How to: Income tax for wage and salary earners

Introduction

If you are a wage or salary earner you will pay income tax through compulsory PAYE deductions ("Pay As You Earn") from your wages or salary. The amount deducted is based on your annual income. The amount deducted includes an ACC Earner Premium.

How do I find out my tax code?

The amount of PAYE deducted depends also on which tax code applies to you. Inland Revenue recently introduced new tax codes. You can find out your tax code by obtaining a copy of the tax code declaration form (IR330) from Inland Revenue; you can phone them on 0800 257 773 and they will send you the form, or you can download the form from the IRD website at www.ird.govt.nz.

Completing your tax form when you start your employment

When you start your job you will be required to complete a tax code declaration form, which, among other things, will determine the amount of PAYE that will be deducted.

While you may have someone file this form on your behalf, you will have ultimate responsibility for its contents, and therefore will be responsible for any interest and penalties if less than the correct amount is deducted from your income. However, if the person who completed your tax form was providing you with a service – for example, an accountant – you are entitled to take legal action against that person if he or she was negligent.

Do I need to file an annual tax return?

Under recent Inland Revenue changes, most people who have paid PAYE during the tax year will not have to file an IR5 annual tax return. You should contact the IRD if you are in doubt as to whether you are required to file a return.

As you no longer need to file a tax return, the old IR12 tax deduction certificate that your employer gave you each year has now become redundant. However, if you would like a record of your income and tax paid for the year you can ask Inland Revenue to send you a Summary of Earnings.

If you are required to file a tax return, failing to do so on time will incur a penalty. However, if you can show that you have a reasonable excuse, you may apply in writing to the IRD and they may cancel the penalty in your case.

Accountants’ and lawyers’ fees are deductible

If you incur fees for professional services from accountants and lawyers in earning your income or in filing tax returns, you can claim these fees as a legitimate tax deduction.

Cautionary notes

• The IRD are entitled to charge you penalties and interest for late payments of income tax.
• It is advisable to keep all your income tax records for at least seven years. This will prove invaluable if you become involved in a dispute with the IRD.
• Taxation law is particularly complex, detailed and technical. Particularly if a dispute arises with Inland Revenue, it may be advisable for you to obtain advice from an accountant or lawyer experienced in taxation issues.
• The guidelines as to what is considered to be income can be confusing. For example, proceeds from house sales are generally not deemed to be income unless the seller had originally bought the house with the primary intention of reselling it for a profit. Similarly, profit derived from the sale of personal property will not be considered income and therefore will not be taxed, unless the seller had bought it intending to resell for a profit or is in the business of trading in personal property. For detailed information on this question, consult an accountant or lawyer.