Tax Planning for Individuals in New Zealand

October 20, 2010 New Zealand FinanceNew Zealand Taxation

Piggy savings bankThere are numerous perfectly legal and accepted ways to ensure that New Zealand taxpayers are not overpaying their tax liabilities and maximizing any existing tax benefits that the Government provides. Below is a list provided by an international tax adviser, Ed Kruger, explaining the easiest steps one can take to ensure that their taxes are optimized and that they do not needlessly squander their money.

Correct Tax Code
For a PAYE earner, choosing the right tax code is the fundamental step to ensuring that a correct tax liability is paid. If you provide your employer with a tax code that results in tax underpayment, the Inland Revenue Department will not stay quite about it, and will provide you with a nasty surprise at the end of the tax year. Conversely, too high a tax rate will result in continued overpayments throughout the entire year. While the IRD will provide an end-of-year tax refund on the overpayment, the amount will not gain any interest. It is better to pick the correct tax code from the beginning, and to update it if your situation changes.

Consider Tax-Efficient Investments
Consider investing in Portfolio Investment Entity (PIE). From October 1st 2010 the top tax rate applicable to a PIE is 28%. If you choose the correct Prescribed Investor Rate (PIR) for these investments, the derived income is excluded and not required to be included in your tax returns. Additionally, this income is not taken into consideration when testing Family Assistance eligibility, or Student Loan and Child Support repayments.

However, there is a risk that, as with any investments, PIEs might not perform as well as expected.

Make Claims on All Donations
With the Government’s and media’s push towards charitable giving in New Zealand, monetary donations are an excellent way to provide some relief to your tax liabilities, as a third of your total givings can be claimed back. Do not forget to make a claim for all of the donations you have made throughout the year.

It is better to make donations in both yours and your spouse names. In the situation that you are not able to claim the entirety of the donations under your own name, your spouse can claim the balance.

Donate as an Individual, Not a Company
Make donations in your own name not your company’s. When making donations as a company, the associated tax relief will only be 30 percent of the donation amount(or, 28 percent, as of 01 April 2011). However, donations made under an individual’s name will be provided with a tax rebate at a rate of 33.33 percent. Depending on the amount donated, the difference could be rather significant.

Student Loan Repayments
It is beneficial to pay off the loan amount as soon as possible. Extra repayments can significantly shorten the repayment timeframe, and can be made at any time, not just the end of the year. Additionally, repayments exceeding NZD 500 will be granted a 10 percent voluntary repayment bonus.

Tax-Efficient Loan Repayments
If you have spare cash which you would like to use to repay your debts, make repayments on your personal borrowing first, as they are not eligible for any forms of tax deductions.

Independent Earner Tax Credit
On April 1st 2009 the Government introduced an Independent Earner Tax Credit. Depending on an individual’s circumstances, the credit could be up to NZD 520 per year. To be eligible for the credit you must be a New Zealand tax resident with annual income between NZD 24 000 and NZD 48 000, neither you nor your partner are entitled to a Working for Families tax credit, and you did not received an income-tested benefit or Veteran Pension.

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