Doing your taxes on your own is hard because it’s just so easy to get it wrong. Part of the difficulty lies in all the jargon: from allowable deductions to new income, just how is anyone able to fill out the IR330 without pulling their hair out over the painful terminology? You’re no accountant so we don’t expect you to know your RWT from your PAYE to your SOE. Argh acronyms! So, we’ve put together a glossary of sorts to help you get your taxes done right. We’ll start off with some of the easier tax terms and then head into the more complicated ones! By the end of it you’ll be a total expert, right? Right…read on!
IRD: The Big Cheese
You can’t do your taxes without knowing the Inland Revenue Department, AKA IRD, IR, or Te Tari Taake. The IRD collects revenue from new citizens that the government needs to pay for the many programmes and services to help communities. It has over 4,700 staff because it does so much for NZ, such as:
- Operates the NZ student loan scheme
- Collects and pays child support to custodial caregivers
- Administers Working for Families Tax Credits
While paying taxes can be a drag, it helps knowing that the taxes you pay go to fund the programmes that help make our country run properly.
This is the fun part: where you get paid!
Income is the money you’re paid for the work you do. Whether you’re flipping burgers or you’re writing prescriptions, all employed kiwis make an income and therefore, we all pay….
Income tax is money taken out of your earnings every pay day. Your employer takes out income tax before you get paid, then you’re left with what we call your ‘after tax income’: the income you make after your taxes have been paid. If you’re self-employed it’s your responsibility to put aside your tax money. How much you pay depends on the amount of money you make. Fun fact: the more you make, the more you pay!
Say hello to your total income from all sources (less any allowable deductions or current year losses). That sounds more complicated than it really is. Your net income is all the money you make from all the jobs you have. So, if you have a salaried day job, and you moonlight as a club DJ too, both of those incomes make up your net income. If you only have the one job, your net income is your annual salary (or wages!) before tax. It’s often a great figure, until that tax comes off! Ouch!
The income year, is a fancy term for the tax year. It starts on 1 April and finishes on 31 March the following year, which just so happens to be the date you need to get your taxes filed by (well, they’re pretty lenient so you have until July 7th in reality).
The 2016 income year relates to income from 1 April 2015 to 31 March 2016.
Pay as you earn (PAYE)
PAYE is income tax with the ACC levy included. When you’re looking at your payslip wondering why it’s so much lower than you though it would be, that’s PAYE. This entry on your payslip indicates that your tax has been taken from your pay by your employer, before it even got paid to you. Your employer is legally bound to put aside your tax money and pay it to the IRD on your behalf.
Do it right
When it comes to paying your taxes, you’ve got to be comfortable with filling out forms. The IRD has a ridiculous number of forms, but we’ll just look at the most common ones: the IR330 and IR3.
Tax code declaration (IR330)
The IR330 is a form that all NZ employees must fill out to select their tax code. You have to fill out this form when you start a new job or you need to change your tax code, say after you’ve paid off that pesky student loan (congrats!). If you have multiple jobs, you need a separate IR330 form for each one. Keep in mind that if you don’t fill out the IR330, your employer still needs to deduct money for your taxes, but at a much higher rate
If you’re earning income, you’ll need a tax code to be able to pay the right amount of taxes. Different tax codes apply to different work situations, so it’s important you fill out the IR330 with the right tax code. Now, there are a lot of codes to choose from, but don’t freak out: most people are on MSL, which indicates they have one main job and a student loan. No student loan? Lucky you – just take off the SL and stick with M. Your tax code is super important because it tells the IRD just how much money they should be deducting from your income. Get it wrong and you could end up with a massive tax bill at the end of the year.
IR3: Individual income tax return
At the end of the tax year, employed kiwis must fill out the IR3 income tax return form.
This handy form informs the IRD about:
- what your income was during the year
- how much tax you paid on your income
- any business expenses (allowable deductions)
- whether you’re owed tax (refund!) or you owe tax
You’ll be ponying up cash to the IRD if you’re employed, no matter what.
From freelancers to small business owners – every New Zealander pays tax. IR3 taxpayers include the following:
- you get income from rental properties
- you receive income that hasn’t been taxed
- you run your own business
- you are self-employed, or
- you receive schedular payments
Filling it out is as easy as keeping detailed records of your income such as bank statements and cheque books. You can either fill it out online or kick it old school and go paper. Your call, just make sure you fill it out correctly!
Now let’s get complicated
That’s the easy part done. Here’s where things can get a little trickier when you’re working out your taxes for yourself.
While there have been some pretty crazy tax deductions in the past, when you’re working out your own taxes it’s good to know what’s allowable and what’s not. Usually, you can claim for three kinds of deductions in your tax return:
- return preparation fees (if you get us to do your tax return for you!)
- commission on interest and dividends
- loss of earnings on certain insurance premiums
Self-employed? Good news: you can also claim for costs related to producing business income such as paying wages, rent, or buying stationery. Capital expenditure, like buying a computer, isn’t allowed, but you can claim depreciation of these assets every year.
Deductions are awesome because they reduce your taxable income which reduces the amount of income tax you pay. Winning!
Resident withholding tax (RWT)
Say what? It’s a mouthful but not as complex as it seems. RWT is the tax taken out of resident passive income.
Resident passive income is the amount paid to a NZ resident that consists of:
- a dividend
- a taxable Māori authority distribution (other than a retirement scheme contribution)
- a replacement payment paid to a person under a share lending arrangement
Payers of interest like banks and trusts, take RWT out of interest payments and send it to Inland Revenue. You might have noticed RWT being taken out on your bank statements. Don’t panic! Your bank does it to make it easier for you, so you don’t have to figure out how to pay it yourself.
Schedular payments used to be known as withholding payments. They refer to the money paid to a contractor or casual worker, that are subject to tax at a flat rate that is much higher than the regular income tax rate for workers. The tax taken out is put aside by the employer and paid to Inland Revenue on the employee’s behalf. At the end of the income year contractors and freelancers need to fill out an IR3 tax return to be able to get a refund.
Summary of earnings (SOE)
A summary of earnings is exactly what it it says it is: it contains income and tax information from your employer, and the amount of the ACC earners’ levy you’ve paid.
You need the information in your SOE if you want to work out whether or not you’re due a refund at the end of the tax year.
If you’re filling out your IR3 yourself, you need to put the info from your SOE on that IR3! The IRD automatically sends out SOEs in late May, but if you haven’t received it by then you can request one online. Note that you can make changes to your SOE if the info is incorrect. If you’ve had any one-off jobs that you need to claim, now’s the time to do it – then just send the updated SOE back to the IRD to sort it out.
Now you’re an expert
Are you feeling confident enough to tackle your taxes without us? Hopefully this little glossary of tax terms has helped, but if you’re still unsure about doing your taxes yourself we’re here to help. Doing your taxes on your own can be daunting, with or without the right terminology.
Remember, paying the fee to have us do your taxes for you is an allowable deduction. Take advantage of this perk and get in touch with us today!