I have had a number of calls from people worried that the Government is increasing the tax on their savings from 19.5% to 21%. There is plenty of confusion out there in the public at the moment due to the changed tax rates for RWT or resident withholding tax. This is the tax that is deducted from interest that people earn on their bank accounts and the like. As someone with more than a few financial and accounting qualifications and having been part of the Select Committee that made the changes I thought it would be good to clarify the changes.

The banks and other organisations have unfortunately not done their communications well with the members of the public. What has happened in reality is that the amounts that the rates of tax has changed too and this is simply an alignment of RWT or ‘interest tax’ with your actual rate of income tax.

What this means is that if you earned the median income from all sources of $538 per week in 2009 ($27,976 per annum) and say have $5,000 saved and earn a few dollars of interest income then from 1 April you will notice that you will have RWT deducted at a rate of 21% per annum rather than 19.5% per annum – unless you tell the bank otherwise. This is because your actual tax rate is 21% per annum and by having it deducted at 19.5% you were creating an income tax liability for the end of the year. Most people don’t realise that if you earn over $200 a year in interest you are required to fill in an income tax return and by doing so they were discovering a surprise at the end of the year that they were not paying the correct amount of tax. With the tax changes you would no longer have an end of year bill to worry about.

If on the other hand if you work part time and say earn $12,000 a year and have saved say $3,500 and get $210 a year at 6% interest per annum then instead of paying 19.5% RWT ($40.95 in tax a year) in 2010 you would now only have $26.25 deducted a year so you are now a few dollars better off with the changes!

Equally for some others e.g. where there is one Superannuitant and a spouse is still working or has no income it come also be beneficial to think carefully about who in the relationship earns any investment income. As an example if one is getting Super but also has a few thousand a year in interest income but the spouse is not working and has no income, then transferring the investments into the spouses name is not only legal but will mean you save on RWT interest tax as the spouse earning under $14,000 a year will be taxed at only 12.5% rather than the 21% that the person on Super would be paying!

For those earning slightly above the average wage, say for example $45,000 a year and still have say $5,000 saved then instead of being taxed at 33% on the interest you instead will be taxed at 21% so a net saving as well.

So overall these are a positive set of changes for the vast majority of taxpayers. If you are uncertain about your own circumstances you should seek professional independent advice.

Web links:

National Superannuation Rates http://www.workandincome.govt.nz/manuals-and-procedures/deskfile/main_benefits_rates/new_zealand_superannuation_tables.htm

RWT Rates http://www.ird.govt.nz/rwt/receiving/how-much/

Income Tax Rates http://www.ird.govt.nz/news-updates/like-to-know-april-2009-tax-changes.html

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