Understanding your tax return: What the Numbers Actually Mean

Tax returns can feel overwhelming! If you don’t know what you’re looking at, they are appear to be full of of numbers, jargon, and confusing schedules. But getting a clear picture of what your return is telling you is key to staying on top of your obligations and planning ahead. We’ve broken down the parts of a tax return below and what each area means.

The Income Section

Your tax return starts by summarising your total income for the year. Income is typically made up of

• Business profits – If you're a sole trader or in a partnership, this will show the net profit from your business after expenses.

• Shareholder salary – If you trade through a company, you might be paid a shareholder salary (a common tax-effective method).

• Wages or PAYE income – If you also have a part-time job or employment outside your business.

• Interest income – From bank accounts, term deposits, or loans.

• Dividends – From shares in New Zealand or overseas companies.

• Rental income – If you own investment property.

• Overseas income – Including foreign pensions, overseas investments, or contract work.

• Income from trusts – Distributions from family or business trusts.

How your tax is Calculated

Once your total income is calculated, Inland Revenue applies the relevant tax rates (progressive for individuals, flat for companies and trusts).

Then we deduct any tax already paid, which might include:

• PAYE deducted by employers

• RWT (Resident Withholding Tax) on bank interest

• Dividend imputation credits

• Foreign tax credits (if applicable)

What’s left is called residual income tax - this is effectively your tax bill in income not taxed at source for the year.

Terminal tax to pay

If you haven’t paid enough tax throughout the year (residual income tax less provisional tax paid), the shortfall becomes terminal tax. This is the final payment due for the tax year and is usually payable by 7 April of the following year.

What is Provisional Tax?

If your residual income tax is more than $5,000, Inland Revenue requires you to start paying provisional tax in the following year. This is a way to spread your tax bill across the year instead of facing one large lump sum.

Most commonly, proviosional tax is calculated as 105% of last year’s tax however you can choose to estimate your tax bill. Please be ware this can be costly in IRD interest if you estimate incorrectly.

You can learn more in our provisional tax blog post linked here for other provisional tax options and dates.

Important Note for First-Time Taxpayers

If this is your first year in business or the first time you're earning self-employed income, it's important to understand that your first tax bill can feel like a double whammy.

Why? Because:

• You don’t pay any tax during your first year of trading.

• Then, at the end of that first year, you pay terminal tax for Year 1 and

• Inland Revenue requires you to start paying provisional tax for Year 2 at the same time.

That means you could be paying two years of tax in the same 12-month window - which can come as a shock if you haven’t set funds aside.

You can check out our blog on tips for saving for tax otherwise please get in touch to come up with a cashflow / tax saving plan that’s right for you.

Lets do an example

2024 Tax Return

This person made $138,400 of income from various sources in the financial year.

Tax on their total income for the 2024 year is $36,600. This tax is calculated using our marginal tax rates.

Through their income taxed at source (ie wages), they paid $7,114 plus they had some tax deducted from interest income. This gave total tax credits of $7,150.

The PIE credit adjustment is because their Kiwisaver was set to the incorrect tax rate, therefore they had a $0.02 refund in tax. Sometimes this can require a payment if your PIE rate is too low. PIE rates should be updated directly with your Kiwisaver provider.

After taking off tax credits, this tax payer had a residual tax bill of $29,452.79. They had paid $26,512 of provisional tax throughout the prior financial year, leaving terminal tax of $2,940.79

Their 2025 provisional tax is calculated as the 2024 residual tax amount, plus 5%. Depending on when the tax return is filed, the provisional tax payments are split over the remaining provisional tax dates.

It’s important to note that even if your tax return isn’t filed before 28 August, if you paid provisional tax last year, you should still pay it for the next year but based on your last filed tax return plus 10%. The IRD effectively assume your income and thus tax bill will increase by 5% per year.

Come the final provisional tax date, if your income is down, you may be able to pay less tax. More on this here.

Tax returns are complicated, so it’s best to discuss your tax return with your tax advisor.