Posts by Deborah
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Never had a speeding ticket. Only ever had one at fault accident, when as a very new driver, I quietly reversed into another car at the supermarket.
But... I know that I often make mistakes, and I'm just lucky that they've never ended up seriously. I try to be a sensible and safe driver, because I like being alive, and I figure that other people like being alive too. But every now and then I lose concentration and I miss something that I ought to have seen, or a misjudge a corner, or my speed creeps up too high. That's one of the things that I've found so powerful about this ad: it reminds me that a mistake can be just as fatal as wilfully driving dangerously.
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Speaker: Why we can’t just fix secondary…, in reply to Rich of Observationz,
Does DC 5 apply to companies?
If you're a co-owner of a company, then you are a shareholder, and excessive remuneration to a shareholder, or an associated person of a shareholder (eg. a spouse / civil union partner / de facto partner) gets treated as a dividend and taxed accordingly. So there's a different mechanism that achieves the same end ie. you can't pay a salary to an associated person who hasn't actually done any work for that salary.
The same sort of thing applies to a partnership, except that the remedy is for the Commissioner to set aside the salary and re-do the profit split.
The rules are in section GB 23 of the Income Tax Act 2007.
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Speaker: Why we can’t just fix secondary…, in reply to ,
When it comes to partnerships, the rule of thumb is that profits get divided up according to the partnership agreement, or in the absence of a formal partnership agreement, then in accordance with relevant law such as the Partnership Act 1908 (yes, that legislation really is over 100 years old, 'though it has been much amended in the meantime). Roughly the idea is that the split of income has to bear some relationship to the underlying reality. So if you and your business partner have put in more or less the same amount of money, and you do more or less the same amount of work, then you're going to end up with a more or less 50:50 split for tax purposes.
One commonplace scenario might be a couple where they own a rental property jointly, and one person works in paid employment. From a tax point of view, it would be good to be able to stream all the rental property income to the person who is not in paid employment, to take advantage of the lower tax rates, but in practice, you can't get away with that.
Long story short: you have to look at the underlying economic and legal reality, not just what would be convenient in terms of splitting partnership income.
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Speaker: Why we can’t just fix secondary…, in reply to izogi,
It's illegal, izogi.
Section DC 5 of the Income Tax Act 2007
DC 5 Payments to spouses, civil union partners, or de facto partners: services
No deduction without approval
(1) A person is denied a deduction for a payment to their spouse, civil union partner, or de facto partner for services without the Commissioner’s approval.
When Commissioner can give consent
(2) The Commissioner may approve the deduction only if—
(a) the Commissioner considers that the payment is for services rendered; and
(b) the services are not domestic services or otherwise services connected with the home; and
(c) the payment is incurred by the person exclusively in deriving their assessable income; and
(d) the approval is granted before the deduction is claimed.In other words, you have to have a genuine reason for paying your spouse/civil union partner/partner, and you have to get permission from the Commissioner before you get to claim the deduction.
Of course, you can still go ahead and pay your partner, and she / he will then have to pay taxes on it. But you can't claim the deduction, so it will still count as your income too, and you will have to pay income tax on it too. So it would be a very silly thing to do. As well as being unethical, as you say.
Regarding student allowances and the like, my understanding is that the rules for claiming them have tightened up, so that income diverted through trusts or via income equalisation accounts gets added back into the mix for calculating student allowance entitlements. Study Link has a page on what gets counted as parental income: Parents' income - Student Allowance definition. The definition of parental income is pretty closely linked to the definition of income for Working for Families purposes, and that was tidied up a year or two ago to minimise the use of trusts and the like as a mechanism for getting for W4F credits.
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The joys of income splitting....
People are often very keen on income splitting. But it's worth knowing the numbers around it. A couple of examples, one set at the level of the top tax threshold, and one set at a joint household income of $80,000.
1) If one person earns $140,000, then she or he pays $37,120 income tax. If two people earn $70,000 each, then they each pay $14,020 tax, and between them, they pay $28,040 tax. That's a tax saving of $9,080 compared to the single income earner.
2) If one person earns $80,000, then she or he pays $17,320 income tax. If that income is split between two people, with one of them earning say $60,000, and the other earning $20,000, then they pay $11,020 and $2,520 tax respectively, giving a total tax bill of $13,540, which yields a total tax saving of $3,780.
Long story short: the benefits of income splitting flow disproportionately to high income earners, especially those households where one person is in a very high paid job, and the other person is very low paid or not in work at all. It's worth thinking about which sorts of people are likely to fit into that pattern (hint: it's not low paid workers in South Auckland).
It gets even more complicated when you factor in Working for Families, which calculated on a family basis, and so in effect creates a form of income splitting already. Those calculations make my head hurt, which is why I've stuck with just the simple income tax calculations.
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Speaker: Why we can’t just fix secondary…, in reply to izogi,
Even if it was a complete 100% refund to the individual, money’s still being channeled to accountants to handle the complexity of a tax system so it’s arguably not ideal unless you’re in the business. I’m all for reduced complexity where possible.
Yes, indeed. I've found that I can do my tax return in NZ and get it right, every time (as you'd hope, given that I lecture in tax). But when we lived in Australia, I would do our tax returns, send them off to the ATO, and find that they would come back with changes.
If a reasonably competent person has to pay an expert in order to deal with a government department, then that suggests that there may be something wrong. Tax *is* complex, and perhaps it's not possible to reduce its complexity to the point where everyone can just do their own tax returns with comparative ease. Even so, if se started to find that everyone had to hire experts in order to do an ordinary tax return, then we might be wanting to conduct a major review of the way we do tax.
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Speaker: Why we can’t just fix secondary…, in reply to Matthew Poole,
If you pay for someone to do your tax return, then the expense reduces your total income, but the tax effect is only at your marginal tax rate.
So, imagine you earn more than $70,000 a year, so you're on the top tax rate of 33% for every dollar in excess of $70,000. Let's say you earn $100,000 a year. The tax on $100,000 is $23,920 (trust me).
But, let's say you pay someone $1,000 to do your tax return for you. The expense can be claimed as a deduction against your income. So now your income is $99,000. The tax on $99,000 is $23,590.
You've spent $1,000, and you've reduced your tax bill by $330. You've spent $1,000, and you will get $330 back (in reduced cost), so the overall effect is that you are worse off by $670.
That's the standard rule for any deductible expense. The expense reduces your income by $whatever, and that in turn reduces your tax bill by $whatever x your personal top tax rate.
So yes, you get a 100% deduction for the cost of a third person's help in preparing your tax return, but the tax effect is at most equivalent to one third of the expense.
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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.
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My first ever Public Address post! And it's about... tax. Of course.
Many thanks for posting this, Russell.
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Just as a side observation, it's amazing to see so many people, here, there and everywhere, talking about the economy, and how it works, and who it should serve.