A growing number of New Zealand families are facing unexpected demands from Inland Revenue (IRD) to repay Working for Families tax credits after moving abroad, a practice critics describe as overly rigid and financially burdensome. The issue stems from the IRD’s policy of “annualizing” income, effectively projecting a departing taxpayer’s earnings over a full year, even if they’ve only worked a portion of it in New Zealand.
Kenneth, who recently relocated to Australia with his family from Auckland, is one such case. Despite earning just under $84,000 NZD in his final tax year, the IRD calculated his income at approximately $110,000, triggering a demand to repay $4,000 in Working for Families credits. This calculation included one-off payments – $7,213 in accrued holiday pay and $7,027 from a salary negotiation – treated as regular income. “It’s a ‘computer says no’ situation,” Kenneth stated, highlighting the inflexibility of the system.
The IRD defends the practice as a measure to prevent tax avoidance by individuals who might otherwise pay less tax if they left mid-tax year. However, tax expert Terry Baucher argues the application is disproportionately harsh, particularly given the low income threshold at which Working for Families benefits begin to be reduced. Currently, households earning more than $42,700 a year see their entitlements cut at a rate of 27 percent – a threshold that hasn’t been adjusted since 2018.
“The threshold is so low, and everything above that is abated at 27c on the dollar,” Baucher explained. “Someone getting 40 hours of minimum wage is now above that. So that’s the real kicker.” He points out that the current threshold is below the minimum wage, meaning even full-time minimum wage earners can quickly become ineligible for the full benefit.
This isn’t an isolated incident. Working for Families debt is already a significant issue, with hundreds of millions of dollars currently outstanding. Previously, cases have emerged where couples were required to repay over $20,000 in overpaid benefits, with repayments deducted at a rate of $350 per fortnight. The scale of the problem prompted the government to announce a review of Working for Families last year, exploring options like more frequent income reporting to prevent overpayments.
However, Baucher is skeptical of the review’s potential impact, describing it as “window dressing.” He believes a more fundamental rethink is needed, focusing on both the abatement thresholds and the overall structure of the benefit system. He suggests the IRD could utilize adjustments to PAYE (Pay As You Earn) tax codes to claw back overpayments incrementally, rather than demanding large lump-sum repayments from departing families.
“Instead of requiring people to suddenly front up with $4000 at a time, it’s probably easier for them to say, ‘okay, we’re going to adjust your PAYE code and take a bit extra to claw that back’,” Baucher said. “It would be for those families far more manageable.”
The issue is further complicated by a broader trend of New Zealanders emigrating, particularly to Australia. , Willie Jackson noted on Facebook that Stats NZ reported 73,900 Kiwis had left the country in the year ending . While the reasons for emigration are multifaceted, the financial implications of leaving – including unexpected tax bills – are likely contributing to the outflow.
Data from reveals that only 24 percent of households receiving weekly or fortnightly Working for Families payments had received the correct amount after reconciliation by the IRD, indicating systemic issues with the accuracy of benefit calculations. This suggests the problem extends beyond those leaving the country and affects a wider range of families.
The current system, while intended to safeguard revenue, appears to be creating significant hardship for families already navigating the complexities of relocation and financial adjustment. The IRD’s rigid application of annualization, coupled with low abatement thresholds, is resulting in unexpected and substantial bills, raising questions about the fairness and practicality of the current Working for Families framework.
