NZ TAX rules on Redundancy compared with Australia

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Forums › Finance and wealth management › NZ TAX rules on Redundancy compared with Australia - We Suck --

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Dingbatt

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#2480377 10-May-2020 11:30

Since redundancy payments are normally determined as x number of weeks pay, then I would think that applying a tax rate equivalent to that which would have occurred if it was paid out over that (x number of weeks) time period rather than as a lump sum would be a fairer way of doing it.

In the end it will all be balanced with either a rebate or demand at the end of the tax year, so the ping pong argument over evasion/avoidance is irrelevant (there’s a feud thread if you want to continue it). But it doesn’t address the need for cashflow now, rather than a refund post March 2021. Perhaps you could apply for a lower rate now in the knowledge it may incur a bill next March?

“We’ve arranged a society based on science and technology, in which nobody understands anything about science technology. Carl Sagan 1996

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BlinkyBill

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#2480401 10-May-2020 12:18

Dingbatt:

Since redundancy payments are normally determined as x number of weeks pay, then I would think that applying a tax rate equivalent to that which would have occurred if it was paid out over that (x number of weeks) time period rather than as a lump sum would be a fairer way of doing it.

In the end it will all be balanced with either a rebate or demand at the end of the tax year, so the ping pong argument over evasion/avoidance is irrelevant (there’s a feud thread if you want to continue it). But it doesn’t address the need for cashflow now, rather than a refund post March 2021. Perhaps you could apply for a lower rate now in the knowledge it may incur a bill next March?

The calculation is determined according to some formula; the payment happens once. The income is recognised when it is paid. It is a fundamental principle of income tax that the tax that applies to income is calculated according to the period in which it is incurred.

For taxation purposes, I see no possible reason why one class of income should be treated differently than every other class of income.

Dingbatt

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#2480406 10-May-2020 12:30

At the moment the government is under no obligation to pay a wage subsidy, provide business loan guarantees, allow access to previous tax payments, etc, but they have, because morally it is the right thing to do. It is their actions that have led to the current circumstances, so ultimately they can change any rules they wish to try and reduce the harm.

Its always easy for those unaffected (yet) to sit back and say “hard luck, those are the rules”.

“We’ve arranged a society based on science and technology, in which nobody understands anything about science technology. Carl Sagan 1996

BlinkyBill

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#2480407 10-May-2020 12:47

Dingbatt:

Its always easy for those unaffected (yet) to sit back and say “hard luck, those are the rules”.

Changing the way tax is paid on redundancy payments, spreading it out, will make no difference to anything or anyone.

Dingbatt

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#2480454 10-May-2020 13:43

BlinkyBill:

Dingbatt:

Its always easy for those unaffected (yet) to sit back and say “hard luck, those are the rules”.

Changing the way tax is paid on redundancy payments, spreading it out, will make no difference to anything or anyone.

Opinion as fact? (OAF)

A reason why you think this, would be helpful.

“We’ve arranged a society based on science and technology, in which nobody understands anything about science technology. Carl Sagan 1996

afe66

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#2480675 10-May-2020 16:51

Having filled out tax returns in several countries nz system is a dream.

Nothing is really reclaimable so there are few holes to drives tax evasion systems to aim for.

Remember the ones who benefit from complexity are never the poorer people. Rich people employ accountants and and benefit from any loopholes.

BlinkyBill

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#2480697 10-May-2020 17:26

Sure. Tax owed to the government must be paid. If it is deducted at source, i.e. when the salary payment is paid, there is no reconciliation required relative to the payment, and it is paid on the basis of lodged tax code. All good so far.

Let's say, taking an unfortunate situation, due to no more earnings for the tax year, and those total earnings drop the payer to a lower tax bracket (meaning more tax is paid on the redundancy payment than is actually due). In this case on the current situation a refund would be payable by IR to the payee.

If no tax had been paid on the redundancy payment, and that was the last income for the year, then tax may be owing, andf it must be paid. This puts an unnecessary burden on the payee. If base-rate tax had been paid, and the person dropped to a mid-rate level, tax would be paid and some would be owing - would the payee be able to pay the tax? In either case, a new process needs to be established to be able to handle a part-tax payment (just ask self-employed about provisional tax processes) versus the current end of tax year reconciliation process which is pretty simple.

Let's say, taking a more positive example, the redundant person finds a new job fairly quickly. The total tax year earnings are, let's say 55 weeks worth or normal income, instead of 52. The additional 3 weeks pushes the person up a tax bracket. That tax needs to be paid - does the redundant person have the money to pay?

So the issues are:

- we would need a new tax process to handle spread or part payment of PAYE; and

- we would need a new tax process to manage end-of-tax year reconciliation; and

- the affected person will need to do a tax return; and

- the person paying the tax will have a tax bill when they are presumably tight for money, most likely having spent the tax-due money already (and if they are disciplined enough not to spend it, why not simply remit as tax at source?)

The PAYE tax reforms for individuals meant that tax due is collected at source, most people probably don't need to do tax returns (albeit everyone should at least check using the IR tool), and the system is weighted to refunds rather than payments.

So it's a pretty expensive option for a relatively small number of affected people, to build in a new and approach to collecting tax on redundancy payments and reconcile at the end of the tax year. And I worry people will get into trouble if they spend the tax bill money and can't pay IR.

Questions for you - what are the benefits of a different approach, how many people would benefit, and what do you think it will cost the taxpayer to implement such a system, and why, if the person runs into problems, are social welfare provisions not satisfactory?

Kyanar

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#2481167 11-May-2020 13:56

Dingbatt:

It is the same when a company goes into receivership (well certainly was last time it affected me). The workers, who probably need the money than most, are way down the queue with all the unsecured creditors.

Once the IRD, liquidator and banks have had a go at the carcass there is often only cents in the dollar left for the workers.

That is weird. Over here in Aus, the employees are "priority unsecured creditors" - they rank above the Australian Taxation Office, and any secured creditors whose security is "floating assets". Basically the only creditors that rank higher are the liquidators and named security creditors. But then the government also guarantees to cover missing wages.

Kyanar

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#2481168 11-May-2020 13:58

Senecio:

In the last financial year the total Australian tax take was 559.8B with population of 24.9M people that's $22,400 per head

For the same financial year NZ took in 86.5B in tax on a population of 4.89M, that's $17,700 per head.

I'm sure someone will poke holes in my methodology but I'm sure by any measure you care to use you'll find that Australians pay more tax than Kiwi's. Its just collected in different ways.

Biggest hole in your methodology is you're including tax non-payers such as toddlers.

Handle9

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#2481333 11-May-2020 15:40

Kyanar:
Dingbatt:

It is the same when a company goes into receivership (well certainly was last time it affected me). The workers, who probably need the money than most, are way down the queue with all the unsecured creditors.

Once the IRD, liquidator and banks have had a go at the carcass there is often only cents in the dollar left for the workers.

That is weird. Over here in Aus, the employees are "priority unsecured creditors" - they rank above the Australian Taxation Office, and any secured creditors whose security is "floating assets". Basically the only creditors that rank higher are the liquidators and named security creditors. But then the government also guarantees to cover missing wages.

Employees wages are preferred creditors in NZ. The IRD etc get paid after them. Holiday pay is next.

http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM323545.html

GV27

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#2481335 11-May-2020 15:54

Dingbatt:

A reason why you think this, would be helpful.

Your final tax position is still washed up just the same at the end of the year.

Previous redundancy relief, as stated, was through a tax credit specifically for people laid off - again, applied at year-end when you filed a tax return.

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