Personal Finance

I Have No Money and It’s All My Fault: A Brutally Honest Guide to Taxes

Hi friends,

It’s time.

I’ve been contemplating writing a blog post on income tax for so long, but put it off due to the fact that.. Well, I couldn’t write it with the same positive, optimistic tone of my usual blog posts. Why? Because it’s a rather confronting topic, where most people realise that everything is their fault.

If you’re a calm, humble person, you’ll accept and learn from it. You’ll even thank the person informing you for enlightening you of how income tax works.

If you’re not, you’ll throw a f**king fit and scream at the customer service officer at the other end of the phone as if they are personally responsible for your taxes and your tax bills.

Let’s start from the beginning. In the early years of my career, I used to receive a tax refund every year. But one year, I didn’t, so I asked my tax intermediary why.

“A tax refund every year isn’t guaranteed,” they told me. “It depends on if you have paid the right amount of tax throughout the year. If you have overpaid your taxes, that’s when you get a tax refund.”

I thanked them and moved on with my life.

(I now know that it’s likely when my income went over the $48,000 mark and made me no longer eligible for the IETC – Independent Earner’s Tax Credit. More on this later.)

Who knew that years later, I’d find myself working for the national tax department, explaining people’s tax bills and tax refunds to them on a daily basis? I was recently very surprised to discover that even a friend who was an experienced chartered accountant didn’t understand their tax bill – saying “Why do I have it? I only have PAYE income.”

It’s not the fact that they said it. It’s the fact that they said it coming from a place where they were already assuming everything was IRD’s fault. Some people, on the other hand, open-mindedly and kindly ask, “I don’t get this – could you please help me understand?”

So here are some things I want to preface this blog with:

  • Stop complaining about the government. You’re not edgy.
  • Stop trying to put the blame on the government, or your Kiwisaver provider, or your bank, or your employer. Taking responsibility for your own finances is life-changing.
  • Stop thinking of the IRD as bad, greedy people. They are literally as neutral as you can get; and have no agenda at all. Tax intermediaries are not bad, greedy people either – but they definitely can be when they charge people to file income tax returns that are extremely easy to learn.
  • IRD doesn’t hate you. IRD doesn’t love you, either. Most people don’t realise that IRD doesn’t take people’s taxes – IRD only collects information about people’s taxes, and fixes them up at the end of each financial year. In fact, there’s a lot of things IRD wishes they could do, but can’t, because they themselves simply do what the government tells them to do. But if you had to say whether IRD was ‘good’ or ‘bad’? Definitely good. IRD’s policies are inherently lenient and compassionate.

(Or, if you asked me where IRD sits on an alignment chart, I’d say neutral good.)

Let’s get started!

Disclaimer: all figures are hypothetical. They’re there to illustrate my point.

You know the quote, “Life is really simple, but we insist on making it complicated?” That’s how I see income tax.

The concept of income tax is simple:

You earn money.

You earn money and pay taxes on this money.

You earn money and pay taxes on this money in tiers.

You earn money and pay taxes on this money in tiers of 10.5%, 17.5%, 30%, and 33% (in New Zealand).

At the end of each financial year, if you have overpaid your taxes, you will receive a tax refund – hooray!

At the end of each financial year, if you have underpaid your taxes, you will receive a tax bill – boo.

Income tax only becomes complicated when people whine, complain, blame, and look everywhere but in themselves for the reason why things haven’t gone their way.

However, is it really a bad thing to get a tax bill? You might think I’m crazy for asking that, but is it really?

Think about what would happen if everyone who underpaid their taxes got out of paying their tax bill. You would’ve paid your fair share of taxes all year, while they somehow got to pay less, and get away with it. That wouldn’t be fair at all. The fact that everyone is subject to the same tax rates is what makes the system fair. Income tax pays for our transport, our roads, our hospitals, our libraries, our schools, our universities, our parks, and so, so much more. Everyday things we take for granted.

Your Student Allowance comes from taxes. Your Jobseeker Support comes from taxes. Your Working for Families comes from taxes. Your Independent Earner’s Tax Credit comes from taxes. Your Paid Parental Leave comes from taxes. Your superannuation will come from taxes.

So I find it perfectly reasonable for the government to ask of you only your fair share. Most people think that their tax bill is extra money they have to pay – it’s not. It’s money you should’ve paid and contributed to your country throughout the year, but didn’t.

The simple truth is that if everyone did the right thing, nobody would ever get tax refunds or tax bills, because you wouldn’t owe or be owed any money.

I’d like to introduce you to an extremely handy, life-changing calculator.

On this calculator, you will be able to input your annual income, and it will tell you how much tax you’re supposed to have paid by the end of this financial year (31/03/2020).

Why life-changing, you ask? Because IRD keeps a record of the taxes you have paid throughout the year, as your employer sends the information to them. If you are nearing the end of the financial year – January, February, March – and find that something seems terribly off, you can then make changes to rectify this ASAP and get things back on track.

If I was earning $50,000, I know that between 01/04/2019 and 31/03/2020, I should have paid $8020 in income tax:

50k tax

However, say at the end of the year, I’ve only paid $7020 – leaving me with a $1000 bill.

Now why would I have only paid $7020?

Simple: I gave my employer, my bank, my Kiwisaver provider, or anyone else who taxes me, the wrong tax code.

When you start a new job, you’ll be given one of these – a handy dandy IR330.

Most of you are familiar with what to do regarding your main source of income, but most people receive a tax bill because they’ve chosen the wrong secondary income tax code. You’ll see them at the bottom, here:

Secondary Income

Say I worked two jobs throughout the year, and my main source of income is set to an M tax code. However, I’ve chosen S for my secondary income tax code – which is wrong. If my total annual income is $50,000, I should be using the next one up – SH. This is the one for income between $48,000 to $70,000.

In this instance, using S would have been what created a tax bill for me and meant that I owed the government money at the end of the year.

However, not everyone’s case is as simple as this – a lot of people get tax bills because they only think of their day job as their income.

In reality, you have more sources of income than you think.

Most people have these sources of income:

  • Salary/wages (ie. their 9-5 day job)
  • Bank interest
  • Kiwisaver PIE income

So you might think, “I earn $50,000 at my day job – so my total annual income is $50,000!”

When in reality, including your bank interest and your Kiwisaver, your total annual income is $70,000+, pushing you into the highest income tier. And when that happens, if you have been using the tax rates for a lower income tier, that is when you also get a tax bill.

“But why is Kiwisaver counted as part of my income?”

Because it is your income. Your Kiwisaver income is PIE income (Portfolio Investment Entity) – the same type of income that term deposits are.

If you go to the bank and open a term deposit, you will earn PIE income – and get to choose when you want to take your money out, whether it’s 3 months, 6 months, 12 months, or 5 years.

If you open a Kiwisaver, you will earn PIE income – but can only take it out when you are 65, or meet one of the four criteria (buying your first home etc).

When people have insisted that their Kiwisaver ‘isn’t their income’, it’s ‘the government’s income’, I’ve been tempted to ask them:

“So if it’s not your income and it’s the government’s, does that mean the government can just take your money? At that point you would insist that it IS your income, right?’

The bad news may be that you have to stick to Kiwisaver’s rules if you have one – but it’s not really bad news as Kiwisaver is entirely voluntary and optional anyway.

But the good news is that, hey! The $30,000 you have in your Kiwisaver is your income! Exciting times.

This means that you have to pay income tax on the interest that you earn on your Kiwisaver throughout the financial year. As Kiwisaver income is PIE income, you will use a tax rate called a PIR – Prescribed Investor Rate. (Yes, you! You’re an investor!)

PIR’s are 10.5%, 17.5%, and 28%. Likewise, you can check out the link to see the income tiers and where each rate applies. So, if you have been using 10.5% all year, but you were really meant to be using 28%, you will, once again, end up with a tax bill.

I once spoke to a woman who got a tax bill because she had gotten a huge payout near the end of the financial year. After earning a steady monthly income all year, her income jumped to $30,000 in one single month in January.

She explained that she was going on maternity leave, and got a payout for the rest of the income she was entitled to for the year. This pushed her income to over $80,000.

As she’d been using M for her main source of income and and SH for her secondary source of income, her mistake was not taking into account that from April 2018 through to March 2019, she would be earning over $80,000 – not under $70,000.

Because her income was now over $80,000, this means that for the financial year, she should have used ST for her secondary source of income instead.

(Of course, she argued and said that the $30,000 in January was ‘not her income’ and was her ‘income for the rest of the year’. I don’t think she’d say that if she was trying to get a mortgage and had to prove how much money she could earn in one financial year, right?  The cheek of some people. The question is, did she get paid $30,000? Did she get paid in January? Both answers are yes. Facts don’t lie.)

Now to an exciting part of tax – IETC!

Independent Earner Tax Credit is a tax credit for people earning between $24,000 to $48,000. If you are earning between $24,000 to $44,000, you get $10 per week – $520 a year. This abates if you earn between $44,000 to $48,000.

People who are eligible for the IETC should be using an ME tax code; but if they have been using an M tax code all year, they get all of this back at the end of the financial year – hence why they think they are extremely lucky to get a free $520 every year when really, it’s their IETC!

I remember helping one of my colleagues generate people’s IETCs once. I went to their financial years 31/03/2017 and 31/03/2018, made some adjustments and bam! $1040 for them. “Sophia, you literally made money come out of nowhere!” I’ll be honest, it felt pretty awesome to send people large amounts of ‘free’ money on a daily basis.

I’d like to sum up this blog post with a few made-up FAQs:

Why did I get a tax refund?

Because you overpaid your tax.

Why did I get a tax bill?

Because you underpaid your tax.

How did I underpay my tax?

You used the wrong tax code when you gave your IR330 to your employer.

Or you gave your bank the wrong tax rate (called ‘RWT on interest’) – maybe you gave them 10.5% when you should’ve given them 17.5%.

Or you gave your Kiwisaver provider 17.5% when you should’ve given them 28%.

Or maybe you used the wrong secondary tax code, and used SB when you should’ve used S.

Maybe you changed jobs throughout the year, but forgot to take into account that from April through to March, you’ll now have earned enough income to move up an income tier!

Want a one on one consultation? Email me! (No, don’t – I’m not qualified, just a nerd.)

What is ‘tax on taxable income’?

The total income tax you should’ve paid on your earnings from April through to March.

What are ‘tax credits’?

The total income tax you have already paid on your earnings from April through to March.

They are also things that reduce your tax on taxable income, eg. your IETC.

What is PAYE?

Income tax + ACC.

Your employer takes PAYE out of your earnings; most of it goes to IRD for your income tax. 1.39% goes to ACC so that if you somehow break your leg or otherwise injure yourself at work, you can be paid out and financially looked after.

Only the income tax portion contributes to your income tax credits at the end of the financial year. The ACC portion is sucked into a black hole and gone forever.

What is ‘residual income tax’?

Hint: residue. It’s the income tax that’s left over that you need to pay – the difference between what you paid, and what you should’ve paid. This is your tax refund or your tax bill. If your residual income tax is a credit, you have a refund. If your residual income tax is a debit, you have a bill.

What is provisional tax?

Income tax split into 3 equal instalments throughout the next financial year because your residual income tax is over $2500. Meaning that the government’s thought, ‘Hey, you seem to need some help making your taxes manageable; here, we’ve split it up for you for next time!’

Note: it’s not additional tax. It’s just your ordinary income tax, structured in a way that’s intended to be more helpful to you.

How can I pay my tax bill if I can’t afford it?

Do an installment arrangement. You will receive your tax bill between April to July; your tax bill will be due between February to April. This means you have months to make easy, manageable, interest-free repayments. Your interest – the last rate I was aware of was 8.22% – only starts when your installments extend past the due date.

You can pay weekly, fortnightly, monthly, and even make extra repayments whenever – reducing your interest if any! Voila!

If you are seriously struggling and can’t pay even $10 per week, you can apply for financial hardship. A very compassionate policy. To stop others from taking the piss out of it, you have to declare and provide evidence of your financial situation. That’s what makes it a fair, honest system for you, for me, and for everyone who works hard.

How should I spend my tax refund?

Start your dream business! Travel the world! Shout your entire office lunch to show them how much you love them! Buy 10 cats!

I’ve realised that there is a lot I haven’t covered – like:

  • What if I’m self-employed?
  • What if I have a day job and I’m self-employed? I’m a lawyer by day and a stripper by night. Halp!
  • How do I get out of this ‘provisional tax’? Please. Make it stahp.
  • What is an IR3 and how do I file one?
  • What? I can get 33% of my charity donations back? How?
  • Can you help me read my income tax assessment?

…But if I went into all of it, this blog post would turn into a novel.

So if you have any questions, comments, or just want to say, “Wtf, Sophia? You’re so weird”, as always, please feel free to leave a comment below or contact me here.

And remember: IRD staff are human beings who get tax refunds and tax bills, too.

Love,

Sophia

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