about achieving a higher profile on an international stage, there could be some unexpected upsides to stepping up to more rigorous financial reporting. Instead of special purpose reporting, a company could benefit from adopting International Financial Reporting Standards (IFRS). Put simply, it’s an international accounting language that crosses borders so investors or shareholders who have a reasonable level of financial knowledge can compare listed companies across the globe. The standards are comprehensive, consistent, transparent and universal. Different jurisdictions have their own versions of IFRS and Aotearoa is no exception. We have NZ IFRS, a local version of IFRS which includes domestic requirements for our market while ensuring we comply with IFRS. The standards are updated regularly. NZ IFRS and which companies must comply Naturally, NZ IFRS is required for publicly listed companies, whether they’re based here or internationally. For some businesses, especially household names, you’ll often see the complying information packaged up in the financial section of a glossy annual report. For other businesses, the information will be available on the Companies Office website. Privately owned New Zealand companies with assets totalling more than $66 million or revenue over $33 million must also comply with NZ IFRS. Other entities deemed ‘publicly accountable’ may also need to report under NZ IFRS, for example regulated entities such as banks or insurers. Adopting IFRS sends a clear message your company is ready for the big leagues If your company doesn’t meet the threshold for mandatory adoption of IFRS, why would you choose to opt into the standards? Attracting the right buyers at the right price The first and biggest motivator is the prospect of a sale. Reporting under IFRS makes a company more attractive in the international marketplace. If your company has the potential to be purchased by a global corporation as a subsidiary, that potential buyer will be an IFRS reporter. By stepping up to IFRS, your company can be assessed more easily and accurately by the prospective purchaser. We’ve seen many Kiwi companies sold overseas in recent years, from huge sales like Vend ($455 million) and Timely (around $100 million), through to high-performing SMEs and farms. IFRS shows you’re speaking the same language, and that your company can easily slot into their own reporting regime. It also demonstrates that your business has the capability and capacity to comply with IFRS. Because this level of reporting is more complex, and requires a higher level of sophistication, it shows a purchaser that your company has the acumen and expertise to be a major asset on the balance sheet. Stepping up your capital raising game Another important motivator of switching to NZ IFRS early is fundraising. If your business is seeking to raise money from the capital markets, adopting higher-level reporting can help investors make a more informed decision. It can give them confidence in your company and allows them to have a more in-depth understanding of precisely how the company is performing. And, if your company is dealing in complex financial instruments such as hedging, foreign exchange or derivatives, there is no information in special purpose reporting that tells you how to treat these. NZ IFRS provides clear guidance about reporting on these types of activities. IFRS produces higher-quality financial statements Financial statements produced under NZ IFRS are considerably more accurate than those produced under the special purpose financial reporting framework. A higher level of scrutiny is applied across your organisation’s financials, and the standards themselves provide guidance about how to improve the accuracy of your statements. Here’s some examples to highlight how they differ: If your company has $1m debtors owing at the end of the financial year, special purpose reporting will value that at $1m. That’s a straightforward way to account for those monies owed. In contrast, NZ IFRS demands a closer look at the outstanding invoices. If the company historically sees a 5% rate of default, your NZ IFRS financial statements will provision for that and value the accounts receivable at $950k. This is a more accurate valuation of the receivable invoices. When a business exports goods, once the goods are on a ship and on their way overseas, they are invoiced and recorded as a sale. Under NZ IFRS, those goods might not actually be sold until they land at the receiving port – the sale would be reversed back into inventory until the product arrives and ownership passes. Unlike special purpose reporting, NZ IFRS requires right-of-use values for leased assets, which needs some detailed calculations to capture. There are hundreds more rules like these that contribute to IFRS providing much more detailed and accurate accounts. If you adopt IFRS, the quality of your accounts is going to be significantly higher, and it could change your final numbers quite substantially. Making a decision about whether to adopt NZ IFRS Adopting NZ IFRS does involve extra work and higher costs. You certainly wouldn’t adopt these standards lightly. Ideally, you should consider the costs and benefits to the business – is it worthwhile? If IFRS statements could make the difference between a sale or no sale, or maximise the value of your company, it could be an investment with a very impressive return. It won’t be right for every business, but for up-and-coming companies with great acquisition prospects, NZ IFRS can show you’re ready for the big stage.

The Holidays Act 2003 is one of the most difficult pieces of legislation for Kiwi businesses to comply with. In fact, it is so tricky, that one of the first major entities to be caught out for non-compliance was MBIE – the regulator in charge of Holidays Act compliance. This complexity has seen the Act continue to be in the news over the past few years for all the wrong reasons; three of the biggest stories to hit the headlines include: • The Auditor-General has estimated a $2.1 billion dollar holiday pay liability for the Government • McDonalds has been remediating its holiday pay non-compliance since 2019 • The former District Health Boards have become a “$1 billion nightmare” of Holidays Act non-compliance But the damage isn’t limited to the large end of town either – in fact, we are seeing the Labour Inspectorate pursue small to medium sized enterprises with greater frequency and more rigour, meaning compliance with the Act is essential for businesses of all sizes. What drives non-compliance in the aged care and retirement villages (RV) sector? The holiday pay calculation is straight-forward for organisations where team members consistently work 9-to-5, especially when they don’t have allowances, commissions, or bonuses. Underpayments in those situations are unlikely or immaterial. But this is where the simplicity stops. Where employee work patterns vary - as is the case throughout the aged care and RV sectors - the calculation becomes harder, and non-compliance is much more likely. Support staff often have variable work patterns, including work on weekends and public holidays, as well as complex remuneration structures that include a variety of allowances. The problem doesn’t end there though – bonuses are often common for senior leaders, and this can also contribute to potential non-compliance. Casual staff arrangements are common and we have started to see more pressure from the Labour Inspectorate on correct determination of employee entitlements (casual or otherwise). It is vital operators get these classifications correct to ensure compliance with the Act. These are just a few examples of the specific issues that apply to the sector, but there are almost certainly many other drivers of non-compliance that could apply to operators depending on their payroll system setup and internal payroll processes. Common red flags to look out for While we can’t provide an exhaustive list of what causes non-compliance, here are some of the more common red flags to look for, which might indicate you are inadvertently non-compliant with the requirements set out in the Act. 1. Recording leave balances in hourly or daily units: The Holidays Act defines leave entitlement in weeks, making it difficult to remain compliant when recording leave in hours or days. This is particularly true when employee work patterns change. 2. Complex or variable remuneration structures: The more pay components employees have, the more likely it is that there is non-compliance. Many allowances and bonuses that should be included in gross earnings calculations often aren’t. Examples of these include payments such as allowances or overtime rates that kick in when an employee works more than fifty hours, or daily allowances for long 12 hour shifts. 3. Variable work patterns: These often result in payroll systems inaccurately calculating an employee’s work pattern at any given time. This is a significant driver of non-compliance. 4. Weekend shifts and working public holidays: Many companies struggle to accurately determine statutory holiday and alternate day entitlements. 5. Incorrect identification of casual employees: Some companies fail to identify when their employees should no longer be classified as “casual”, meaning they aren’t awarded the annual leave they are entitled to. “But I have a compliant payroll system!” We often hear from clients that thought they were compliant with the law because their payroll provider said they were. Sadly though, using a major system or outsourcing the payroll function entirely does not necessarily guarantee compliance. As mentioned at the beginning of this article, even some of our largest organisations aren’t immune to slip-ups that snowball into very expensive remediations. So, what does this all mean for me? Although changes to the Act are in draft, they will not immediately guarantee compliance for those with non-compliant payroll systems, nor remove the requirement to address historic non-compliance. To ensure current and future compliance with the law, it is vital that you take a proactive approach in dealing with any possible holiday pay issues. This can limit the extent of any potential financial or reputational fallout.