Taxation of Individuals, Employment Income, and Personal Deductions
Core framework
Individuals are taxed on worldwide income with progressive rates. Employment income includes salary, wages, bonuses, and most benefits. Candidates must know the PAYE system, fringe benefit tax (FBT) on employer-provided benefits, and the treatment of allowances (taxable unless an exempt allowance for travel, tool, or meal expenses is available).
Key concepts: the personal tax rates and the independent earner tax credit; KiwiSaver contributions; student loan repayments; the working for families abatement; and deductions for individuals (generally limited, but some specific deductions such as certain interest and rental expenses apply).
Traps
- Treating reimbursements as taxable when they merely reimburse an expense incurred for the employer.
- Confusing FBT (employer pays) with PAYE on a cash allowance.
- Forgetting that private use of a company vehicle creates an FBT liability, often calculated on the availability basis.
- Ignoring the low-value benefit exemption (benefits of $300 or less per employee per quarter, subject to conditions).
Worked example
An employer provides a car available for private use. Under the availability basis, the taxable value is a percentage of the cost price (or the specified value) based on the number of days available. The employer pays FBT, not the employee; the employee is not taxed on the benefit.
Rule of thumb
Identify who receives the benefit and who bears the tax. Cash to the employee is generally PAYE; a benefit in kind is generally FBT.