# Speaker by Various Artists

86

### Why we can’t just fix secondary tax

“What are you going to do about secondary tax?” people ask me.  “It’s not fair to charge people more tax just because they’ve got a couple of part time jobs.”

It’s a common mistake.  And it’s easy to understand why people think they’re paying more tax.  If you have two jobs, each paying \$250 a week before tax, then in the first job, you will end up with about \$220 in your pocket, and in your second job, you will end up with \$202 after tax and ACC has been deducted.

Here’s the problem.  If you didn’t pay secondary tax, and just paid the same amount of tax on each job, then at the end of the tax year, you would end up a big tax bill.

Here’s how it works.  NB: for the purposes of this example, I’m just using tax rates, so I’m ignoring the ACC levy.

First up, you need to remember that the tax you are paying is income tax.  You pay income tax on all the income you earn during a year.  If you are a wage or salary earner, then in order to make paying tax easy, it gets deducted out of your wages as you earn it.  The PAYE (Pay As You Earn) tax you see deducted is not actually a tax: it’s a down payment on your tax bill for the year.

If you have one job earning \$50,000 before tax, then over the year, you should have a\$8,020 PAYE deducted, leaving you with \$41,980 in your back pocket.

(You can check the actual tax rates and calculate tax for yourself, if you like.  Or you could just trust me on this.)

At the end of the tax year on 31 March, you should end up with no extra tax to pay, because the correct amount will have been deducted throughout the year.

Income                                                           \$50,000

Tax on income                                               \$8,020

Less Tax already paid as PAYE                    \$8020

Balance for you to pay                                  \$0

But what say you have two jobs, each earning \$25,000?  Each of your employers will deduct the right amount for someone earning \$25,000 a year.  That’s \$3,395 per job, and during the course of the year, you will have \$6,790 deducted from your wages.

The problem is, you still have to pay tax on \$50,000 of income.

Income                                                           \$50,000

Tax on income                                               \$8,020

Less Tax already paid as PAYE                    \$6,790

Balance for you to pay                                  \$1,230

If you don’t pay secondary tax, and only pay ordinary old PAYE, you end up with a stonking great tax bill at the end of the year.

The secondary tax rates fix this problem, more or less.  Your main job gets taxed at ordinary rates, but then you pay a higher rate on your second job, so you don’t get caught out with a big amount of tax to pay at the end of the year.

On the first main job where you earn \$25,000, you have \$3,395 PAYE deducted.  On your second job, where you also earn \$25,000, PAYE is calculated using the secondary tax rates, so you have \$7,500 deducted.

(You could look up the secondary tax rates and calculate this for yourself if you like, or you could just trust me, again.)

At the end of the year, your tax calculation would look like this.

Income                                                           \$50,000

Tax on income                                               \$8,020

Less Tax already paid as PAYE                    \$10,893

Refund!                                                          \$2,873

So much nicer to get a refund than to end up with more tax to pay.

Of course, you might well have had quite a big cashflow problem during the year.  You might have preferred to have that \$50 or so per week to spend when you needed it, instead of getting it all as one big lump sum in a refund.  But at least you don’t owe money.

You can apply to IRD to get a special rate to use for your second job if you’re going to end up in that kind of situation.  But most people don’t know about that, and they find dealing with IRD a bit worrying.

Even getting the refund can be daunting.  You have to get tax records and fill out a tax return.  The IRD’s website has plenty of information about how to do that, which is fine if you’re internet-savvy and comfortable with numbers.  But most people glaze over a little when confronted with tax.

There’s almost certainly a technological fix for all this but it will require a new IRD computer system.  In the meantime, we’re stuck with secondary tax rates and filing tax returns at the end of the year.  And the big problem with just cutting secondary tax rates remains: if you do that, then all that happens is that you have to pay more tax at the end of the year.

Deborah Russell is a lecturer in taxation at Massey University.  She is the Labour candidate for Rangitīkei in the 2014 General Election.

### 86 responses to this post

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• My first ever Public Address post! And it's about... tax. Of course.

Many thanks for posting this, Russell.

Manawatu City • Since Nov 2006 • 1431 posts Report Reply

• That's fairly obvious to me - the more you earn, the higher your effective tax rate, hence if you have more than one job, you'd underpay tax. So you need to pay more on that job to avoid winding up owing tax.

The real problem is that most New Zealanders are functionally innumerate - estimating weekly take-home from an annual salary, even without any complications, is beyond most people.

Maybe we should fix that.

Back in Wellington • Since Nov 2006 • 5317 posts Report Reply

• Thanks for that Deborah. Another area to look at is the amount of tax in relation to GDP over the years. There is a big debate in Australia at the moment about budget blowouts and special levies and so on. Yet some have pointed out that spending is much the same as a % but its the tax take as a % that has dropped.
This has echoes in NZ , remember the 'decade of deficits' which was really about big tax cuts meant you borrow to make up the difference

Auckland • Since Nov 2006 • 314 posts Report Reply

• Thank you, Deborah! I must have explained this to people dozens of times (with example calculations). Now I can just direct them to your excellent explanation. Much appreciated!

Dunsandel • Since Nov 2006 • 1153 posts Report Reply

• Is there any provision for a payment of interest on the money taken in excess?

Tuscaloosa • Since May 2008 • 23 posts Report Reply

• Moz, in reply to Tim Croft,

Is there any provision for a payment of interest on the money taken in excess?

Not for things like this, no. It's just part of the cost of paying tax. OTOH, if they did pay inetrest it would probably be at the rate government normally pays when they borrow money... a few percent less than the banks and often less than the CPI.

For most people it's worth running the numbers: \$1200 a year is \$100/month. Assume you do your tax on time and get your refund within a month, so there's no extra period when you're losing on the full amount. \$100/month at (say) 2% per annum you'd earn \$11 over the year.

But if they did have to, they'd have to hike taxes somewhere to make up the shortfall. It really is a zero sum game in that regard. So it's probably better to leave it alone.

Sydney, West Island • Since Nov 2006 • 864 posts Report Reply

• B Jones, in reply to Tim Croft,

Is there any provision for a payment of interest on the money taken in excess?

Nope, but you don't get charged interest on the period of time (up to nearly two years) that you might owe tax before it's first due. After that, you get penalised, but I got overpaid at the beginning of this tax year and that's effectively an interest free loan until February 2016.

Wellington • Since Nov 2006 • 962 posts Report Reply

• Getting a special tax code is a thing I discovered stepping in and out of the workforce to have kids. It's so much better getting the right money in your pocket on payday than settling up at the end of the tax year.

Wellington • Since Nov 2006 • 962 posts Report Reply

• How about fixing the student loan repayments on secondary work- It seems to me that the way it is done makes a certain amount of day to day hardship for young people working 2 (or 3) jobs. Particularly for those people working 3 jobs with more or less equal hours.

It just seems to me there should be able to be a better way of handling things for a population where the demographics are of a low wage, casualised workforce.

Dunedin • Since May 2007 • 1365 posts Report Reply

• Moz, in reply to B Jones,

Nope, but you don't get charged interest on the period of time (up to nearly two years) that you might owe tax before it's first due.

Not everyone understands that idea. Fortunately, perhaps.

The worst was in Oz when I transitioned from being self-employed (IT contracting) to cycle touring. The tax department came after me to make quarterly payments on my "assessed income" and it took a bit of work to convnice them that I was not actually earning anything. The idea that I wouldn't be happy to give them money and get it back a year later was apparently unusual, and again, took some work to convince them that if I gave them all my savings as "tax", I would have to go back to work in order to have money to live on, and that quite defeated the whole point of saving up to go on holiday.

Even the most sensible ideas, like "chase self-employed people to make quartly payments of the tax they will have to pay" needs to allow for individual circumstances. Some of it was bewildering "get a letter from your former employer saying you've stopped working"... "this letter is from you"... "do you understand what 'self-employed' means?" It was funny, but also stressful - they can, and do, assess quite hefty penalties for non-payment. Those penalties can be even harder to recover after they decide the original payment was demanded in error (and a big shout-out to my friends at Student Loans New Zealand)

Sydney, West Island • Since Nov 2006 • 864 posts Report Reply

• My son, as a supported living allowance beneficiary, cops the secondary tax problem. He has a half-day a week job which I don't think takes him into another tax bracket (it's not even nearly enough to abate his benefit). It's frustrating.

Auckland • Since Nov 2006 • 21431 posts Report Reply

• I was just think about secondary tax problems the other weekend as well!

Agree that the principle of avoiding big bills at the end of the year is important, but surely there's a problem here in that causing cashflow issues for people on low incomes working multiple jobs is a really bad thing to do. Especially given that basically we're saying that you have to lend the government money, at no interest, with redemption at the government's schedule. If you're on \$400 a week, you can be really really keen to have that \$20 now and not in April, which is why people are willing to pay a lot for short term credit.

Also the poor interaction with the welfare system, but then that's just generally a depressing area of perverse incentives and bureaucratic annoyance.

Since Jul 2008 • 1452 posts Report Reply

• There's some good info here about special tax codes: IRD website.

You do have to go looking for it, though.

Wellington • Since Nov 2006 • 962 posts Report Reply

• I just crunched through some numbers, using the same total income, \$50,000, and the same assumption of two jobs each earning \$25,000, and you end up with the same problem with secondary tax rates ie. a big PAYE deduction from your second job, and then a big refund at the end of the tax year.

- Total income of \$50,000 results in about \$12,580 of income tax, ACC levies, and student loan repayments.
- Total deductions if you have two jobs of \$25,000 each, using the student loan deduction rates is about \$15,455 (including tax, ACC and student loan repayments).
- You get a refund of about \$2875.

That's a nice lump sum to get, but as Keir says, sometimes you would far rather have that money in your back pocket on pay day, rather than getting it at the end of the tax year.

Manawatu City • Since Nov 2006 • 1431 posts Report Reply

• It's a big jump once you go over \$48,000. 19.2% to 31.7%.

Jeez, it's hard to find, but here's the form to fix the problem: IR23BS

Wellington • Since Nov 2006 • 962 posts Report Reply

• Matthew Poole, in reply to Keir Leslie,

now and not in April

It's actually July, not April. You can file from 1 April but refunds are not made until the due-date for filing tax returns has passed which is 7 July.

People get confused when told that they'll get their refund after the end of the tax year and are then told it'll be July. "But the tax year ends in March!" they wail plaintively. Actually, no, the tax year for individuals and most companies finishes in March, but the government tax year runs July-June. And it's the government that's got a tax year to finish before it'll return over-paid taxation revenue.

The pit from whence crawl… • Since Mar 2007 • 4043 posts Report Reply

• This year they say it's mid-late June*: Tax 2014. That would be nice.

*I'm expecting and have in fact already spent my fairly decent tax refund this year, and have been stalking the IRD website to find out when it will show up.

Wellington • Since Nov 2006 • 962 posts Report Reply

• debunk, in reply to Deborah,

One job PAYE other(s) do as invoiced jobs as tradesmen etc do...can get the PAYE back and claim car, office, computer etc expenses IR3 form or all available online..GST registration is worthwhile too is bone fide self employed and that's another 15% claimable (or off-settable)..Keep Good Records...simple Income/Expenditure accounts done by self have sufficed many years..

New Zealand • Since Aug 2012 • 105 posts Report Reply

• izogi, in reply to Moz,

The worst was in Oz when I transitioned from being self-employed (IT contracting) to cycle touring. The tax department came after me to make quarterly payments on my “assessed income” and it took a bit of work to convnice them that I was not actually earning anything.

I’ve generally found Australia’s tax system to be insanely complex and heavily politically influenced compared with NZ’s, in terms of the paperwork required every year. Tax accountant retail shops seemed about as popular on the streets around urban and suburban Melbourne as hairdressers. But in my case when the ATO wanted to shift me to provisional tax (based on non-salary overseas earnings from interest on some life savings in a NZ bank account), it really only took a phone call for me to ask them to switch me back to an annual return. This was on the grounds that I was in the process of leaving the country and was about to file my final tax return, plus they accepted my explanation that it wasn’t going to involve a lot of money.

That was in September, and I’ve yet to file my Aussie return because my partner still had a salary job there until December (whilst telecommuting from NZ with an ambiguous state where both countries might be treating her as a tax resident). Australia’s joint-income thing means I have to declare her income before I can submit mine, and her former employer (whose system she can no longer log into for payslips) is an Australian government bureaucracy that won’t provide any proper tax documentation until at least July when Australia’s tax year ends. All of this is causing frustrations with trying to sort out my NZ tax return after my first year back here as a sole trader, thanks to the ambiguous overlaps in residency and the need to declare income and tax paid in another country whilst being a NZ resident.

So… Does anyone know of a good personal tax accountant, preferably in or near near Wellington, who’s also familiar with Australian tax laws? With all the tax accountants out there, it seems surprisingly difficult to find one on either side of the ditch who’s qualified and interested in advising with personal tax on both sides. If it was only dealing with NZ I could see it being so much simpler, and I think I’ll be much happier once I have this year out of the way. :)

Wellington • Since Jan 2007 • 943 posts Report Reply

• Found doing joint self-employed British and NZ accounts a nightmare and ended out seeking help in HMRC Reading office .. you should be able to find someone online in Oz..agree they do have heaps of regulations and not accounts friendly. Try doing it yourself with accompanying letter to ATO and let them do the corrections and give advice..much cheaper than accountants - gave them up years ago ..exorbitant ..and this was for things like software devt,, stats., teaching/training, advocacy ..hav as many self employed occupations as you wish and much more profitable. Good luck isogi..I was off on my folding bike exploring between times ..

New Zealand • Since Aug 2012 • 105 posts Report Reply

• I can remember after my first couple of years in the workforce, coming across people complaining about having to pay tax at the end of the year. I tried to explain that this was a good thing because they had the use of the money throughout the year. It was like an interest free loan. They invariably said that even so, they would have rather had a refund. (I guess a tax refund is a form of compulsory saving like a Christmas Club).

Auckland • Since Nov 2006 • 561 posts Report Reply

• izogi, in reply to debunk,

Heh, thanks @debunk. Without getting into detail I think NZ's very fortunate to have such a simple tax system by comparison, that's not heavily shaped by politics with a few exceptions. I suspect the reason that countries like Australia can get away with things like taking GST off "fresh food" (a nice way to increase profits for supermarkets imho), is that its system is already so complex and dictated by a massive existing industry of tax accountants at every corner, who revel in additional ways to root the system.

This year it's just messy for us thanks to the overlap of some residency stuff, but generally speaking I hugely prefer the NZ returns I've done.. and appreciated that I don't have to do them if I've just had a straight salary job all year. At a personal level they're as simple as asking how much money was earned, how much tax was paid, and then calculating out the difference between that and what's owed. The web interface which IRD has given us, for many years now, is vastly easier and faster to use than the ATO's convoluted Windows application.

Wellington • Since Jan 2007 • 943 posts Report Reply

• Moz, in reply to izogi,

I hugely prefer the NZ returns I've done.. and appreciated that I don't have to do them

Very true. Trying to explain the NZ system to Australians or merkins is hard because they really struggle to understand how a tax system could be designed to raise money, rather than be burdened with a huge range of tiny political carbuncles.

Admittedly my problem could easily have happened in NZ AFAIK. Any provisional tax system is going to require intervention when someone's situation changes.

Sydney, West Island • Since Nov 2006 • 864 posts Report Reply

• bmk, in reply to David Hood,

How about fixing the student loan repayments on secondary work

Yes. When I was studying that was the biggest problem with secondary tax - the fact that I was on a super tight income and yet they were deducting student loan repayments when I wasn't going to earn over the threshold. Sure I got a refund at the end of the year but it made work barely worth while during the year and made it so hard to get by.

Since Jun 2010 • 326 posts Report Reply

• To clarify - I could handle the higher income tax amount but when you add another 10% for Student Loan repayments - it really hurts.

Since Jun 2010 • 326 posts Report Reply

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