If you haven’t read my first post on tax – how it works, why you got a refund, why you should pay your bill, plus FAQs, check it out here.
If you’re a sole trader (self-employed) or business with 30% or more decline in revenue due to COVID-19, you may be eligible for a COVID-19 wage subsidy. Here’s more info on financial support during COVID-19.
It’s nearly the end of the financial year! You know what that means – EOFY sales (yay!) and tax refunds – or bills.
Tonight, I worked out if I was getting a tax refund or a tax bill. In case you were curious, I thought I would share how I did it and how you can too – so that perhaps, you can either have a tax refund to look forward to, or prepare early in advance for a tax bill you’ll now be able to effortlessly pay off!
First, you’ll need to know what your gross income was for the financial year.
As you know, the financial year runs from 1st April to 31st March. If you changed jobs throughout the year, you’ll need to break down what you were earning, and for how long.
Here’s my example, using my real job changes but hypothetical figures!
From April to July, I was working in a job paying me $48,000.
From August to mid-October, I changed jobs and was earning $45,000.
From mid-October to March, I changed jobs within the same company and got a pay rise to $49,500. So:
From April to July, my gross income earned was $16,000.
$48,000 / 12 months = $4000
$4000 x 4 months = $6000
From August to mid-October, my gross income earned was $9375.
$45,000 / 12 months = $3750
$3750 x 2.5 months = $9375
From mid-October to March, my gross income earned will be $22,687.50.
$49,500 / 12 months = $4125
$4125 x 5.5 months = $22,687.50
4 months + 2.5 months + 5.5 months = 12 months means the whole financial year is accounted for;
My total gross income for this time would be approximately $48,062.50.
Second, you’ll need to know how much tax you should’ve paid on this income.
You’ll need a super handy tool called the Tax on Annual Income Calculator, which will tell you how much income tax you should’ve paid based on the current income tax rates. It’s brilliant as it even breaks it down into the tiers of 10.5%, 17.5%, 30% and 33%.
From the drop down menus, you want to select ‘Individual person’, ‘1 April 2019 to 31 March 2020’, then enter your taxable income. Taxable means income you are liable to pay tax on – so for example, I don’t count my rental income (I don’t charge enough for it to need to be declared!).
If you did a side hustle, be it photography, modelling, or graphic design, you don’t need to declare it in an IR3 if it was $200 NZD or less.
Using my hypothetical income, it looks like this:
This means that earning an income of $48,062 (-50c), I should’ve paid $7438.60 in income tax from April to March.
Third, you’ll need to know how much income tax you have already paid.
Here’s how you do it:
Log into your MyIR.
Go to Income Tax.
Go to Periods.
Go to (year ending) 31 March 2020.
Click on ‘View breakdown’.
Look at ‘Total tax deducted’. (This is your PAYE minus your ACC)
This is my real income & tax breakdown for 1st April 2016 to 31st March 2017:
Now, take the income tax you should’ve paid thoughout the year, and the income tax you have paid so far.
Have you paid more than you should’ve? Congrats, you’ll be likely to receive a tax refund.
Have you paid less than you should’ve? You’ll need to pay the difference. But don’t worry, if you need to or just want to, you can ask for an installment arrangement. You’ll receive your tax bill between April to July, and it will only be due between February to April. You can get the payments direct debited to make it easier for you, and all payments made before the due date are interest-free.
This blog post covers income tax only, not Working for Families.
This blog post is simplified. In reality, your salary/wage earnings will be a big part of whether you get a tax refund or tax bill, but your bank interest and Kiwisaver earnings also get taken into account. This blog post assumes your bank interest (RWT) and Kiwisaver earnings (PIE income) are on the correct tax rate. However, even if they aren’t, they don’t account for the biggest part of the your tax calculation for most people. So, what you work out from my method is approximate – unless something is drastically different in your personal circumstances.
This is also approximate because we still have 12 days to go until 31st March 2020, so my method accounts for 354 of the 366 days in this leap year.
Another note as to why this blog is simplified: I’m just a personal finance nerd with insurance, tax & banking experience, who writes this blog for fun and to help others. If I were to go in depth into literally everything, even specific scenarios, I’d be acting like your personal financial advisor – which I don’t have the qualifications of an AFA to do.
If you changed jobs throughout the year and got a pay rise, but didn’t update your income tax rate, income tax code, RWT rate at the bank, or PIR rate with your Kiwisaver (or other PIE investments), you are likely to receive a tax bill.
You get a tax refund when it goes the other way: if your income decreased some time between 1st April 2019 and 31st March 2020 but you also didn’t update your details even when you became liable to pay less tax.
To see all this information for yourself once the financial year is done and dusted, you can get your summary of income from Inland Revenue, your RWT certificate from your bank, and your Kiwisaver annual statement from your Kiwisaver provider.
Finally, I want to share with you one more thing you can do if you get a tax bill. But it is one that involves risk!
Prior to the end of the last financial year, the end of year tax calculation determining whether you’ll get a tax refund or a tax bill and if so, how much was called a Personal Tax Summary.
You don’t get this unless you deliberately ask for it (or your tax agent did on your behalf).
You can ask for one, and if you do, you might get a tax refund therefore credit to pay towards your tax bill, OR you might get a tax bill which you will have to pay.
Some would say it’s a 50/50 chance, but it’s not. You can ask yourself: “Was there a financial year that my income decreased, but I never changed my tax code?”
If so, that financial year is likely (but not certain) to give you a tax refund!
Lastly, I have to get this off my chest…
How to not be a dick to IRD
Remember that IRD are not good or bad. Throughout the year, your employer, bank & Kiwisaver provider deducts your tax, and send this tax to IRD. IRD simply collects it on behalf of the NZ government in order to provide social support to us all. They’re just doing their job: to inform you at the end of the financial year if there’s a difference between what you should’ve paid, and what you did pay.
The person on the other end of the phone is not only a human being just like you and me, they have to pay tax just like everyone else. They get tax refunds and tax bills too. They’re not exempt from anything. Be kind and understanding and know that IRD is not responsible for your tax bill – and neither is this person.
If you don’t understand something, just ask. You can even ask for it in written form, via the ‘Correspondence’ tab in MyIR. Don’t scream. Don’t shout. And don’t blame others. At the end of the day, it is all our own responsibility to update our tax code & rate when our income changes – nobody else’s. It’s also our responsibility to contribute our fair share to society, because at some point, you or someone close to you will receive financial assistance from IRD – whether it’s the benefit, student allowance, student loan, Working for Families, superannuation, or anything else. Want to freely take, take, take, but not give? Don’t be a dick.
There is something we can always do, no matter what: thank the person helping us, use the opportunity to learn more and appreciate this amazing system we have (many people who have lived overseas have told me that our tax system is the easiest to use & understand) and make sure we’re super on top of it next financial year!
I hope this has helped! To being better humans,