Land and Income Tax Amendment Act (No. 2) 1972

This commentary item was published in Public Information Bulletin Volume 68, July 1972

More information about Public Information Bulletins.

New PAYE Tax Tables

In a statement following the presentation of the 1972 Budget the Minister of Finance, the Hon RD Muldoon, gave more details about the proposed tax changes and amended tax tables now issued to employers.

Here is a summary of Mr Muldoon's statement.

Reasons For New Tax Tables

The two provisions in the Budget necessitating the new tax tables are -

• The abolition after 30 June of tax exemption for dependent children, and
• The 10% reduction in most rates of PAYE tax deductions from 1 July onwards.

Only 3 Codes In New Tables

All children and dependent relatives have been eliminated from the tax codes and PAYE tables. The new tables contain only 3 codes -

• "M" - married with dependent spouse or employing a housekeeper.
• "S" - single or spouse with independent income.
• "No Declaration" - no tax code declaration completed.

Mr Muldoon pointed out that the cutting down of the tax deduction tables should be a simplification for all employers.

Amendment Bill Provides For Change

In most cases no further action is required by employees. The Land and Income Tax Amendment Bill provides for the change of all existing "M" and "S" codes with numbers after them (indicating numbers of dependants) to simple "M" and "S" codes in line with the new tables.

In a small number of cases, however, taxpayers have been issued with special tax codes to take into account special circumstances personal to the taxpayer. Some of these may need reviewing.

Adjustment In End-Of-Year Assessment

Claims for dependent relatives other than children for whom a family benefit is payable will be adjusted in the end-of-year assessment and most taxpayers may prefer a substantial adjustment in this manner.

However, if any taxpayer wants an immediate benefit in PAYE tax deductions he should get in touch with his local tax office. They will issue an appropriate special tax code.

Effect On Provisional Taxpayers

Mr Muldoon also made it clear that the Budget proposals could have an effect on all taxpayers deriving farming, business or investment income who were required to pay 1973 provisional tax. The proposals that could affect the provisional tax liability are -

• The reduction in the annual rates or personal tax on incomes derived during the year ending 31 March next by 7 1/2 percent.
• The allowance of the whole of the annual reduction from the first instalment payable by 7 September.
• The reduction in the special exemption for dependent children to $35 a child for the 1973 income year.
• An increase in the dividend rebate.
• Tax deductions at time of payment from Universal Superannuation.

The 1972 tax return forms for provisional taxpayers, which make provision for the calculation and payment of 1973 provisional tax, were printed and distributed well in advance of the Budget announcements. As a consequence the method of calculating the total amount of provisional tax shown in the return forms and the amount payable as the first instalment did not cover the changes announced.

Department Preparing A Special Handout

The Minister said that the Inland Revenue Department was preparing a special handout to advise the new position. This will shortly be available at post offices and tax offices. (A sample is reproduced later in this bulletin).

Returns Already Furnished

Mr Muldoon said that a number of provisional taxpayers would have already furnished their 1972 returns and calculated their provisional tax for 1973. In some cases they would have paid the first instalment of provisional tax.

These and other taxpayers who have not yet furnished their 1972 returns may prefer to adopt their 1972 liability for terminal tax as their 1973 provisional tax and pay one-third as the first instalment, as provided in the 1972 return form. This will be quite acceptable to the Department.

What Is Provisional Tax

The Minister pointed out that provisional tax, as the name suggests, was payment on account. The final tax liability for the year would be determined when the 1973 tax return was furnished.

Mr Muldoon said taxpayers could be assured that the Department would adopt a reasonable attitude regarding the calculation of provisional tax. They would not make any minor adjustments to what the taxpayers calculated as their provisional liability.

PAYE Tax Tables Now Available

New PAYE tax tables to be used from the first complete pay period after 1 July 1972 have been printed and are now available from all tax offices and post offices.

Tables Available

Weekly PAYE tax tables have already been issued to employers. Any employer who has not received the new tables or who uses other than weekly tables should get in touch with the tax office.

More About 1973 Provisional Tax

You Don't Need To Recalculate

As is said in the Minister's statement, summarised in item 1 of this Bulletin, 1973 provisional tax is really a payment on account and your 1973 tax liability will be finally determined when you furnish a return for that year.

If you prefer to leave the 1973 tax changes to be taken into account when you put in your 1973 tax return, that is all right with us. All you need to do is to work out your 1973 provisional tax as shown in your 1972 tax return and use this amount as your 1973 provisional tax. Pay one-third as your first instalment.

Handout (IR3P) Now Available

The Minister of Finance in his statement also referred to a handout being prepared by this Department. This is reproduce at the end of this item and copies are now available at tax and post offices. It should be read together with the 1972 IR3 return form. Of course only those who want to take account of the changes need use it.

Handout Gives Two Options

If you do wish to take into account the 1973 tax changes the handout sets out two ways of working out your 1973 provisional tax.

The first option is the easier. It takes into account the reduced tax rates and also adjusts for the change in the dependent child exemption. The second option makes adjustments for changes in the dividend rebate, the fact that PAYE tax is now deducted from Universal Superannuation and the additional allowance for donations and school fees. However, even if some of these things affect your tax liability you may still use the simpler first option if you wish. Remember provisional tax is only a payment on account and the final tax liability will be determined when your 1973 return is furnished.

Example of Option 1

Here is an example, using Option 1, of a provisional tax calculation for a married man with 2 children and a taxable balance of income to be taxed of $3,900.

*Not required if the taxpayer has income from salary or wages and has claimed for his children in his 1972 tax code.

Only one-quarter of the total tax need be paid for the first instalment.

Why One Quarter

Normally one-third of the provisional tax is payable as the first instalment. However, this year one of the tax changes is a 7 1/2% reduction from basic tax rates and the full year's reduction may be taken from the first instalment of provisional tax. The tax tables supplied with the 1972 IR3 tax return include a temporary surcharge of 3 1/3 %. Taking one-quarter of the provisional tax at these old rates gives exactly the same result as taking one third of the provisional tax at basic rates and then deducting the full 7 1/2 % rebate for the year.

How We Will Assess 1973 Provisional Tax

Whatever calculation method you choose we will follow it when assessing the provisional tax for the year. If you just pay an amount of provisional tax and don't show how you worked it out we will assume you are not taking the tax changes into account and will use your 1972 tax as your 1973 provisional tax. However, if this is not so please get in touch with us.

Trustees Can Use Same Basis

If you are a trustee paying provisional tax on behalf of beneficiaries in an estate or trust you also have the option of using the old rates of tax or of working out the tax on the new basis. You may need to work out the tax separately for each beneficiary and, if you use the new basis, attach a provisional tax calculation (Form IR3P) for each beneficiary to the IR5A return form.

Estimated Income

If you are estimating your 1973 provisional income you can either use the 1972 return form and work out your tax at the old rates or you can use the second option on the handout and work out your tax on the new basis. The notes on the handout tell you how.

First Instalment When Returns Delayed

If you have an extension of time and will not have your return in by 7 September 1972 you need to pay one-third of the provisional tax you paid for 1972 without taking into account the tax changes. However, if you consider your 1973 income will be less than 1972 you may estimate your income and, if you wish, take into account the 1973 tax changes.

How To Provide For Additional Deductions

The handout tells you how to take into account the new rates and exemptions in working out your provisional tax. It does not cover the further deductions to be allowed for tax purposes, such as payroll tax or the increased and extended investment allowance. You may estimate your provisional income for 1973 if you consider that taking into account these further allowances and all other factors your 1973 income will be less than 1972.

Short Cuts For Accountants

Accountants and agents wanting to take the tax changes into account need not use the handout (IR3P) unless they wish. However, it is essential that the amount worked out as the full 1973 provisional tax is entered on the return form. They can also either work out the tax for the first instalment taking the changes into account or pay that instalment on the basis of last year's tax and then adjust the provisional tax liability on the second instalment.

We will be sending accountants a tax table based on the new rates, that is, a reduction of 7 1/2% from the basic rate, to help in working out 1973 provisional tax and later 1973 terminal tax.

The new table can be used together with the 1972 tax tables from the return form instead of using the options in the handout. They give an easy way to work out each instalment of 1973 provisional tax and obtain the benefit of the whole of the reduced tax rate in the first instalment.

Here is how we suggest you use the two tables -

• First adjust the income to be taxed to take into account the tax changes. For example, add $100 for each child for whom a family benefit is payable - not needed when salary and wages derived.
• Then read the tax on the adjusted income to be taxed using the 1972 tax table.
• Take one-quarter of this tax - this is the first instalment payable by 7 September 1972.
• Next read the tax on the same income using the new 1973 tax table and take away the amount of the first instalment - this is the second instalment payable by 7 March 1973.

[CCH note: Form not reproduced]

Provisional Tax Too High Because Of Source Deduction Payments

Generally, your 1972 terminal tax is used as the basis of your 1973 provisional tax. However, the 1972 terminal tax and therefore the 1973 provisional tax may have been increased because PAYE tax deductions did not fully account for tax on salary or wages or other remuneration in the 1972 year. This could happen, for example, when back pay or secondary income was derived. If you consider your 1973 provisional tax is too high because of this you may reduce it to the amount correctly payable. To find this amount -

• Work out the gross tax you would have paid if your only income for 1972 had been the income from which PAYE tax deductions were made.
• In doing this, use the total of your special exemptions as entered on page 2 of your 1972 return form to arrive at your taxable balance of assessable income.
• Use the 1972 tax tables in the 1972 return form to work out the gross tax payable on this balance.
• Take this amount away from the gross tax payable on your total income.
• The balance will be the amount of provisional tax payable.

Here is an example

Facts

• Married man - no children
• Salary $8,500 - PAYE tax deducted $2,724.80
• Income liable for provisional tax $200.
• Provisional tax liability using normal calculation $201.62.

Here is how the provisional tax liability is worked out by the alternative method.

Tax Calculation on Total Income

Remember, even if you work out your provisional tax in this way you can still use the new tax rates and other optional adjustments provided for on the IR3P handout.

New Income Tax Rates For Companies - Basis Of Calculation

New company tax tables cannot be made available until the necessary legislation is passed.

However, companies wishing to make provision for tax in their accounts may use the new rates for this purpose. The rates for resident companies are -

1. On that amount of income which does not exceed $6,250 - 20 cents in the dollar increased by .002 cents in the dollar for each dollar of income.
2. For each dollar in excess of $6,250 - 45 cents in the dollar.

Paying Provisional Tax

"Provisional"companies may also use the new rates when paying 1973 provisional tax if they so desire. If it is wished to also take advantage of the 1973 tax provisions affecting companies, for instance, the deduction of payroll tax, the company's income should be estimated. Remember that when estimating the company's income all factors which might affect the income should be taken into account, not only the Budget changes.