Heather Roy's Diary

PAYE Refunds: The Right Of The Over-taxed
It is said that only two things are certain in life - death and taxation. When I was a student studying to become a physiotherapist I paid my way by working as a cleaner in the summer holidays. The wages were high by comparison with my usual student income and, living with my parents, I was able to save a high proportion.

The tax I paid was levied on the assumption that each week's income was evenly distributed throughout the year, so I was being 'overtaxed'. In a good year I would earn $4,000 and have a negligible tax liability so, around May, I would receive a second instalment of my wages as I received a refund on tax paid. It was typically about $500 and, at the time, that was a major contribution to my income.

Pay As You Earn (PAYE) taxation certainly isn't an exact science, and even for those working a full financial year there are 'unders and overs' that affect the amount they should be taxed. Last year I was entitled to a refund of a couple of hundred dollars and it was welcome - even for someone on my income.

So the negative reaction of many to IRD's proposal to make the PAYE deducted from each pay packet the 'final tax' for most taxpayers is entirely understandable. It would end the refunds that many receive as the result of lodging a tax return. It is proposed for those who work for most of the year.

The IRD says the proposal, contained in the 'Making Tax Easier' discussion document (http://taxpolicy.ird.govt.nz/publications/2010-dd-making-tax-easier/over...) earlier this year, would reduce costs. IRD spends a lot of money processing small refunds or debts, but this does not make for fair or equitable policy if workers can't apply for a tax refund when they have been overtaxed through no fault of their own. The discussion document says the year-end square-up would no longer be available for the 528,000 people who receive PAYE income for 11 or 12 months of the year.

All those who have been overtaxed by more than a trivial amount should have the right to seek a refund.

The history of PAYE is very interesting. Many are surprised it was developed by an economist with impeccable right-wing credentials - Milton Friedman, in 1944. It was war-time and he was working for the US Government. The financial cost of WWII was very high and taxes needed to rise to fund it.

Friedman found that workers had real difficulty paying a large tax bill at the end of the financial year, but a smaller amount deducted from each pay packet was easier and more palatable to individuals. Once the war concluded, the regular income tax deductions on wages and salaries continued and were adopted in many other countries.

The US has a complicated array of taxes and income tax is generally referred to as Federal tax. In Australia it is called Pay As You Go (PAYG), and in New Zealand PAYE. By any name, it is an efficient way to collect tax but Friedman later called it his greatest ever mistake. This was because most people regarded their 'after tax' income as their total income.

Research shows that most people significantly underestimate how much tax they pay and, intriguingly, women are more likely to underestimate their tax burden than men. By comparison, most people who own a home can tell you exactly what their Council rates are.

The problem with PAYE is that tax is calculated for each pay period. As tax rates rise with income brackets many people pay, temporarily, too much tax. It used to be routine to fill out a tax return until 1995 - remember IR5s? Now it is voluntary, but this proposal will make it impossible for over half a million New Zealanders.

ACT proposed many years ago that every worker should receive a tax statement at least at the end of the financial year so they knew how much tax they had paid. Currently you can request a statement but last year only a small proportion of earners did.

People should know how much they contribute compulsorily and they should be able to claim a refund when overtaxed - end of story.

Lest We Forget - James McKie Receives Conspicuous Gallantry Cross
Lance Corporal James McKie has been awarded the Conspicuous Gallantry Cross - the second highest award after the Victoria Cross - for bravery while serving with the British Army in Afghanistan. He had previously served in the New Zealand Army as a medic.

James saved the lives of two British soldiers in March this year - a live grenade landed next to the three, and James threw it back at the Taleban. He described it as "Conscious decision backed by instinct. I think that's the only way you can say it ..."

Yesterday James said the award was for his platoon from 3 Rifles: "We had four killed and eight injured - 23 of us went to Sangin and 12 of us came back."
Formerly from Wellington, where his family still lives, James was told of his award in London yesterday and will be formally presented with the Conspicuous Gallantry Cross later in the year by a senior member of the Royal Family.

ENDS