RENEWING/APPLYING FOR A SPECIAL TAX CODE: WHY & HOW?

A special tax code in NZ can get your tax refund to you as you go, instead of making you wait until after the tax year ends. IRD now calls it a tailored tax code. If you are paid wages or salary and also make a loss on self-employed income, it might suit you. This guide explains why you might apply, how to apply for the first time, how to renew each year, and what to watch for.

30-Second Read

• A special tax code (IRD calls it a tailored tax code) can reduce the tax deducted from your wages or salary during the year.
• It suits you if you are paid wages or salary and also make a loss on self-employed income.
• You apply to IRD. IRD sends back a certificate, and you give it to your payroll people.
• It lasts for up to one tax year and ends on 31 March. You must reapply every year.
• Don’t leave it late. IRD says applications made in February and March can take longer than 10 working days.
• Most residential rental losses are ring-fenced, so a special tax code generally won’t help with them.
• The code uses your estimates. IRD works out your exact tax when you file your income tax return.
• Tell us, or IRD, if your income changes during the year.

What Is a Special Tax Code?

A standard tax code deducts tax from your pay as if your wages were your only income. That works well for most people. It doesn’t work well if you also make a loss somewhere else. Your employer deducts too much tax during the year, and you wait for a refund.

A special tax code fixes that. IRD works out a tax rate that suits your whole situation. Your employer then deducts less tax from each pay. IRD’s own name for it is a tailored tax code. Many clients still search for it as a “special tax code”, so we use both names here.

IRD’s page on which tailored tax option is right for you says you can use one if your income comes from sources such as:

• salary or wages
• schedular income
• New Zealand Superannuation or the Veteran’s Pension
• a second job or other income on top of your main job
• a benefit or ACC while you are also working
• an overseas pension that is taxable in New Zealand
• business losses from previous years, when you now earn salary or wages

IRD says businesses and organisations can’t apply for this kind of code.

Applying (For the First Time)

If you are making a loss on your rental properties or self-employed income, and you are also paid wages or salary, then you might want to think about applying for a special tax code.

Why?

Well, usually you wait until the end of the financial year, then your accountant submits a tax return, then you wait more for the IRD to process it, then finally you get your tax refund. Waiting, waiting, waiting!

But if you submit a special tax code application, then you can get the refund as you go, rather than having to wait until after the end of the tax year (31 March).

How?

The IRD sends a letter back, which you give to your payroll people. It authorises them to deduct less tax from your wages or salary. Voila! Tax refunds as you go.

IRD’s Do you need a tailored tax code? guide (IR23G) explains that IRD calculates the correct rate for your situation. The rate may be higher or lower than the current rates. IRD then sends a certificate for you to give to your employer.

What Are the Benefits?

The money is in your bank account, not the IRD’s. So you get the money in the hand, meaning more interest earned or saved and better cash flow.

Hmmm, Sounds Interesting. How Easy Is It?

Super easy! Here is the postal route:

1. Download the IR23BS form from IRD, complete it, sign it and print it.
2. Complete a profit and loss projection. [Download our free profit and loss projection template].
3. Post it all to:

Inland Revenue PO Box 39010 Wellington Mail Centre Lower Hutt 5045

The IR23BS asks for the reason you are applying. It also asks you to detail any losses you are carrying forward. IRD’s form says that if this is your first application and you haven’t filed returns that include losses from these sources, you will need to provide documents showing how you calculated the amount you are claiming. That is what the profit and loss projection is for.

IRD also lets you apply online. In myIR, go to your income tax account, then “Manage account”, and click “Tailored tax code application”. IRD says you will get a letter and certificate within 10 working days, and a copy shows in myIR if you have an account.

Three Worked Examples

Worked Example 1: Kereama’s Photography Loss

Kereama earns a $95,000 salary. He also runs a photography business on the side, and he expects it to lose $8,000 this year. With a standard tax code, his employer deducts tax as if his salary were his only income. He would wait until after 31 March for his refund.

IRD’s individual tax rates show the effect:

• Tax on $95,000 is $15,650.50 on the first $78,100, plus 33% on the remaining $16,900 ($5,577). That is $21,227.50.
• Tax on $87,000 (after the $8,000 loss) is $15,650.50 plus 33% on the remaining $8,900 ($2,937). That is $18,587.50.

The difference is $2,640, which equals $8,000 × 33%. Kereama applies for a special tax code. If his employer spreads that amount across a year of pays, he keeps about $51 more each week. IRD sets the actual rate, so this is only an illustration. It also ignores ACC levies.

This is his first application, so he sends a profit and loss projection to show how he calculated the $8,000.

Worked Example 2: Isla’s Rental Loss

Isla earns a $100,000 salary. Her LTC owns a residential rental that makes a $6,000 loss. She wonders whether a special tax code would cut her PAYE.

It won’t. IRD’s IR23BS form says tailored tax codes don’t apply to residential rental losses. Most of these losses are now ring-fenced, so residential property deductions can generally only offset residential property income. Isla’s tax on her salary stays the same. She carries the $6,000 forward against future rental income.

Worked Example 3: Tevita Renews

Tevita has a special tax code for the year ending 31 March. In early February, IRD sends him a letter reminding him to reapply. Last year he expected an $8,000 loss from his consultancy. This year he expects only $3,000.

He sends the form to us in early March and tells us the figures have changed. We adjust the application. The saving drops from $2,640 to $990 ($3,000 × 33%). If Tevita had reapplied with last year’s $8,000, his employer would deduct too little tax. He would face a bill at the end of the year. IRD says you must tell it if your circumstances change.

Renewing Your Application

Your special tax code expires each year at the end of March. IRD’s page on tailored tax options says it starts on the date IRD approves it and ends on 31 March. So, to beat the rush, we recommend you reapply in early February. What to do?

1. Download the form from IRD.
2. Complete as much as possible and email it to mytax info (at) epsomtax.com. If any income or costs have changed from the prior year, please let us know so that we can make an adjustment on the application.
3. We’ll post it to IRD.
4. The IRD will reply to either you or us with a letter to give to your payroll people.
5. Voila! Sorted for another year.

IRD’s guidance adds some timing detail. If you already have a code, IRD sends you a reminder letter in early February. IR23G says it sends the renewal form before 20 February. IRD also says applications made during February and March may take longer than 10 working days.

Things to Know Before You Apply

IR23G lists several points that catch people out:

• It is based on estimates. Your income will be an estimate, so IRD can only work out the exact amount of tax when you complete your income tax return.
• It lasts one tax year. You need to reapply each year you want one.
• It can’t be backdated. A code takes effect either from 1 April or from the day IRD approves it.
• It applies to one employer. The IR23BS says a code covers one employer, or NZ Superannuation or the Veteran’s Pension. For another employer, complete another application.
• It doesn’t change student loan deductions. IRD says you can no longer use a tailored tax code to change student loan repayments.
• Changes matter. You must tell IRD if your circumstances change during the year. If your income goes down, you may end up with a large tax bill.
• Return the certificate if asked. If IRD asks you to send a certificate back, you must do so within 7 days.

What About Rental Property Losses?

Note that due to the introduction of ring-fencing of losses from residential rental property, you cannot as of 1/4/19 include this loss on your personal tax return. So if this was your only source of loss, there’s little point in submitting a special tax code application. IRD’s IR23BS form says the same: tailored tax codes and rates don’t apply to residential rental losses, because most of these losses are now ring-fenced.

However, there are other ways to use a rental property loss. Please contact us to discuss. Our guides to ring-fencing of property losses and to offsetting LTC profits and losses against other rentals explain the rules. Our article on what happens if you make a loss covers each type of entity.

Checklist: Applying or Renewing

• ✅ Check you are paid wages or salary, or NZ Super, and also have a loss or other income
• ✅ Check the loss isn’t a residential rental loss, because ring-fencing applies
• ✅ Estimate your income and loss for the year to 31 March
• ✅ Complete the IR23BS, or apply in myIR
• ✅ For a first application, prepare a profit and loss projection
• ✅ Apply early, because February and March applications can take longer than 10 working days
• ✅ Give the certificate to your payroll people, or show it to your payer
• ✅ Tell us, or IRD, if your income changes during the year
• ✅ Diarise early March to renew for the next year

Common Questions

Can my company apply? No. IRD says businesses and organisations can’t apply for this kind of tailored tax code.

How long does IRD take? IRD says it will send a letter and certificate within 10 working days. Applications in February and March can take longer.

Can IRD backdate my code? No. IR23G says a code takes effect from 1 April or from the day IRD approves it. It can’t be backdated.

Does a special tax code change my student loan repayments? No. IRD says you can no longer use a tailored tax code to change student loan deductions.

Do I still file a tax return? The code uses estimates, and IRD says it can only work out your exact tax when you complete your income tax return. See our guide on the process for your tax returns.

What if my income falls during the year? Tell IRD, or tell us. A code based on higher income can leave you with a bill at the end of the year.

Summary

A special tax code, which IRD calls a tailored tax code, lets you get your refund as you go if you are paid wages or salary and also make a loss on self-employed income. You apply to IRD, using the IR23BS or myIR, and you give the certificate to your payroll people. It lasts for one tax year and ends on 31 March, so you must reapply every year.

Residential rental losses are ring-fenced, so a special tax code generally won’t help with them. Apply early, keep your estimates honest, and tell IRD if your income changes.

Want Help With Your Application?

A special tax code can put money in your bank account months earlier. It only works if the figures are right. Contact EpsomTax.com or call +64 9-973-0706, line 2. We’ll check your estimates, tell you if the loss qualifies, and post the application to IRD.

This article is general information, not personal tax advice.