Why do I get a Tax Bill from the IRD?

We very often get this question around May/June each year when people start getting letters from the IRD in relation to the End of Tax Year Reconciliation.

Here in New Zealand, the tax year runs from April 1st to March 31st, irrespective of when your Employer's Tax Year may run.

This means that at the end of March, the IRD has all the information they need (hopefully) to determine what your Total Tax Bill for the year should be, and for most people, it is zero or minimal, but for some, they are shocked to find they owe the IRD money....how can this be when you have had ALL your taxes deducted at source - PAYE stands for Pay as you Earn.

When the IRD does its reconciliations it looks at your Income from all sources and determines the correct amount of tax you need to pay. If the amount owing to them is less than $50 they just write it off, and if you have paid too much Tax then they just send you a refund (make sure your Bank Account is up to date within your myIR)

If your ONLY source of Income is from paid employment, then it would be unusual to get a bill from them unless:

• You have additional sources of Income
• You have been paid a Bonus during the year
• You have been using the wrong Tax Code (less likely these days as the IRD is onto to this very quickly)
• You have been using the wrong PIR Tax Code on your KiwiSaver Savings
• You have been taxed incorrectly on your Employer's KiwiSaver Contributions (ESCT Tax)
• Lastly, the calculation of Tax on your normal Salary/Wages is nothing more than a 'best guess' at the time you are taxed. The period before or after (unless it is a Lump Sum payment) does not impact your tax calculation done today.

New Zealand uses a Sliding Scale Tax Calculation in that Income up to level A is taxed at one rate, at level B at another rate, level C at another rate etc etc to a maximum of 39%. See below:

All simple stuff but things that can upset these calculations are:

• Overtime - your pay from one period to another is very different
• Significant Pay Increases - so the assumptions taken prior to the pay rise are no longer valid after the pay rise
• Bonus Payments - these use a different calculation method as these are based on rules around a Lump Sum payment
• Sales Commissions - depending on whether you get these every pay period (regular) or quarterly (irregular) determines the tax calculation used
• Termination Pay - If you leave an Employer the final Leave Payment must be taxed as a Lump Sum Payment

As mentioned above, Lump Sum Payments are taxed differently from your regular wage and salary.

Lump Sum Payments – also called extra pay – include:

• annual or special bonuses
• cashed in annual leave
• retiring or redundancy payments
• payments for accepting restrictive covenants
• exit inducement payments
• gratuities (tips)
• back pay
• back paid holiday pay
• lump sum holiday pay
• employee share scheme benefits – if you choose to deduct tax.

Overtime or regular payments are not lump sum payments.

The calculation of the Tax on Lump Sum Payments is not simple, but you can read all about it HERE!