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How tax cuts could mean a tax bill for some workers

Waitaki App


05 June 2024, 9:14 PM

How tax cuts could mean a tax bill for some workersPhoto: RNZ

A number of taxpayers could be landed with a bill - or a tax refund - because of the government's decision to enact tax changes part-way through the year.

The government announced in this year's Budget that tax brackets will be adjusted from 31 July, reducing most people's tax bills.

But while the tax bracket change will apply to tax being withheld on income earned after that date immediately, a different approach will be taken to this year's end-of-year tax return calculation.

This tax year will be considered a "composite year" and the tax reduction will be averaged out across it.

Robyn Walker - a tax partner at Deloitte - said that would mean that someone who earned more income in the last 244 days of the year could find they were undertaxed and still had more tax to pay.

She said annual tax calculations this year would be done with eight bands to reflect the averaging out of the tax bracket shift.

The rates assumed that people earned income evenly through the year and had been taxed for 121 days at the old threshold and 244 under the new threshold.

"It can work in your favour or against you if have variations in how you earn income. The issue is if you earned most of your income in the first part of the year proportionally more of that income will have been taxed at the higher thresholds and less at the lower thresholds so when the composite calculation is done you should be in a refund position.

"But if you just started work, maybe you're a student and you just have a holiday job working in December, you're only working when the lower threshold is being applied and you will potentially be undertaxed and have a tax liability."

Inland Revenue agreed some people would have more tax to pay or a refund, which they normally did not.

"This will be managed through the normal end of year process."

The department writes off debts of up to $50 automatically.