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Ever wonder where your income tax goes?

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2016 Your personalised income tax receipt.

Gross income
Income tax paid
Average tax rate
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Government spending
Areas and Programmes
Income Tax Allocated
2016 Budget
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2015 Spending
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Social security & welfare
New Zealand Superannuation
Jobseeker support & emergency benefit
Supported living payment
Sole parent support
Family tax credit
Other Working For Families tax credits
Accommodation assistance
Income-related rents
Disability assistance
Paid parental leave
Childcare assistance
Other
Health
Payments to District Health Boards
National disability support services
Public health services purchasing
Other
Education
Early childhood education
Primary schools
Secondary schools
Special needs support
Professional development
School improvement
Tertiary tuition
Tertiary student allowances
Student loans
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Core Government services
Official development assistance
Science expenses
Other
Law & order
Police
Ministry of Justice
Department of Corrections
New Zealand Customs Service
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Defence
NZDF core expenses
Other
Transport & communications
Rail funding
Other
Economic & industrial services
Employment initiatives
Kiwisaver
Other
Heritage, culture & recreation
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Housing & community development
Community services
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Warm up New Zealand
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Environmental protection
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TAX FAQ’s

Got questions? Check out our FAQs below. Just click on the question to get the answers you’re looking for.

What is tax?

If you live, work, or play in New Zealand, you’ve probably paid tax. Tax is money that the government collects by law, from people and organisations, and through transactions. Tax is compulsory to pay, and there are many different types of tax.

In 2015, almost all (over 92%) of the Government’s money (also known as core revenue) came from collecting tax both “directly” and “indirectly” from people and organisations in New Zealand.

Why do we have to pay tax?

The government collects tax so it can pay for everything we as voters ask it to do in New Zealand—everything from providing a police force to running our court system, our schools and our hospitals. Without all of us paying tax, there’s no way the New Zealand Government could pay for everything that it does.

Certain types of taxes are seen to perform a double role, both collecting money to offset the cost of government services, and also artificially raising the price of something the government thinks is harmful. A good example of this is cigarettes, where the government increases the tax charged on sales of cigarettes to make them more expensive, with the consequence that people are discouraged from buying them.

What does the government spend our taxes on?

Most of the goods and services the government spends our money on are ones that only it has the authority or ability to provide. For instance, the government operates the defence force, the courts, the police, and social welfare because the public doesn’t think it would be safe or right for private contractors to be in charge of providing those services on behalf of New Zealand.

In other cases, the government provides public goods that are known as “non-rival” and “non-excludable.”

Non-rival goods are products or services that don’t reduce in availability or quality when used by more than one person. These are things like listening to a public radio station or watching a public television channel—tuning in doesn’t reduce their availability or quality to others.

Non-excludable goods are things that people cannot be excluded from using once they are in the public domain. For example, public parks, roads or streetlights would be difficult and costly to regulate and restrict certain people from using.

Everyone in society can benefit from non-rival and non-excludable goods, but it can be difficult or politically undesirable for private companies to make money from providing them, so the government often takes on responsibility for providing these things to all people equally.

What is ‘direct tax’ and ‘indirect tax,’ and do I pay both?

Direct tax refers to taxes that we all pay directly to the government. As individuals, the main direct tax we all pay is income tax, although we may also pay property tax or resident interest tax directly to the Inland Revenue Department (IRD), which collects taxes on behalf of the government. Companies in New Zealand also pay direct taxes to the government primarily in the form of corporate income tax.

Indirect tax refers to taxes that the government collects indirectly—that is, we pay the tax to a third party and that third party then pays it on to the government. The most well known indirect tax in New Zealand is the Goods and Services Tax (GST). Consumers—that’s us—purchase things from shops and tradespeople who charge us GST on top of the price of their goods and services; these shops and tradespeople then give the government all of the money they’ve collected as GST. Other types of indirect taxes that we as individuals and companies in New Zealand pay include excise tax, customs duties, and gaming levies.

Where else does the government get money from?

FIGURE 1: WHERE CORE GOVERNMENT REVENUE COMES FROM
MITT-CrownCoreIncome

Adapted from: The New Zealand Treasury, “Where core Crown revenue comes from” in Key Facts for Taxpayers 2014, available at http://www.treasury.govt.nz/budget/2014/taxpayers/b14-taxpayers.pdf (accessed 19 May 2015).

What counts as income tax?

As you may have noticed, income tax is by far the biggest source of the government’s revenue. Income, according to the IRD, is money a person has earned over the tax year, whether that be from salary and wages; income from your own businesses; interest you’ve made on any investments you may have; rental income; or overseas income, which might come from work done overseas or from an overseas pension. The government requires payment of a percentage of all of this taxable income.

For many people, paying income tax is pretty straightforward: your employer sends a percentage of what you earn to the IRD as you earn it (PAYE, or Pay As You Earn). Though, if you have income from other sources it’s usually your responsibility to report this to the IRD and to pay them the correct percentage of that money as income tax.

What is GST?

GST is the second biggest slice of the government’s revenue pie, bringing in nearly a quarter of the government’s revenue. We’ve all seen GST: it’s that often forgotten about little tax you’ll see on the bottom of your grocery receipt. It’s a tax charged on almost all goods and services consumed in New Zealand: from a new TV to a ride in a taxi.

Every person or business selling goods or services in New Zealand has to include GST in their prices, and when they make a sale they are responsible for passing that money on to the government.

The tax is currently set at 15% of the cost of whatever you’re buying, and because it’s charged on every transaction, GST is the same for everyone in New Zealand.

Is GST an unfair tax?

Because everyone is charged GST at the same rate (15%), some people call GST a regressive tax (the opposite of progressive tax), which would mean that lower-income earners are the ones who pay a larger proportion of their overall income in tax than high-income earners do.

How does that work out, you ask?

Imagine if three different people were going to buy a pair of jeans for $80. When they walk into the store, they don’t get asked what their income is before they buy them, right? Everyone gets charged the same tax. This table shows the effect of GST on each of them:

MITT-GSTRegressiveTax

This example shows us how GST is a regressive tax when you consider an individual transaction.

And yet there are those who say that it’s an exaggeration to call GST a regressive tax.* They argue that this concept of GST doesn’t consider the fact that over a person’s lifetime, they’ll usually spend most of what they earn (if you earn more money, you’re likely to buy a nicer car, more expensive clothing, dine out more often etc.)—so that everyone will end up paying roughly the same proportion of their income as GST over their lifetimes.

Even though everyone pays the same price for a bottle of milk or this pair of jeans, this doesn’t mean that everyone will buy the same products, or even the same type of products—those with higher incomes might buy more and more expensive things, and thus pay more GST than those who buy fewer or less expensive things.

Looking at it that way, it would be more correct to think of GST as a proportional tax rather than as a regressive tax because both low and high income earners end up paying similar proportions of their income as GST over a lifetime of earning and spending.

*R. McLeod et al., “Tax Review 2001: Issues Paper,” (Tax Review 2001, 2001), 47-48; S. Davidson, “Personal Income Tax in New Zealand: Who pays and is progressive taxation justified?” (Wellington: New Zealand Business Roundtable, 2005), 14

Why do some people pay a higher percentage of income tax than others?

Because here in New Zealand—as in many other countries around the world—we have what is called a progressive income tax. This means that as your income increases, the proportion of that income that you pay in tax increases as well—progressively.

In New Zealand, the increase in the income tax rate happens in four stages as you hit different income levels (increasing at $14,000, $48,000 and $70,000). As your income goes above each of these levels, every dollar you earn past that point is taxed at a higher rate.

Let’s break it down:

MITT-IncomeTaxBreakdown

How does progressive tax actually work?

We reckon this graph does a pretty good job. To make things easy, we’ve used the example of Sophia, who earns $100,000 a year. The following shows how the income tax she pays changes as her income increases through the different tax levels.

FIGURE 2: SOPHIA’S TOTAL INCOME

MITT-IncomeExample

FIGURE 3: SOPHIA’S TAX BREAKDOWN OVER HER TOTAL INCOME

MITT-IncomeExampleBreakdown

Average tax? Marginal tax? What’s the difference?

Because of the progressive nature of our income tax system, there are two ways you can think about your own personal income tax rate: marginally or on average. Your marginal income tax rate is the amount you’re paying on the last dollar of your income, whereas your average income tax rate is the percentage of your total income that you will pay in income tax for the year.

Going back to our example of Sophia (who we talk about in the last question), her marginal income tax rate would be 33% because that’s the rate at which the 100,000th dollar she earns will be taxed. Her average tax rate, however, will be 23.9% because 23.9% of her total income will go to income tax.

Why does NZ have a progressive tax system?

In terms of admin, it’d be far simpler to tax everyone at the same rate no matter how much they earn. So why do we bother with progressive tax rates?

Progressive income tax rates reflect the “ability to pay” principle: the theory being that those with higher incomes should pay a higher percentage of income tax because they can cope with a higher income tax burden—that is, the total percentage of their income that they pay in tax—than people with lower incomes.

This progressive system also means that there is an element of redistribution in the tax system: basically, high-income earners pay a larger portion of their total income to provide public goods and services than lower-income earners. Some forms of government assistance, which are paid for by tax, are only available to low-income earners, like welfare benefits, housing assistance and some health services. That means that our progressive tax system enables some redistribution of money from high-income earners to be spent to assist those who earn less.

How much of the total income tax take comes from low income earners compared with higher earners in NZ?

How many people are in these different income brackets, you ask? And how much income tax do they all pay? This table shows the percentage of the working-age population in eight different income brackets. It also shows how much income tax people in each of these brackets paid last year, and the percentage of the total income tax paid by people in each income bracket.

FIGURE 4: WHO PAYS INCOME TAX AND HOW MUCH DO THEY PAY?

MITT-WhoPaysIncomeTax

Adapted from: The New Zealand Treasury, “Who pays income tax . . . and how much” in Key Facts for Taxpayers, Budget 2016, available at http://www.budget.govt.nz/budget/2016/economic-fiscal-outlook/facts-taxpayers.htm (accessed 26 May 2016).

Why do I have to pay special taxes on alcohol and petrol?

“Excise tax” is another tax that is charged by the quantity of the good or service purchased. However, unlike GST, excise tax is charged on specific products at different rates, and for different reasons.

One reason is to discourage people from consuming a product that society considers to be harmful, like cigarettes. The government has been gradually increasing the excise tax on cigarettes for years to make it increasingly expensive to smoke, with the goal of encouraging people to cut down on their consumption, or give up altogether.

Another reason that our government adds excise tax to something is because they want to offset the costs to society of that activity. What does that mean? The best local example of this is the excise tax on petrol, currently just over 67 cents per litre*. Unlike the money collected from the tobacco excise tax, which is collected and put into the pool of government revenue for general spending, the petrol tax of 67.13 cents per litre goes directly to special accounts for targeted expenditure, including the National Land Transport Fund (56.52 cents) and the ACC Motor Vehicle Account (6.90 cents).

This broadly ensures that people who drive cars on our roads are the ones who primarily shoulder the costs associated with driving, and the more petrol they use, the more they pay towards those costs. Diesel fuel does not have an excise tax on it, but diesel vehicle users pay the Road User Charge for the kilometres they travel, which also contributes directly to roading and driving costs.

*This and other figures relating to the petrol excise tax taken from the Automobile Association website http://www.aa.co.nz/cars/maintenance/fuel-prices-and-types/petrol/ (accessed 26 May 2016)

Why is it important to know how the government spends my tax?

Put simply, it’s good for us to keep an eye on how our money is being spent. While the Government produces a fair bit of information on the taxes it collects and spends, it’s usually a bunch of massive numbers on charts and tables that look like something from a textbook. When politicians talk about spending millions of dollars on this or that, it’s difficult to remember that some of those dollars actually came out of your pay, and because of that you have a say in how it’s spent.

Say you earn $45,000 a year. Our Tax Tracker will tell you that from the $6,895 you’ll pay in income tax this year: $2,328.86 will go to social security and welfare; $1,248.84 of it will go to education; $76.30 will go to heritage, culture & recreation; and $49.38 will go to environmental protection.

We discovered a lot of handy facts while crunching the numbers for the Tax Tracker. For example, did you know that each of us pays more towards subsidising tertiary education than for the police and foreign aid combined? Who knew? Economists, that’s who—until now.

Armed with this information, you can understand how the Government is spending your tax and what kind of choices it’s making for you—pretty important stuff when it comes to assessing what you think about how our government is going, and especially helpful when it comes time to work out how you want to vote. Usually we say that someone should put their money where their mouth is. In this situation, we reckon New Zealanders would do well to be aware of where their money already is, and realise they have the right to speak up about how it’s being spent.

How is my income tax spent?

Each year the Government tells us how it plans to spend our tax (and its other sources of revenue) in a massive document called the Budget. The Budget lays out what kind of goods and services the Government is going to fund, and how much money it will take to pay for each of those goods and services. These goods and services are listed in the Budget under twelve categories:

welfare Social Security and Welfare: Providing income support, helping people into work, funding community service providers, and funding services and programmes that care for and protect vulnerable children and youth; items in this category include: superannuation, sole parent support, working for families tax credits, and paid parental leave.
Health

Health: providing funding for healthcare services through payments to District Health Boards, which in turn distribute that money to different health services within their jurisdictions such as public hospitals, surgery and disability support.

Education

Education: providing funding for education from early childhood to tertiary as well as for delivering the curriculum for primary and secondary schools; financing for unpaid student loans and student allowances are also in this category.

Government Services

Core Government Services: funding the costs of running Government departments, including paying the salaries of public service staff, administrative costs, and the costs of running Government-owned buildings; this category also includes Official Development Assistance (foreign aid).

Law and order

Law and Order: funding for the police, the court systems, legal aid, tribunals, customs and victim support.

Defence

Defence: funding for the New Zealand Defence Force.

Transportation and Communications

Transportation and Communications: funding for the provision of public transport and railroads as well as for communications concerns such as the ultra-fast broadband network and the regulation of communication networks (telecommunication, broadcasting and mobile phone service); this category can also include the New Zealand Transport Agency (NZTA), though it primarily gets its funding not from core Government revenue but from specially designated taxes like road user charges, so we haven’t included this in the Income Tax Tracker figures.

Economic and Industrial Services

Economic and Industrial Services: funding employment initiatives and KiwiSaver tax credits.

Heritage, Culture and Recreation

Heritage, Culture and Recreation: funding for such things as museums, art galleries, community grants and public broadcasting.

Housing and Community Development

Housing and Community Development: funding for housing subsidies, the overseeing of tenancy agreements and the provision of state housing.

Environmental Protection

Environmental Protection: funding for services aimed at environmental protection.

Finance Costs

Finance Costs: interest payments on the Government’s outstanding gross debt.

How’d we work all this out?

If you’d like to know how our economist crunched the numbers to create the Tax Tracker app, take a look at our Methods and Sources document here.