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Chapter 1: What common mistakes do Kiwis make with the IRD?
Tax is one where it's easy to get real grumpy, real fast. We don't like handing the money over, and we suspect we're paying more than we should be. But it's confusing, so what can you do? According to Bakir Hussain, well, plenty.
Bakir is a chartered certified accountant with yonks of experience, the founder of Finex Accounting, and has both a book and a newsletter dedicated to making this stuff simple for us. And thank you because we need it.
That's one of the big misconceptions that, oh, I'll get taxed on the whole income at 30 or 33 percent. And that's not the case.
It turns out the gap between what most of us think we can get back from the tax system and what we actually could get, well, it's a big gap and it's costing us money.
I got him backdated around 15,000. That's huge. He had three kids and had never came for it. He had no idea.
And after today, we want to make sure you stop feeling confused as well as avoid nasty surprises and also stop leaving money on the table.
suddenly quarter of a million of debt to the IRD that needs to be paid. But the fact is, it's not sudden. They've been trying to reach him for two years.
So welcome to Making Sense. It's the podcast people who want financial freedom without giving up their coffee. I'm Frances Cook, financial journalist and fellow financial freedom seeker who makes money simple for you. Today, it's what we're getting wrong about tax and how to make the system actually start working in your favor.
This episode of Making Sense is brought to you in partnership with Odoo. the all-in-one business management platform that brings everything you need to run your business into one place, fully integrated and actually affordable. Go to odoo.com, that's O-D-O-O.com for more. I want to help as many people as possible reach financial freedom by taking control of their money.
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Chapter 2: How does New Zealand's progressive tax system work?
First, hit subscribe wherever you like to listen, YouTube, Spotify, Apple Podcasts, or any other podcast player. Then send this episode to a friend so we can all level up together. Then the show grows and I can keep giving you the money info that makes a difference for your life. Okay, back to it. Welcome in, Bakir. Let's talk tax because this is really, it's a big one for people.
I feel like people get really stressed about this. The cost of living we all know is through the roof. And I really feel like at moments like this, optimizing these little base layers can make such a huge difference. Do you have any examples of anonymized, obviously, but clients who you've worked with where this is, they've made some changes and it's made a difference?
yes when it comes to families a big one is working for families because unless you're registered with the ird for the working for families account you can not get that there was a someone in the community that had
come to me a couple of years ago i got him back dated around 15 000 worth of um working for families and uh there wasn't a good night nice bonus for him because he had three kids and had never came for it he had no idea what this was and how it works because most people are just too scared of the ird and and tax that's a big win so when it comes to individuals Donations is a big one.
And I think that comes down to awareness. And when it comes to businesses, it's all about knowing what expenses or reductions you can claim. And so we've had cases where people have increased their income
uh and and showed an additional say 10 000 20 000 just to say oh this looks right where i don't want i'm so scared of the iid that i'm happy to declare additional income and then pay tax on it uh selling no that's not the right way you claim what is actual and it's all about knowing what expenses you can claim because some people may claim everything under the sun or or try to
But some people will say, no, we don't want to claim anything. And both of them are wrong in a way that you want to get the right balance and follow what the rules are.
I've got two thoughts from that. The first one is that amazing $15,000 that you got back for one client. How good. I didn't realize you could go back to claim on working for families. How far can you go back? It's generally four years. So it's really worth talking to someone. If you think it's not right, you can go back in time and actually...
Yes, and credit where it's due. The IRD is pretty good at doing that as long as you're able to prove that you're eligible for it and you register for it. And sometimes it's even as simple as just calling the IRD and explaining this to them. You don't need an accountant. You don't need to be technically aware of how the tax rules work.
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Chapter 3: What are the most common causes of surprise tax bills?
So there's always two sides to this. My experience with the IRD is that they're definitely not monsters. They want to help. I think they're definitely much better than the ATO in Australia or the IRS in the U.S.,
uh where they're they're fair the other thing is with when it comes to people um it's a psychological uh thing as well and what i mean by that is sometimes people are just too scared to even open the letter from the ird so we've seen plenty of cases where a lot of problems would have been solved if they had just opened the letter or the notification from the ird and addressed that
by calling them or talking to someone or getting advice upfront. So it's the avoidance. It's the anxiety around when it comes to just the word IRD or the word taxes, which can sometimes lead to you just trying to ignore things. But most often than not, when you ignore something, it only escalates and becomes worse, like any problem in life. Communication, I think, is really important.
So ignoring the IRD is the worst thing you could do. Would you put that as like a top five mistake or even number one? Number one, absolutely. The worst thing you can do is completely ignoring them. From experience, around 70 to 80% of all problems that we see is because they just ignored IRD letters or they've not gotten proactive advice on something that they've worked on.
They started a business or changed jobs or moved jobs. countries whether coming in into new zealand whether even moving to australia i was talking to someone two days ago who is a business owner who's moved from new zealand to australia and he has suddenly quarter of million of debt to the ird that needs to be paid but the fact is it's not sudden they've been trying to reach him for two years
That's a lot of money. I can see why people panic. And for someone like that, are we talking a payment plan or something like that? $250,000 is a lot.
Yes. So that's one of the extreme examples. But I think half of it is just interest in penalties that has been applied. From ignoring it. From ignoring it. There you go. And then once you get charged interest and penalties, interest is very hard to get waived off or remitted. Penalties, sometimes you have a 50-50 chance based on what the reason for the late filing was.
For example, if it's outside... uh your control if someone's not been well or other reasons but that's still a huge amount if once filed taxes for someone for the last 13 years and someone who's come in and who hasn't filed the tax for the last year or two they're stressed out and i tell them look You're still not the worst case scenario, right?
I've seen way worse methods.
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Chapter 4: What can salary earners legitimately claim back on taxes?
What I mean by that is there are usually two methods to get the working for families tax payments. You could go with a lump sum payment at the end of the year based on whatever your entitlement is, versus you could choose to get regular payments, whether that's weekly, fortnightly payments. Usually the tax bill arises when you're on regular payments.
Because the amount that the IRD gives you is based on an estimated annual family or household income that you have. And so if the actual income at the end of the year is different from that, if it's higher, that the IRD has already paid you some regular payments, that's when you end up with the tax bill because they say, oh, we've overpaid you because your actual entitlement is
maybe $100 and you've already paid your $200. And so my suggestion to most people is if you can afford it and if you can manage the cash flow side of things, then always go with the lump sum option. It's just that you get at the end of the year, but think of it as a bonus.
Look at it as a forced saving of sorts versus even if it's a dollar to pay, no one likes to get a tax bill at the end of the year.
So true. So true. Well, on that as well, because I know people, they love the idea of a tax refund. So tax refunds, how do they work? What's the most common ways to get one?
I think there's a big misconception there. Firstly, a tax refund is, in essence, technically not free money. A tax refund is your own money you're getting back. from the IRD. So what has happened is you've overpaid your taxes. And so one example of that is if you're a salary earner and if you're doing a regular job, then you can get a tax refund if your employer has overpaid your taxes.
And that can normally happen. A common example of that is if you have changed jobs during the year, if you've only worked, say, part year during the year, because what the employer does is they calculate your taxes on an annualized basis. And so they assume you're working at that salary or at that amount for the year.
And if you only work for part of the year, you've tend to overpay your taxes or your employer has overpaid your taxes. And so you get a refund back at the end of the year.
It's funny, isn't it? I was talking to an accountant quite a while ago and he said, everyone always wants a tax refund. You should be really bummed out if you get a tax refund because it's your money. It means that you gave it away and you could have invested it or something or made money back. And I was sort of like, that's probably a very... True statement.
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Chapter 5: Who qualifies for Working for Families and how can they backdate claims?
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tax can be confusing and a lot of stuff out there on the media, especially social media, can be confusing because it's designed to be catchy and punchy. But I think primarily the confusion for most people comes from the fact that there are two sets of tax rules, one for individuals and one for businesses.
And so once you get that distinction and clarity and understand that things become much easier.
Interesting. Okay, so run me through that. How does that change the way we should be thinking about tax?
So, for example, if you're in full-time employment, then there's a certain set of tax rules that would apply and pretty much which is the PAYE model. And you'd get in your bank an after-tax salary and pretty much everything's automated for you as an individual from there on. Even the end-of-year tax process, the IRD automates it.
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Chapter 6: How can self-employed individuals claim home office deductions?
That's such a funny little loop. claiming back for money that you're giving to the IRT, but sure.
Yes, and it's unfortunately quite high, the interest rate, and it's applied on a daily basis. The third one is if you're engaging a tax agent to file or prepare your tax return. So those are the three common ones under expenses.
You then have a lot of credits or rebates, which are technically not expenses, but the effect is that your taxable income is reduced or you get something back from the IRD. The most common one there is donations. A lot of people donate to their school, to registered charities, to their mosque, church, synagogue, temple, any entity that has a charitable status.
or registered with charity services, they get what is known as donee status. And so what that means is firstly, there's no income tax that applies to the charities. And if you or me as a taxpayer is paying from the after tax income that we get to the charity, what the IRD does is it allows you to claim back a third of the donated amount that you've given to that charity.
So that's a common one that's actually missed out. And it's not even people missing out. It's also not going back and claiming the last four years. The other credits is what is known as an independent earner tax credit. If you're earning between a certain threshold, then you get a certain credit from the IRD on tax that you've paid, you get that back.
Another common one, working for families, tax credits. And one of the recent announcements from the government, for example, is one component of that, which is the in-work tax credit, That's gone up by roughly $50 a week because of the recent fuel crisis that we're in. And then there's a third category is what we call deductions.
And so as an individual, if you are investing in shares, because I know you talk a lot there. We love shares. Yes. And if you're borrowing money to invest, then the interest on that
is claimable as an expense the assumption is that the income you earn from that investing is taxable and again if you are investment uh doing investments into anything else as an individual and sometimes you get charged commissions or or broker fees that's also claimable as an expense is there a type of person that is probably leaving money on the table and not knowing about it Yes.
When it comes to the salary earner and most people in New Zealand, from experience, I've seen them not claim as many donations as I'd like to see. Some of the reasons to that that I'm told is, oh, we've donated it. We don't want to even claim it back. What's gone is gone. And what I tell them is not only should you claim it back,
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Chapter 7: What is tax threshold creep and how does it affect Kiwis?
It just stopped again the last couple of years for whatever reason. And I hope it's not another 14 years till we get another adjustment of the income tax thresholds.
Yeah, no, I think you're so right because it is very easy for these things to get neglected. And I think because tax is such a bogeyman to people that we don't get much conversation about it except for in a debate. I don't want to pay tax, which like, sure, but can we get more into the nitty gritty of that?
It's a creep where people do end up paying more tax and we need to, if that needs to be the case, sure, but it should have to be a case made for that, not it just sort of happening automatically, right?
Absolutely. At the very least, what's still unfortunately lacking from what I see personally is even the general awareness of how tax works. The fact that there are two separate set of rules, one for individuals, one for businesses. And if that confusion and if even if that distinction is made more clear to a lot of people, a lot of the questions will get answered.
And because there's a lot of it is just myth out there and there's a lot of it is confusion, which need not be there.
Absolutely. If someone was listening to this and they did only one thing differently and how they approach their taxes and the tax system. What do you hope it would be?
I think the one thing that I would suggest is do not ignore the IRD. If you've received a letter from them or correspondence, do not leave it unopened. And while it's understandable that there could be reasons of whether it's anxiety, whether it's procrastination, whether it's the fear of the IRD, but ignoring it will not make the problem go away.
Try your best to talk to someone, reach out to the IRD, but do read the letter and act upon it because a lot of the tax issues or the tax problems or the tax debt, they're not related to tax at all. It's more of ignoring the problem. Once you talk to them, things get sorted out.
I look back even to, you know, when I was a student and I, budgets were tight, really tight. I think it's even worse for students now. And I did have a couple of things I got sent to a debt collector. wasn't great. And I ignored it and it freaked me out. But I eventually got on the phone and talked to them and they waived all of it except for 40 bucks.
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