Do you need to complete a tax return as an individual if you are working as a paid employee?
Here in New Zealand, for the majority of employees the answer will be “no”. However, in Australia and the UK, (and probably many other countries) the chances are that the answer will be “yes”.
So now concentrating on New Zealand, although much of what will follow will equally apply to Australia and the UK, what qualifies an employee as being someone who does need to complete a tax return?
The simple answer is “if you receive other sources of income”.
Having said that, if your only other sources of income are interests or dividends that you have received from NZ banks or NZ listed companies then you still may not need to complete a tax return as resident withholding tax will have been applied. However it is probably in your best interests to complete a tax return anyway as the tax may not have been withheld at the correct rate.
So what else qualifies as “other income”?
Well to be honest pretty much any income you have received other than gifts from family and friends. So let us look at the main potential other sources of income that there are and which need to be reported via a Tax Return:
If you have an investment property that you let out, either as a standard rental property or as a holiday let then the income that you receive from this needs to be declared. However, there are certain costs in relation to the investment property than can be used to offset the income such as mortgage interest, rates and insurance, repairs and maintenance etc.
Investments and Shares
As already mentioned, Resident Withholding Tax (RWT) will already have been deducted from dividends received from NZ companies but it may not have been withheld at the correct rate. Likewise, returns on investments in Portfolio Investment Entities (PIEs) will need to be declared if your returns have been taxed at a lower rate than they should have been.
Trusts and Estates
If you are a beneficiary of any trust or estate then any income that you receive from that trust or estate needs to be declared.
This covers the whole range of potential income that you could receive including interest from foreign banks/companies, dividends from foreign companies, superannuation paid overseas, income from foreign employers etc. However, if you have already paid tax to another country based on any of this income, then as long as you provide the IRD with proof of this tax payment, it will be used to offset any potential tax payment to NZ.
The one exception to this rule if for new migrants to NZ. New migrants, who have not lived in NZ for at least the 10 previous years, are granted a four year exemption to most foreign sources of income, the exceptions being employment income that was earned while living in NZ.
Partnership or Look Through Company (LTC) Income
Any income that you have received from a partnership that you are a part of, or from a Look Through Company that you are a shareholder of, excluding of course, any income that was paid to you as a salary with tax deducted.
This only needs to be declared if it was paid to you tax free. If tax was deducted then it is counted as normal paid employment.
Self Employment Income
Although an employee you may still have your own small business on the side. Any income you receive from this business, less any allowable deductible costs, will need to be declared. This category will be looked at more closely in a future post.
Any Other Income
This is basically a cover-all to cover any other type of income that you may have received including tips or gratuities, “cash in hand” jobs etc.
Obviously the above is just intended to convey the types of income that should be declared on an Individual Tax Return and to give an idea to individuals of what they should be looking out for. If you receive any of these types of income, particularly when it is income against which costs can be offset, then it is best to seek professional advice for help with your tax return.