A single point of view

BY MARY HOLM

Q. I read your article, Count your blessings, not your taxes, on September 14 with some resignation.

What planet are you on? To talk down to somebody who has created, worked hard and paid tax to society at large, what a message!

I am in the youth of my old age and despair at articles like yours which put down people who question taxes.

What are taxes but theft from people by politicians who say they know how to spend it more wisely? What nonsense. It isn't their money. Large salaries and personal superannuation are the norm for these bureaucrats.

We are all paying at least 50 per cent - 33 plus 12.5 per cent GST plus 5 per cent duty. Surely you are not supporting 66 per cent that kept the country in the dark ages and did not create anything but Think Big, an absolute failure under Muldoon's stewardship.

You are putting a socialist message out, and a single point of view. Mark my words. This path is destructive. Give society an easy way out and they will take it, not aspiring to their higher selves but being insidiously enslaved to the giver.

Normal people know what it is like to be on a benefit, as we all realise that without adequate money life is a struggle. But conversely what would society be like without savers, entrepreneurs, creators and questioners?

It is too easy to be a journalist and make it appear your written message carries some validity and depth. But to me it was an article not very well thought through.

I don't need a reply, but am curious at what you felt your article would achieve, outside of subjection to the status quo.

Surely more jobs, more opportunities, more excellence, more focus on exports are the only things that will stop us sliding into total dependence.

A. Your letter came with a letterhead from a company that gets rid of pests. I feel like one of your victims!

What did I think my article would achieve?

Not a move to socialism. It's a lovely idea in some ways, but it doesn't work.

Not subjection to the status quo. I think it's great if people question tax rates, how the tax system works, and how tax dollars are spent. There's always room for improvement there.

The man who originally wrote to me said: "It looks like there is no incentive for people like me who save and who have never depended on the state for anything but the privilege of being in this country."

What I was trying to achieve was to point out that he doesn't need an incentive. He has saved plenty already.

If we want to keep taxes as low as possible - and believe me, I'm no more a fan of 66 per cent, or even the current 39 per cent, than you are - we don't want to start subsidising those who don't need it.

There's plenty more I could respond to. Suffice to say that I can't help having a single point of view. I'm only one person.

And I think savers, entrepreneurs, creators, questioners, more jobs, more opportunities, more excellence, and more focus on exports are all great.

Q. More about taxes in your column two weeks ago ... groan!

Like you, I don't object to paying 39 per cent of what I earn. The problem is that the IRD applies penalties if you can't estimate your income accurately eight months in advance, something that is impossible for those of us surfing the "Knowledge Wave" so beloved of our leaders.

Suppose a modestly successful "Knowledge Waver" expects to earn $100,000 for the year, and so sends off his cheque for the first provisional tax on 7th July, of a third of $100,000 times 39 per cent, which equals $13,000.

Then a few weeks later an unexpected cheque arrives from a grateful overseas client for $200,000. (This really does happen. The Government is right about the Knowledge Wave.)

Much popping of corks, but just as the hangover is wearing off the accountant delivers the bad news.

Our surfer's income for the year will now be $300,000 instead of $100,000. And thus the provisional tax paid should have been $39,000 not $13,000. So it was underpaid by $26,000.

Our hero is happy to send off another $26,000 immediately, but apparently this is not good enough. The IRD will charge "Use of Money Interest" on the underpayment.

Furthermore, says the accountant cheerfully, you will be charged penalty tax for underpayment.

"How much might this penalty be?" asks our hero.

"You don't want to know", replies the accountant, causing our hero to reflect that the IRD can fine you many times the amount of underpayment if it wishes, and that fighting it is usually fatal even if you win.

Of course, the IRD bureaucrats may overcome their envy of the rich capitalist and be merciful, but then again they may not.

A rational person in this situation either retires to the golf course, or moves their business overseas. Good solutions personally, but they don't do much for New Zealand's future.

Any suggestions?

Surfing the wave from New Zealand, without falling foul of the tax laws and incurring penalties, is just not possible with the tax laws as they stand.

A. It's not quite as bad as you think.

In your scenario, the hero will be charged use of money interest, says PricewaterhouseCoopers tax partner Scott Kerse.

But, by sending off his $26,000 cheque promptly, he stops the clock running on that.

Penalty tax? That depends on how much taxable income he earned last year.

Assuming he has a tax agent (such as his accountant), he must base his provisional tax payments on either:

* Last year's income plus 5 per cent or, depending on when he filed his tax return, the year before's income plus 10 per cent.

* Or an estimate of what this year's income will be.

If our hero's previous year's income was about $95,200 or less - which when you add 5 per cent comes to $100,000 or less - he won't be subject to penalties beyond the use of money payment even if he makes $1 million this year, says Kerse.

But if he made more in the previous year and decided to make an estimate this year, he would be open to penalties if the estimate is not fair and reasonable.

Kerse says it could be difficult for the IRD to establish the estimate was not fair and reasonable.

On the other hand, if in the next provisional tax instalment he kept using the $100,000 estimate, knowing it was wrong, then there would be trouble.

But that, you would surely agree, is fair enough.

Provided the IRD is fairly flexible about people's estimates, the whole system seems reasonable to me. That is until we look at the current use of money rate, which is a whopping 11.93 per cent.

I suppose it's there to discourage people from deliberately underpaying tax and investing the money elsewhere to make more on it in the meantime. Any investment returning more than 11 per cent has got to be pretty risky.

Still, the rate is tough on innocent underpayers, like our hero.

Because of the high rate, Kerse recommends that people should think carefully when paying provisional tax.

It may be better to overpay. Your cost is the interest forgone, but that beats paying 11.93 per cent.

It's always possible, too, that you will incur a late-payment penalty. And those rates are horrendous. You are right in saying our hero doesn't want to know about them.

You must pay 1 per cent of the amount on the first day after the tax is due, then 4 per cent on the sixth day, and 1 per cent compounding monthly after that, says Kerse. You could run up a big bill pretty fast.

In the end, then, our hero may have to follow Kerse's advice and err on the generous side when paying taxes.

Worse things have happened, though. Any overpayment will come back to him in due course.

The IRD will even pay interest on it - at the princely rate of 4.8 per cent.

One last thought: Before we get too caught up in your scenario, you've got to admit that most people would at least have an inkling that a huge cheque like that might be in the offing.

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