12 tax myths and misconceptions busted

“My pay rise will put me into a higher tax bracket, so my take home pay will be less!” “There is no capital gains tax in New Zealand.” “Tax refunds are a good thing!” In this article we’ll be busting these and 9 other general and investing related tax myths and misconceptions that we commonly see.

Everyone’s circumstances are different, so the information in this article may apply differently to you, and should not be considered tax advice. Seek advice from a tax professional if in doubt about your tax situation.

Our myths and misconceptions articles:
12 common investing myths and misconceptions busted
12 more investing myths and misconceptions busted
12 KiwiSaver myths and misconceptions busted
– 12 tax myths and misconceptions busted (this article)

1. My pay rise will put me into a higher tax bracket, so my take home pay will be less!

When people look at NZ’s income tax rates, there’s a very common misconception that getting a pay rise can result in you being worse off as, as it can move you up the tax brackets (shown in the table below):

For each dollar of incomeTax rate
Up to $14,00010.5%
Over $14,000 and up to $48,00017.5%
Over $48,000 and up to $70,00030%
Over $70,000 and up to $180,00033%
Over $180,00039%

Let’s take Paul for example who currently earns $47,000 per year. He gets offered a pay increase to $50,000 a year, but is afraid this will push him into the higher 30% tax bracket, leaving him worse off. In reality, only the dollars he earns within each bracket are taxed at that rate. In other words:

  • The very first dollar he earns in the tax year (1 April to 31 March) is taxed at 10.5%. This is the same for every other dollar he earns up until $14,000.
  • After that the 14,001st to 48,000th dollars he earns in the tax year is taxed at 17.5%.
  • Then the 48,001st to 70,000th dollars he earns in the tax year is taxed at 30%.

And so on. You could also think of it like buckets – as you earn money you start filling your first bucket which is taxed at 10.5%. Then any extra money you earn starts filling your next bucket which is taxed at 17.5%. Then as you earn even more money, your next buckets (which are taxed at even higher rates) start getting filled.

Now let’s do the math for how much tax Paul will pay before and after his pay rise:

Before Paul gets a pay rise

Here’s how Paul would be taxed on his original $47,000 salary. The first $14,000 of his salary is taxed at $14,000, while the remaining is taxed at 17.5%:

IncomeTax rateTax payable
$1 to $14,00010.5%$1,470
$14,001 to $47,00017.5%$5,775

This results in a tax bill of $7,245 and a take home pay of $39,775 per year (ignoring ACC levies, the Independent Earner Tax Credit, and student loan repayments). This works out to be an effective tax rate of 15.41%.

After Paul gets a pay rise

Here’s how Paul gets taxed after his salary increases to $50,000. Of his $3,000 pay rise, $1,000 of it falls into the 17.5% tax bracket, while the remaining $2,000 spills into the next tax bracket and gets taxed at 30%. His original $47,000 salary gets taxed the same as before.

IncomeTax rateTax payable
$1 to $14,00010.5%$1,470
$14,001 to $48,00017.5%$5,950
$48,001 to $50,00030%$600

This results in a tax bill of $8,020 and a take home pay of $41,980 per year (ignoring any credits and deductions). This works out to be an effective tax rate of 16.04%, far lower than the 30% some may expect. Overall, Paul’s pay rise leaves him better off by $2,205 after tax.

If you want to calculate your own take home pay, the PAYE calculator at PAYE.net.nz is a great tool which can also take into account KiwiSaver, ACC levies, student loan repayments, and the IETC.

2. Since income tax rates are progressive, I should get paid more at the start of the year

This is a common response to the above misconception. If the first dollars you earn in the year are taxed at a lower rate (10.5%), and subsequent dollars are taxed at a higher rate (17.5%+), then why are you paid the same amount every payday? Wouldn’t you get paid more at the start of the tax year to account for the lower tax rate?

What happens in reality is that employers smooth out your tax payments, so that your take home pay remains the same throughout the year. In Paul’s example, every payday he’ll have some of his pay taxed at 10.5%, some at 17.5%, and some at 30%. Overall the tax he pays each payday should be around his effective tax rate of 16%.

3. My second job gets taxed higher than my first job

Looking at the following two people, who do you think pays more tax overall?

  1. Derrick earns $70,000 per year working one job
  2. Paul from our earlier example takes on a second job earning $20,000 per year. This is on top of the $50,000 he earns from his primary job.

Despite both Derrick and Paul earning $70,000 per year, a lot of people would pick Paul to be paying more tax, given the perception that there’s a secondary job tax. However, the number of jobs someone works is irrelevant in calculating tax. Given both Derrick and Paul earn the same income, they both get taxed the same amount. Let’s have a look at the breakdown of this:

Derrick – Earning $70k working 1 job

Derrick’s tax bill on his $70,000 salary is $14,020. The breakdown of this is:

IncomeTax rateTax payable
$1 to $14,00010.5%$1,470
$14,001 to $48,00017.5%$5,950
$48,001 to $70,00030%$6,600

Paul – Earning $70k working 2 jobs

Paul’s tax bill on his two jobs is also $14,020. The breakdown of this is:

IncomeTax rateTax payable
$1 to $14,00010.5%$1,470
$14,001 to $48,00017.5%$5,950
$48,001 to $50,00030%$600
$50,001 to $70,000 (2nd job)30%$6,000

Paul’s take home pay from his second job is indeed less than his first job, given the dollars he earns from that job falls into the 30% tax bracket and is therefore taxed at a higher effective tax rate. However, Paul is being taxed exactly the same as if he were to earn that extra $20,000 through his first job.

Secondary tax codes

So if second jobs don’t actually result in paying higher tax overall, then what’s the purpose of secondary tax codes (shown below)?

Estimated annual total income
from all sources
tax code
tax rate
$14,000 or lessSB10.5%
$14,001 to $48,000S17.5%
$48,001 to $70,000SH30%
$70,001 to $180,000ST33%
Over $180,000SA39%

Secondary tax codes exist to help you pay the right amount of tax upfront throughout the year, and avoid a large tax bill or refund at the end of the year. They don’t exist to penalise you for having more than one job.

As you can see from the above example, Paul’s second job is taxed entirely at 30%, given all the dollars he earns from that job falls between the $48,0001 to $70,000 tax bracket. It wouldn’t be right for him to use the “M” tax code like he would for his primary job, as that would result in his second job getting taxed at the lower rates of 10.5% and 17.5%, which isn’t right as the income from his first job have already filled those buckets. The M tax code would give Paul a large tax bill at the end of the year, therefore he needs to use the secondary tax code “SH” to make sure his 2nd job income is getting taxed at the correct rate upfront.

4. I can choose a lower RWT rate or PIR to lower the amount of tax I pay on my investments

With many types of investments you’ll need to select a RWT rate or PIR, which determines the rate at which tax gets deducted from your investments over the course of the year:

  • Resident Withholding Tax (RWT) rate – This applies to things like bank deposits, bonds, and P2P lending. The different RWT rates are 10.5%, 17.5%, 30%, 33%, and 39%.
  • Prescribed Investor Rate (PIR) – This applies to Multi-Rate PIE funds (including KiwiSaver) and PIE term deposits. The different PIRs are 10.5%, 17.5%, and 28%.

So what’s stopping you from choosing the lowest 10.5% rate and getting taxed less on your investments? The problem is that there’s no seperate investment tax in NZ. Instead all your investment income is captured under your personal income tax. You need to consider your total income when choosing the most appropriate RWT rate, or your past 2 years’ income when choosing your PIR (check out IRD’s find my PIR tool here).

Take Derrick from our above example who earns $70,000 per year. He puts money into a term deposit where he earns $1,000 per year in interest. This $1,000 is the 70,001st to 71,000th dollar he earned during the year, which falls into the 33% tax bracket. Therefore Derrick should set his RWT rate to 33%.

If Derrick had selected another RWT rate, he would end up getting over or under taxed. For example, if he selected a rate of 10.5%, he’d only get taxed $105 on his $1,000 of interest, whereas his actual tax bill is $330 (33% x $1,000). At the end of the year, Derrick would get a tax bill of $225 ($330 – $105) to make up for his underpaid tax.

5. It’s not right that I got taxed even though my investments went down!

Throughout most of 2022 the financial markets have been tumbling, bringing down investment portfolios and KiwiSaver balances. As a result a number of people have felt alarmed that their investments still got taxed!

However, there isn’t anything wrong going on here, and there’s no need to panic. Tax can be applied to your investments on an ongoing basis, not just when you withdraw, take profits, or when the value of your fund goes up. For example:

  • Your investments can generate dividend and interest income, even when their value is falling down. This income is taxable.
  • Many PIE funds that invest in overseas shares (including KiwiSaver) use the FDR method to calculate their taxable income. This method taxes you on the assumption that you made a flat 5% return every year, including when your actual return is negative.

Further Reading:
What taxes do you need to pay on your investments in New Zealand?

6. There is no capital gains tax in New Zealand

It’s often said that capital gains are tax free in NZ. While this is correct in many instances (like on your main home and on long-term shareholdings), there’s still plenty of cases where capital gains are considered income and therefore end up being taxed. For example:

  • Shares – Capital gains on shares may be taxable if the IRD considers you to be a “trader”. There’s no black and white rule to determine whether you meet the definition of a trader, but basically if you buy the shares with the main intention of selling them for a profit (as opposed to buying and holding long-term to earn dividend income), or are in the business of trading shares, then you could be considered one.
  • Cryptocurrency – Capital gains on crypto are usually taxable, as IRD’s position on them is that in the majority of cases you’ll be buying them with the intention of selling them for a profit.
  • Property – Capital gains on residential property (excluding your main home) can be taxable, through the bright-line rule (which taxes those who sell a property within 10 years of purchase), or if you’re in the business of buying and selling properties for a profit.
  • Foreign investments – You could even argue that FIF tax is a form of capital gains tax. The FDR method taxes you on the assumption that you’ve made 5% in capital gains + dividends each year, while the CV method effectively taxes you on any unrealised capital gains.

So a more accurate statement would be to sat that New Zealand has no comprehensive capital gains tax, as many types of capital gains are tax-free while some aren’t.

7. You only need to pay tax on crypto when you sell to New Zealand Dollars

There’s a very common misconception that cryptocurrency gains are only taxed whenever you sell them for NZ Dollars (or any other fiat currency). However, there’s many crypto related activities (that don’t involve selling to fiat) that may be considered taxable such as:

  • Swapping from one cryptocurrency to another (e.g. Bitcoin to Ethereum) – The capital gains you make from the exchange may be taxable income, if you’ve bought/exchanged the crypto with the intention of making a profit.
  • Cryptocurrency staking/lending – Crypto you earn as staking rewards or interest from lending is typically considered taxable income.
  • Cryptocurrency mining – The rewards you earn from crypto mining are also usually taxable, except for some limited cases where you’ve mined crypto as a hobby.
  • Receiving airdrops or hard forks – Receiving airdrops or hard forks may be considered taxable events in some cases, for instance if you have a cryptoasset business.

If you receive income from any of these sources, you would generally need to convert your earnings to NZ dollars, then declare them in your tax return at the end of the year where it’ll be taxed at your normal income tax rate.

Further Reading:
Cryptocurrency tax NZ – What you need to know for individuals (The Comic Accountant)

8. Tax refunds are a good thing!

Take the two following scenarios. How would you feel in each of them?

  1. You overpaid for your groceries at Countdown, and only got a refund at the end of the year.
  2. You get a tax refund at the end of the year.

Most people would feel grumpy about the supermarket chain taking their time to refund you, yet most people would feel happy to get a tax refund. But both scenarios are effectively the same. A tax refund is simply the IRD paying back any tax you overpaid over the course of the year. It doesn’t mean you’re getting free money.

How it works is that after the end of each tax year, IRD tallies up all your income for the year and calculates the amount of tax you’re supposed to pay on that. They then compare that amount against the tax you’ve already paid during the year (e.g. through PAYE and RWT). If the amount you’ve already paid is more than what you’re supposed to pay, you’ll get a tax refund. This overpayment might happen because:

  • You’ve used the wrong RWT rate or PIR
  • You’ve used the wrong tax code
  • Your income has fluctuated during the year e.g. due to changing jobs
  • There’s some rounding differences in your pay

So we don’t believe that tax refunds are a good thing, as getting one means you’ve paid too much tax and have essentially provided the IRD with an interest-free loan. While it’s difficult to avoid overpaying tax entirely, using the correct tax codes, RWT rates, and PIRs can help.

9. FIF rules apply when I have over $50k in overseas investments

This is true – you only need to apply the FIF tax rules on your overseas investments when you’ve invested $50,000 NZD or over in them. However, it’s important to understand that this $50,000 is based on cost, not value. For example:

  • Michelle buys some Apple shares through Sharesies for $45,000 NZD, and their value increases to $50,000 NZD (this could be through either capital gains or currency movements). She isn’t subject to FIF rules as the cost of those shares are below $50,000 NZD.
  • Michelle later buys an additional $5,000 NZD of Apple shares through Sharesies. She’s now subject to FIF, as the cost of her FIFs is now $50,000 NZD.
  • Tash buys $40,000 NZD of Berkshire Hathaway shares through Hatch, and $40,000 NZD of the Vanguard S&P 500 ETF through Stake. She’s subject to FIF tax, as the cost of her FIFs is $80,000 NZD. It doesn’t matter that she split her FIF investments across two investments and platforms.

As usual, there’s a few quirks that could affect how the FIF tax rules apply to you:

  • You’re subject to the FIF rules if you’ve held over $50k in FIFs at any time of year. For example, if you bought $50,000 NZD in FIFs then sold $5,000 NZD the next day, you’ll still be subject to the FIF tax rules for that year.
  • If you use Hatch, any USD cash you hold on the platform is also considered to be a FIF. Say you deposit $60,000 NZD into Hatch, but only invest $40,000 NZD of it into shares. Or say you buy $40,000 NZD of Tesla shares, and later on sell them for $80,000 NZD. Both scenarios would make you subject to FIF, while you’d normally be exempt from from it if you’d used another investment platform.
  • You can still apply the FIF tax rules if you’ve invested less than $50,000 NZD into FIFs. This can be beneficial in some instances, for example, if the dividend yield of your FIF portfolio is greater than 5%. However, if you do opt in to the FIF rules, you must continue to apply them for the next 4 tax years.

You can read more about FIF tax and its quirks in the below article:

Further Reading:
Tax on foreign investments – How do FIF and Estate Taxes work?

10. I’m approaching $50k invested overseas, so I’m switching to a PIE fund to avoid the FIF tax rules

With the FIF tax rules kicking in as you deploy your 50,000th NZ dollar into FIF investments, some people attempt to switch their investment contributions from a FIF into a PIE fund (which don’t fall under the FIF rules) in order to avoid FIF tax. For example:

  • Switching from the Vanguard International Shares Select Exclusions Index Fund (FIF) to the Macquarie All Country Global Shares Index Fund (PIE)
  • Switching from the Vanguard S&P 500 ETF (FIF) to the Smartshares US 500 ETF (PIE)

There’s a few pros to this. By switching to a PIE any FIFs you still hold will continue to be taxed under the much simpler de minimis exemption. The PIE also has the benefit of requiring less admin to do around taxes, capping its tax rate at 28%.

However, PIE funds can still be indirectly subject to FIF tax. PIE funds like the Smartshares US 500 ETF also invest in FIF assets, so they have to pay FIF tax on their holdings. This tax is subsequently passed onto investors in the fund, who effectively pay FIF tax indirectly. This isn’t made any better by the fact that PIE funds only use the FDR method to calculate their taxable income – this is disadvantageous in a year with low or no returns, as using the CV method (which is available when holding FIFs directly) would be preferable in these years.

Overall, for most investors there’s relatively little to gain by switching to a PIE once you’re reaching the $50k mark. Therefore we prefer to keep things simple and pick an option and stick with it, rather than regularly changing your investment approach. Having sound investing behaviours such as investing regularly and consistently, and holding long-term will likely make a bigger difference to your results than trying to optimise the tax efficiency of your investments.

Further Reading:
What’s the best global shares index fund in 2022?
What’s the best S&P 500 index fund in 2022?

11. I should claim more expenses to reduce the amount of tax I pay

Those who are self-employed or running a business will be aware that they can claim expenses. Take Sonya for example who runs a business:

  • Sonya’s business makes $100,000 throughout the year.
  • She also incurs $20,000 in business expenses during the year (e.g. stationery, phone bills, and electricity). Generally, as long as an expense has a direct relationship to her income, she can claim it.

In this case, Sonya isn’t taxed on the $100,000, but rather her income minus expenses which equals $80,000. So claiming expenses is great! On that $80k, at the companies tax rate of 28% her tax liability works out to be $22,400 – a lot lower than the $28,000 she’d be taxed if she didn’t claim any expenses.

But incurring more expenses just for the sake of lowering tax is a bad idea. For example, it’s near the end of the tax year and Sonya incurs an extra $5,000 in unnecessary expenses in an attempt to lower her tax bill. This reduces her taxable income from $80,000 to $75,000. At the companies tax rate of 28% her tax liability now works out to be $21,000.

By incurring that extra $5,000 in expenses, Sonya hasn’t saved $5,000 in tax, but rather just $1,400 – She’s still down by $3,600. Most businesses have an objective of making a profit, so it hasn’t made any financial sense for her to unnecessarily spend $5,000 to save $1,400.

Further Reading:
Why you should never avoid paying taxes (The Comic Accountant)
Is this expense tax deductible, or not? Here’s how to tell (The Comic Accountant)

Claiming donations

In New Zealand we have a donation tax credit which allows individuals to claim up to 33.33 cents in tax credits for every dollar you donate to an approved charity or organisation (when you donate a minimum of $5). Let’s say you were to make a donation of $100 to your child’s school. Claiming the tax credit on this donation would reduce your tax bill by $33.33 – So essentially you’ll be spending $100 to save $33.33 in taxes, leaving you worse off by $66.67.

We aren’t saying you shouldn’t donate to organisations you genuinely want to support – In fact the tax credit is an incentive to do so, and you should take advantage of it when you do make donations. However, it doesn’t make sense if you’re trying to make donations purely for your own financial benefit.

12. Tax is too hard. I’m not going to invest so I don’t have to deal with it

We agree that tax can be incredibly daunting, confusing, and frustrating even for the cleverest of people. But we don’t think it should be reason to put off doing something that improves your financial situation like starting an investment portfolio or asking for a pay rise.

Firstly, having to deal with and pay tax isn’t necessarily a bad thing. Tax is calculated as a percentage of your income, so having to pay more tax generally means you’re making more money.

Secondly, in many cases having to deal with the intricacies of tax is avoidable. If you stick to the likes of the following investments, then chances are all your taxes will be calculated and paid automatically, and you won’t have to file any tax returns:

  • Bank deposits
  • P2P lending
  • PIE funds (including KiwiSaver)
  • NZ shares
  • Australian and US shares, if you invest via Sharesies and fall under the de minimis exemption (under $50k invested in FIFs).

Things may start to get more complex if you invest in the following, as they may require you to calculate and declare your taxes yourself:

  • Investing $50,000+ NZD into FIFs through Sharesies
  • Investing in FIFs through any other platform
  • Cryptocurrency
  • Investment properties

If you’ve invested in these, learning the tax rules yourself is totally possible as long as you put in some time and effort. Otherwise using an accountant is always an option to get on top of your taxes.


We hope this article has helped in improving your knowledge of tax. It’s something that affects us all, but isn’t usually taught in schools, so understandably there’s plenty of myths and misconceptions surrounding it – many which we’ve personally believed in the past!

Are there any myths and misconceptions we missed? Or any points in the article you disagree with? Let us know in the comments below!

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The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.

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