Weekend Money: Joint account holders may still do tax sums

By Mark Fryer

The paperwork will not disappear for everyone when Inland Revenue no longer requires IR5 tax returns every year.

The IRD's plan is to do away with the IR5 which more than a million of us now file every year. If you are in that group you still have one more return to fill out - for the 1998-99 income year - but that will be the last one.

From then on, the IRD will in most cases assume that you are being taxed correctly throughout the year, leaving no need to pay extra tax or ask for a refund.

But what about joint accounts, asked some readers. If the account holders are in different tax brackets (one earning $38,000, the other less), how will the IRD know which tax rate to apply to any interest income?

If that is the case, says the IRD, the account holders have a choice when their financial institution asks for an IRD number to go with their account. At that time they can choose to have all the interest taxed at the higher earner's rate, 33 per cent, meaning the lower earner will have paid too much, and will need to seek a refund at the end of the year.

Or they can choose the lower earner's rate, 19.5 per cent. In that case the higher earner, who is on the 33 per cent rate, will have paid too little tax on their share of the interest and may have more at year's end.

So far so good. However, things do get more complex in some cases. If your total income is over $38,000 and your share of any interest earnings is over $200 and any part of that interest has been taxed at less than 33 per cent, you will be required to call the IRD and tell it how much interest you received and how much tax you paid on it.

The IRD says it will then send you an income statement with this information on it. Under the new scheme, the income statement will detail how much more you have to pay, or how big a refund you are owed, and you will have the opportunity to challenge that figure.

If you fall into this category and neglect to tell the IRD of your interest earnings, it warns that it will be checking.

The system would appear to add up to an incentive - though only a small one - for top-rate taxpayers who expect to earn less than $200 in interest, and who share an account with someone on the lower tax bracket, to elect for taxation at the lower earner's rate.

The interest will then be taxed at the 19.5 per cent rate, and, as long as each person's share of interest does not come to more than $200, you will not be required to tell the IRD.

* You could, of course, get round the whole problem by not giving any tax number to your financial institution. But this could be a costly tactic, given that any interest paid out on accounts where a tax number has not been nominated will automatically be taxed at 45 per cent.