So, you are on your way to NZ, you’ve got your work visa all sorted but it’s just hit you: what about the New Zealand tax system when you work here?! Thankfully, New Zealand has one of the simplest and easiest to navigate tax systems in the world. Having said that, there are still quite a few issues for working holiday and recent immigrants to get their heads around such as getting sorted with an IRD number, income tax rates, ACC, KiwiSaver as well as the different types of employment and the tax implications of each of those.
This article discusses the following components of tax in New Zealand:
- Effective tax rates – the amount of tax you’ll pay on your earnings.
- Registering with the Inland Revenue Department (IRD).
- Goods & Service Tax (GST) – the equivalent of VAT in the UK.
- ACC Levies – deductions for personal accident insurance.
- KiwiSaver – a pensions scheme, much like Auto Enrolment in the UK.
- Employment types – from self-employment to your usual fixed employment.
- Tax implications – common scenarios and tax implication examples. That could save you tax in New Zealand.
Income Tax in New Zealand
The Inland Revenue Department (IRD) is responsible for collecting taxes in New Zealand. Income Tax is calculated at different rates ranging from 10.5% to 33% for individuals, depending on how much you earn.
What are the tax rates in New Zealand?
| Income | Tax rate | Effective tax rate |
|---|---|---|
| $0 – $14,000 | 10.5% | 10.5% |
| $14,001 – $48,000 | 17.5% | 10.5 – 15.5% |
| $48,001 – $70,000 | 30% | 15.5 – 20.0% |
| Over $70,000 | 33% | 20.0 – 33.0% |
| No-notification rate | 48% | 45% |
The average New Zealander pays tax at an effective rate of about 20%, as they pay some at 10.5%, some at 17.5% and some at 33%.
For most workers, this tax is deducted at source by your employer and paid directly to the IRD by them. The deductions are based on the tax code that you declare to your employer when you originally start your employment agreement with them. More details on what code to select can be found on the back of the IR330 Tax Code Declaration Form. For your main source of income, with no New Zealand Student Loan, your tax code will likely be ‘M’.
The IRD’s website has a number of easy to use tools to allow you to calculate what your total tax payable is on an expected level of income. If, at the end of the tax year, you think your employer has deducted more tax than necessary, you can request a Personal Tax Summary (PTS) from the IRD. This document summarises your total income as declared to the IRD as well as all of the taxes and other deductions taken from it. If an over deduction has been made, the IRD PTS will show that you have a tax credit due to you. You can request the IRD to deposit this tax credit direct into your New Zealand bank account. In some circumstances, you may have extra tax to pay if your employer has not correctly, made deduction’s or if your income has changed throughout the year.
In order to have taxes deducted and accounted for correctly, you not only need the correct tax code, but you also need an IRD Number.
Getting Sorted with an IRD Number
An IRD Number is a necessary thing for everyone who works, owns property or otherwise generates a living in New Zealand. It is an eight to nine-digit code that will universally identify you and your tax deductions to the IRD across your daily employment, bank savings accounts and will aid with links through to other services like ACC and KiwiSaver. If taxes are deducted at source by your employer, as is usually the case (more on this later), then the taxes are deducted and income declared to the IRD against your IRD Number, allowing you and the government to easily keep track of how much you have earned and how much tax you have paid on that income.
As with all bureaucratic processes, this can often take some time to get sorted so getting on to it as soon as possible is your best option if you plan to start working soon after touching down in New Zealand.
To get an IRD number if you have a valid work visa requires a few things:
• Your passport details,
• Your most recent overseas tax number (if you have one),
• Your Immigration New Zealand Application number (this will be on your visa letter they send you), and
• Proof of a fully functioning New Zealand Bank Account or completed customer due diligence if you don’t have a bank account yet.
The last point above is the most important as it meets your obligations under the Anti-Money Laundering and Counter Financing of Terrorism Act to prove that you are a legitimate person with a verified identity. It is a quick and easy process to open a bank account once you are in the country. Any of the major banks should be able to open it for you on the spot provided you have everything that they need to be satisfied in verifying your identity. Most banks do not allow to you finalise the account opening process without being in branch to be verified by a bank employee.
If you are going to be working soon after arriving, open a bank account as soon as you can and then send off your IRD Number application straight after that.
Goods & Services Tax (GST)
GST is the New Zealand equivalent of a Value-Added Tax (VAT). It is a universal consumption tax of 15%, charged on most products and services nationwide.
If you are running a business or are self-employed in New Zealand, then you may need to register with the IRD for GST. If your annual income is, or is expected to be, over $60,000 then you need to register for GST. You then charge GST on all of your sales and claim the GST back on all of your business related purchases, the net difference in GST collected and claimed back is what you pay to the IRD on a two-monthly or six-monthly cycle.
Accident Compensation Corporation (ACC) & ACC Levies
The ACC administers New Zealand’s no fault accidental injury insurance scheme for all work and non-work related injuries. If you are a resident, citizen or just a visitor, ACC provides you with the financial compensation and support you need to recover after you suffer a personal injury.
ACC is primarily funded through levies. These levies are collected from the wages of salaried workers, the declared taxable income of companies and self-employed people, vehicle levies (such as those included in fuel taxes and car registration fees), and a government contribution to cover the contribution of those that do not pay-in directly (children, the retired, unemployed and visitors).
If you are working in a salaried position, a portion of your income will be deducted as a part of your PAYE taxes and paid to the IRD by your employer. The IRD then passes these collected levies on to ACC.
KiwiSaver
KiwiSaver is a voluntary (opt-out) long-term savings scheme for New Zealanders. It was introduced as a catalyst to improve New Zealand’s poor rates of personal saving and boost the resources available to savers when they retire. Contributors can also pull out funds for the purchase of their first home if they meet certain circumstances.
Any person who is under the age of retirement (65) and entitled to live in New Zealand permanently is eligible to join a KiwiSaver scheme. The saver can then choose to contribute 3%, 4% or 8% of their pay and have these deductions taken from their pay along with the regular PAYE deductions for income tax and ACC. Your employer pays the deduction direct to the IRD who in turn passes it on to the approved fund you have registered with.
Although the system is voluntary, eligible persons are automatically enrolled and can choose to opt out after the first two weeks of work in the scheme. Approximately two-thirds of the eligible population are enrolled in a KiwiSaver scheme and so if you are looking to settle in New Zealand long-term and have the ability to settle here indefinitely, it will be worthwhile discussing your options with an approved KiwiSaver provider and your employer. If you are not entitled to stay in New Zealand indefinitely, make sure your employer knows this and does not automatically enrol you. Getting back deductions that have been taken in error can be a time-consuming process as KiwiSaver deductions were only designed to flow one-way until you are 65 years old.
Types of Employment and the Different Tax Implications
Permanent Employment
Permanency of employment is determined by the hours you work as well as the regularity and continuity of that work. This category is further split into part-time and full-time. Part-time employees work hours each week that range from just a few up to 30, while full-time employees generally work 30 to 40 hours per week. Whether part-time or full-time, if you are working on an ongoing basis for a set number of hours each week for the foreseeable future, it is likely you are a permanent employee.
As a permanent employee, your boss will take care of pretty much everything once you have signed up and processed all of the paperwork. They will deduct Pay-As-You-Earn (PAYE) taxes from each pay run and pay these direct to the IRD. These deductions are based on the tax code that you declare when you sign up to be their employee. Every employer should give you an IR330 to fill out. This form has a handy flow chart on it to help you easily select the correct code. A portion of your PAYE is also to cover your ACC levies. Additional deductions will be made if you are eligible for and have signed up to KiwiSaver.
Fixed-term Employment
If your work is not ongoing but is for a specific period, like over Christmas in a retail store or on a farm or orchard during harvest season, then you will not be a permanent employee and instead will be classified as a fixed-term employee. The tax implications of this type of work are very similar to permanent employment and your employer will take care of all of your tax deductions.
Casual Employment
Casual employees are a popular choice for a number of businesses in NZ, particularly in the service and hospitality industries. This type of employee has no fixed schedule and generally only work at short notice to cover busy periods or absences of permanent staff. Casual employees have the luxury of not having to accept every offer of a shift from their employer and as such many employers, especially bars and restaurants, tend to have several casual employees on a list that they can call up as and when required. Taxes are deducted as PAYE but you are not entitled to sick leave or holidays and so an extra 8% is added to each pay to pay-out your holiday entitlement as you earn it.
Contract Work and Self-Employment
With this type of employment, the responsibility for incomes taxes, ACC levy payments and KiwiSaver contributions lays solely with you as the worker, not with your employer. New Zealand operates a voluntary disclosure tax system which means that the IRD relies on people to disclose the income that they earn to them correctly. Many self-employed people engage the services of an accountant to ensure that they declare the correct level of income and claim all of their available deductions. Income taxes will be due in lump sums, one to four times a year depending on how much you have to pay. For this reason, it is important to save for your taxes from the moment you start working. Use the tax calculators on the IRD’s website to estimate your taxes due and the corresponding effective tax rate. Make sure at least this rate of savings is put aside so that you do not fall short and incur late payment penalties and interest on the sums.
There are quite a few things to get your head around with tax in New Zealand but once you have got past the first few hurdles of obtaining an IRD number and bank account, it is all pretty simple and user-friendly.
We were looking to write an article on this subject ourselves and came to the conclusion that it is a confusing subject which comes better from a registered professional. Chris Mercer from Mercer Business Partners very kindly offered his time up and put this awesome article together for newbies looking to work in New Zealand. If you have any taxing questions, we’d strongly recommend speaking with professional like Chris. Understanding the New Zealand tax system and what is expected will help you avoid any potential and expensive issues!