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Terry Baucher discusses the controversial extra relief for the newly unemployed, asks: are redundancy payments overtaxed? and notes that record numbers apply for instalment arrangements with Inland Revenue

Terry Baucher discusses the controversial extra relief for the newly unemployed, asks: are redundancy payments overtaxed? and notes that record numbers apply for instalment arrangements with Inland Revenue

According to a Statistics New Zealand report this week, job numbers dropped by a record 37,500 in April. This is the worst fall in employment on record. So naturally, the Government is still under pressure to ameliorate the impact of these job losses.

And its latest measure is a special relief payment beginning on 8th of June. From that date, anyone who has lost their job since March 1st because of the Covid-19 pandemic will be paid $490 a week for anyone who lost full time work and $250 per week for losing part time work. These payments will last for up to 12 weeks and will not be taxed.

Now, the scheme announced is similar to the Job Loss Cover payment introduced by the National Government in the wake of the Canterbury earthquakes in 2010 and 2011.  It also has a number of similarities to the ReStart package for workers who lost their jobs in the Global Financial Crisis in 2008. So these are undoubtedly welcome measures for those affected.

The controversy has arisen because beneficiary advocates have pointed out it appears to discriminate against the existing unemployed people. Furthermore, the fact that the payment that is being received of $490 dollars per week is almost double the $250 a week after tax, that someone on the current Job Seeker payment would receive implicitly acknowledges that the current level of benefits being paid is too low. This is a point that was made by the Welfare Expert Advisory Group report last year, which actually recommended benefits be increased at a cost of over $5 billion.

One of the other features, which beneficiary advocates might question, is that people who qualify for this payment but have partners who are still working may still be eligible for the payment so long as their partner is earning under $2,000 per week. Anyone who's been involved with the existing treatment of beneficiaries will know that there is often very harsh cases come into play where a couple's income is aggregated and that benefits are often struck down because a person has formed a relationship or is deemed to have formed a relationship during the period.

So the gap between the generosity of this new measure and the existing rules is quite marked and has drawn criticism.  How that will play out is largely a political matter. But it points to something that I've talked about previously is that we do need to look at our welfare settings and particularly the interaction with the tax system.

Unusually, these payments are being not being taxed, whereas benefits are actually taxed. Now, the net effect is intended to be the same, but still it's an interesting distinction. So whether it points to as has been hinted at, there's is going to be some further changes and significant changes at that, in the benefits andwelfare system remains to be seen.

For the moment, the important thing is for those who are directly affected now, this new payment will come as a relief for them as it's intended to do so. And leaving aside the politics of it all, we shouldn't be scapegoating those who've been unfortunate enough to by affected by the scale of the pandemic. Let's look to try and improve the system for everyone, but don't blame those who are caught up in it right now.

Speaking of redundancy, this week, I spoke to Madison Reidy of Newshub about the tax treatment of redundancy. Currently, redundancy is treated as a extra pay for tax purposes,s subject to pay as you earn and taxed at normal rates. That is, it's fully taxable to the recipient. The PAYE that's applied is based on the combined total of the redundancy and he annualised value of the PAYE paid to an employee in the previous four weeks.

Now, as Madison and I discussed, the tax treatment of redundancy is pretty harsh. Actually it’s harsh in two ways, firstly because it’s taxed at a time when you may have to be reliant on it for an unknown period of time. The second point is that for some for people the lump sum may be taxed at a higher average tax rate than would normally apply to them. This would be particularly true of lower income earners, say, earning around the $48-50,000 mark, where most of their income is being taxed at 17.5%. They may receive a redundancy payment which would be taxed at 33 percent. And the current system makes no concession for that.

It hasn't always been the case. But our tax rules have been pretty hard on redundancy since 1992 when the rules were changed and redundancy became fully taxable. There was a period between 2 06 and 2011 when a credit was given up to a maximum $3,600 . But that was withdrawn in April 2013. Ironically, it was going to be withdrawn from April 2011, but then got extended for a further period to 1st of October 2011 following the Canterbury earthquakes.

But the treatment of redundancy seems harsh compared with what happens across the ditch in Australia, where the first A$10,638 dollars is tax free. And then A$5,320 dollars per year of service is also treated as tax free. So substantial payments can be received and, depending on the length of service, may not be taxed in Australia at all.  It does have to be redundancy. Accumulated leave and sick leave would be subject to tax in Australia. Over in Britain, the first £30,000 of redundancy is tax free.

It seems to me that we ought to be looking at this question of redundancy and whether, in fact, the rules are appropriate.  There's going to be a lot of redundancy paid out over the next few months. We haven't seen the full impact of the pandemic on employment yet. And therefore, more people, sadly, will be losing their jobs. And at the moment, they're going to get hit very hard with in with the tax on their redundancy and that's going to cause some grievances.

Yes, that new temporary relief payment that has just been announced will help. But I can't help but wonder whether it would probably be easier for people if we weren't so aggressively taxing redundancy in the first place. Unfortunately, rather cynically as I told Newshub Governments have always said they'd look at this, but nothing ever changes.

As an aside the treatment of lump sum payments under PAYE is a problem not just for redundancy. Retiring allowances are treated the same way. And most egregiously in my mind, are ACC payments. Sometimes people get in a dispute with ACC over the amount that's due to them. When those disputes are resolved in their favour, then ARC may make several years of payments all at one go.  These are just simply treated as an extra pay and taxed as if it is the recipient’s normal income income.

What that might mean is say, for example, four years arrears at $20,000 a year or $80,000 might be taxed all at once,. The average tax rate which would apply on this payment is therefore much higher than would have applied if the person had received the payments when they should have done. This is a running sore in ACC, which again, governments have talked about changing but not followed through.

And finally, Inland Revenue is reporting a massive jump in the number of people applying to pay their tax off in instalments.

According to Inland Revenue, in March 2020, there are 104,443 payment instalment arrangements in place, compared with 41,014 in March 2019. The amount of tax that's under instalment has gone from $659 million to $1.167 billion. I suspect this number will rise again in April.

Now Inland Revenue has been very proactive in accepting instalment arrangements, but it is a sign of the scale of what's going on at the moment that so many more taxpayers are now under an instalment plan. It has doubled in one year. And possibly we may see it may have tripled once we see the April figures.

I've talked about instalment arrangements previously and what you need to do is get in front of Inland Revenue as quickly as possible. Explain what's happening and give them a plan as to how you're going to deal with it. Don't put your head in the sand.

Just bear in mind that although at the moment Inland Revenue is being fairly generous about what is COVID-19 related or not, it may well take a second look at this. And that may mean that some people who were trying to set up instalment arrangements prior to the arrival of the virus may still be stuck with having to pay use of interest at 7% on the unpaid debt because it was a pre COVID-19 debt.

Whatever the case, the key thing in dealing with Inland Revenue is communication. Don't put your head in the sand. Deal with the matter. You'll find that at this stage, they're responsive to requests.

Well, that's it for this week. I'm Terry Baucher, and you can find this podcast on my www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay safe.


This article is a transcript of the May 29, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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6 Comments

I remember the 1992 change in redundancy as I was made redundant from a govt job that year.the difference was considerable,I think it was around secondary tax rate,choice between 12c? or 28c as I was earning over 50k then.I was happy to take the dough and found another job.you did get the option of applying for your old job with different job description and reduced salary but then would have been made redundant anyway and got a smaller payout down the track.

Yes redundancy is very unfairly taxed here in NZ. In the UK redundancy pay is compensation for your job loss, it qualifies for special tax treatment, so up to £30,000 (Around $60,000 NZD) is tax free.

Thanks to the employer friendly environment we have had since Ruthanasia, very few low paid jobs have any redundancy - maybe 2 to 4 weeks notice.

Yes, redundancy entitlement is heavily biased to high income jobs. It is part of the total package written into employment contracts, so should be treated same as normal salary. Tax it as a matter of fairness.
And I might add it should not be ignored when collecting the dole. If you are paid 6 months redundancy, it would be double dipping to collect the dole during that time.

Even that is changing too - professional contracts are becoming the same pro-forma contract you'd get with any other role, the only thing that changes is the schedules and the job description so the redundancy provisions (if any) are in the contract itself. Redundancy has moved away from x many years of service = 1 week of redundancy payment to 2 weeks flat, in some cases just 1, for most roles outside the boardroom.

Employment New Zealand's sole focus on redundancy seems to just be that the employee is given notice, is paid unused annual leave, and either is paid for or works through the notice period.

This puts the onus on the employee to read the fine print in their employment agreement as to the length of that notice and any compensation, but if there is no specific mention, an employee would expect it to be at least adhering to the guidelines as published by the Government, which seem to be very broad and open to interpretation, usually to the employers benefit and the employees detriment.

However, in these trying times, turning down an employment offer because the agreement doesn't contain specifics about redundancy is not something people would be willing to do.

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