What is a special tax code?
To get back to basics, your tax code tells your employer how much income tax to deduct from your salary or wages. This helps ensure you pay the right amount of tax throughout the financial year so you don’t end up with a nasty tax bill. Which tax code you need to use depends on a few things such as:
- The number of jobs you have
- If you have a student loan
- If you are a New Zealand resident
- If you qualify for certain tax credits
For most employees, one of the standard tax codes will be fine to make sure your income tax is deducted at the correct rate. However, some workers with exceptional circumstances can apply for a special tax code so that their employer can deduct their income tax at a special rate.
A special tax code (or STC) can mean you have:
- No tax deducted
- Tax deducted at a special rate
- PAYE deducted at a special rate
- Only your ACC earner’s levy deducted
A special tax code is used when one of the standard tax codes would mean your tax is deducted incorrectly for your overall circumstances.
Do you need a special tax code?
There are a few situations that might mean you can apply for a special tax code. These are all situations in which using a standard tax code would you mean you end up with an unusually large tax bill or refund.
- a secondary job or other income over and above your main job
- rental property profit or loss
- business profit or loss
- an overseas pension that’s taxable in New Zealand
For example, you have a significant rental loss to carry forward but you also work one regular 9-5 job. If the loss you have is bigger than the amount of tax you would normally have to pay in the year, you could apply for a special tax code.
In this situation, if you used the standard M tax code and paid the usual tax rate at your job, you would have to file a tax return just to receive the full amount back as a refund. Instead of paying tax money just to have it all refunded back, you could apply for a special tax code and pay less income tax throughout the year to make up for your loss.
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How do you apply for a special tax code?
To get a special tax code, you need to fill out a special tax code declaration, or IR23BS form, with Inland Revenue. To fill out the form correctly, you’ll need to have your IRD number at the ready, as well as know some important information about your income such as:
- How much income you expect to earn in the financial year
- The amount of any losses you have to carry forward
- Whether or not you are registered for Working for Families tax credits.
Once you have completed this form and successfully applied for your special tax code, you will be issued with a special tax code certificate. If you are a contractor, you will receive a special tax rate certificate, which we’ll explain in a bit more detail in the next section.
You will then need to give your special tax code or special tax rate certificate to your employer. This replaces the IR330 form that you usually use to declare your tax code. The new certificate will tell your employer how much tax to deduct from your income, and how long this new rate applies for.
What if I’m a contractor needing a special tax rate?
Special tax codes and special tax rates work slightly differently for regular employees and contractors.
If you’re an employee, you just need to apply for your special tax code certificate and hand it over to your employer. Your employer will make sure to adjust your PAYE deductions to suit your special tax rate. Once your special tax code certificate expires, your employer will change your tax code back to what was on the last IR330 tax code declaration form you gave them.
If you are a contractor (that’s if you receive withholding or schedular payments) working out a special tax rate is a little bit different. If you receive withholding payments you will always use the tax code “WT” and pay withholding tax on your contract income. This means you do not have to apply for a special tax code.
Instead, contractors can apply for a special tax rate. In many situations contractors have the freedom to use either a standard tax rate or to choose their own rate. If the minimum standard rate you would normally choose from is too high – that’s 15% for non-residents or 10% for residents – then you can apply for a special tax rate using the special tax rate application form. If the tax rate you want to use is higher than the standard rate, then you don’t need to apply for a special rate. Instead, you can just declare your chosen tax rate on your regular IR330C tax rate declaration form.
In short, for most wage earners and contractors, one of the standard tax codes or tax rates will be fine to make sure your tax is deducted at the correct rate. For those with exceptional circumstances, a special tax code helps ensure you aren’t making big overpayments on your income tax and don’t end up with a supersized debt at the end of the tax year. If you think you might need a special tax code, you can find out more information and apply for one through Inland Revenue’s website.