Chapter 18 – Withholding Taxes
18.1 Overview
In this chapter, we consider withholding tax obligations in respect of interest, dividends and royalties paid. We also look at Non- Resident Contractors Tax. Chapter 26 “Employment Responsibilities” discusses withholding tax obligations when you pay New Zealand resident contractors, including commission agents, builders etc.
Inland Revenue stringently enforces the deduction of resident withholding tax. This includes the deduction of resident withholding tax on dividends after deducting the imputation credit and on interest payable under loan arrangements raising important practical issues with the potential for significant penalties. A taxpayer who fails to deduct resident withholding tax may attract a penalty for gross carelessness of 40%.
EXAMPLE
If a major shareholder employee in a company borrows money from the bank and on lends this to their company, the company should deduct resident withholding tax from interest payments made to the shareholder/employee unless a specific exemption applies.
18.2.1 Resident Withholding Tax on Interest
18.2.2 Resident Withholding Tax on Dividends
18.2.3 Interest and Dividends to Which RWT Does Not Apply
18.2.4 Certificates of Exemption
18.2.5 Payments of Resident Withholding Tax (RWT) to the Commissioner
18.2.6 Non-Resident Withholding Tax
18.2.7 Approved Issuer Regime
18.2.8 Non-Resident Contractors Tax (NRCT) ) (ITA BB 1-3, BC 7, BD 1, YD 4, RB 3, Sched 4)
18.3.1 Beware RWT on Loans
18.3.2 Review Existing Debt Arrangements
18.3.3 Administrative Tips for RWT
18.3.4 Pitfalls with Payment
18.3.5 Payroll Payments
18.2 Application
18.2.1 Resident Withholding Tax on Interest
Resident withholding tax (RWT) is payable on interest derived by New Zealand residents at the rate advised by the taxpayer.
This is based on the marginal tax of individuals (See 2.1.1). For individuals who have provided an IRD number but not a rate, the default rate is 17.5% for an existing account and 33% for a new account.
A partnership that provides its IRD number may choose the rate of any partner including 28% if one of the partners is a company.
A company may choose a rate of 28% or 33%. If no rate is chosen but an IRD number is provided, the default is 28%.
Trustees may choose a rate that best suits the beneficiaries, but the lowest rate of 10.5% may only be chosen for a testamentary trust.
The payer of the interest deducts RWT when the interest is paid.
Where an IRD number is not provided to the payer of the interest, a no-notification rate of 33% applies for all taxpayers.
18.2.2 Resident Withholding Tax on Dividends
RWT is also payable on dividends at the rate of 33%. Where a shareholder has an exemption, no RWT is payable.
Companies that distribute dividends with imputation credits, must top up the tax to 33% with RWT.
Example
A company pays a gross dividend of $100 with a 28% imputation credit. Withholding payments will include: Imputation credits of $28 and RWT of $5.
RWT must be paid to the IRD by the 20th of the month following the deduction.
18.2.3 Interest and Dividends to Which RWT Does Not Apply
RWT does not apply to all payments of interest and dividends. The main exclusions are:
Interest Exclusions
RWT need not be deducted from interest:
where the recipient holds a certificate of exemption (see discussion below)
where the recipient is a non-resident in New Zealand and derives interest from outside New Zealand
paid between companies in the same group
on a trade debt
on hire purchase agreement or specified lease
in respect of any bonus bonds or inflation adjusted savings bond
payable by a taxpayer to the IRD, i.e. use of money interest
In addition to all of the above, taxpayers (whether individuals or companies or trusts) need not deduct RWT from interest paid to lenders if their interest payments fall below a specified threshold. Taxpayers need not deduct RWT if:
The taxpayer has made payments of interest totalling less than $5,000 for the immediately preceding income tax year, and
The payments of interest in the current year when aggregated do not exceed a total of $5,000
Dividend Exclusions
RWT need not be deducted from dividends:
Paid between members of a group of companies
Attributed repatriation
Paid to a taxpayer who holds a valid certificate of exemption (see discussion below)
Arising due to excessive remuneration to a relative, shareholder, or director of a company
Non-resident withholding income which is tax exempt
Where a dividend is derived from outside New Zealand by a person not resident in New Zealand
Qualifying Company dividends are fully imputed or tax free. Profits flow through to shareholders.
18.2.4 Certificates of Exemption
Where the receiver of an interest payment (or a dividend) holds a certificate of exemption, then the payer (the borrower) is not required to deduct RWT.
Example
When you pay interest on a mortgage to the bank, you are not required to deduct RWT as the Bank will hold a certificate of exemption.
In order to receive a certificate of exemption a written application must be made to the Commissioner. Persons who may apply for a certificate of exemption include:
a registered bank, building society, trustee bank, public trustee, Maori trustee, and a trustee company
taxpayers who are in a loss situation and unlikely to report assessable income in the following year
any taxpayer whose principal business is the borrowing or lending of money
a solicitor’s or broker’s nominee company
any solicitor in relation to the operation of a solicitor’s trust account
a taxpayer who has filed all the required tax returns by the relevant due dates and whose income in the most recent return was more than $2,000,000 before deductions, or whose expected income before deductions for the next accounting year is more than $2,000,000
a taxpayer whose income is wholly or partly exempt from tax
an organisation not carried out for the profit or gain of any member and has net income less than $1,000 in the most recent accounting year.
The annual renewal of your RWT exemption certificate is no longer required.
18.2.5 Payments of Resident Withholding Tax (RWT) to the Commissioner
Interest
Taxpayers are required to deduct and pay RWT:
where the payer of interest expects to pay resident withholding income of more than $500 in each month of the year, then the payment of the RWT must be made to the Commissioner by the 20th of the month following the month in which each deduction is made
in all other circumstances, RWT is payable in two instalments:
for the period 1 April to 30 September by 20 October; and
for the period 1 October to 31 March, by 20 April
Dividends
All payments of RWT on dividends are payable to the Commissioner on the 20th of the month following the payment of the dividend.
18.2.6 Non-Resident Withholding Tax
Non-resident withholding tax (NRWT) is payable on interest, dividends and royalties paid to non-residents.
The default rates of NRWT that must be deducted if there is no double taxation agreement (DTA) are:
30% on unimputed dividends
15% on interest and royalties
NRWT is 0% on imputed non-portfolio dividends, provided that the unimputed portion does not disadvantage a non-resident who can benefit from a DTA.
The rates of NRWT can be reduced by concessions contained in a DTA with the recipient’s country of residence.
For a full list of rates refer to IR290: Non-resident withholding tax (NRWT) rates and country codes. This may be downloaded from the IRD website. NRWT is payable to the IRD on the 20th of the month following payment of the dividend, interest or royalty.
At the end of each financial year a NRWT reconciliation (IR67S), along with NRWT deduction certificates (IR67), must be filed. The reconciliation is due by 31 May each year.
18.2.7 Approved Issuer Regime
NRWT on interest need not be deducted provided:
The interest is paid by an approved issuer (borrower) on a security registered with Inland Revenue
The person paying the interest (borrower) is not associated with the person receiving the interest (non-resident lender).
To be granted approved issuer status, you need to:
register online by using the IRD Approved issuer levy (AIL) payer registration service, and
have complied with your requirements under all Inland Revenue Acts during the two years before the of the application.
Instead of NRWT, a tax-deductible approved issuer levy (AIL) equal to 2% of the interest paid is paid over and above the interest on borrowings from non-resident lenders.
The AIL is payable on the 20th of the month following the month in which interest was paid. A taxpayer with annual AIL of less than $500 may make six-monthly payments.
18.2.8 Non-Resident Contractors Tax (NRCT) ) (ITA BB 1-3, BC 7, BD 1, YD 4, RB 3, Sched 4)
NRCT is payable on all contract payments to non-residents who carry out “contract activity” in New Zealand, if the total contract payments are $15,000 or more in a 12-month period.
Non-resident contractors are exempt from NRCT if they are:
eligible for total relief under a double taxation agreement, and are
present in New Zealand no more than 92 days in any 12-month period.
Contract activity is widely defined and covers all contractual activities (e.g. contract services, granting the use of personal property, etc.) undertaken in New Zealand.
Unless the non-resident contractor holds a valid exemption or special tax rate certificate, the payer of the contract payment must deduct NRCT at 15%, 20% or 45% depending on the circumstances.
Note: The no notification rate for an individual contractor is 45%. For more on NRCT, see IS10/04 on the IRD website.
18.3 Practical Hints
18.3.1 Beware RWT on Loans
Loan arrangements are commonly encountered in business and related party dealings. These include:
Sale of assets to family trusts.
Loans between trusts and beneficiaries.
Loans between related business entities.
Loans from vendors to business purchasers.
In all cases, the assumption should be that the payer of interest, (i.e. the borrower) should deduct RWT unless the criteria for RWT exemption apply. In practice, RWT on related party arrangements are often forgotten and this may cause significant penalty problems or at least use of money interest charges, in a tax investigation.
18.3.2 Review Existing Debt Arrangements
Review your existing borrowing arrangements (whether personal, company, partnership, sole trader, or trusts) to ensure that interest RWT obligations have been met.
Example
If you have borrowed money from the bank and then lent it to a company, then interest RWT must be deducted if the interest payments exceed $5,000 p.a. If this does not occur, penalties will be imposed in a tax investigation situation.
In the scenario referred to above, it may be more appropriate to have the company borrow funds directly from the bank. The viability of this approach will depend on any guarantees required by the bank and the rate of interest charged by the bank.
18.3.3 Administrative Tips for RWT
to register as a payer of resident withholding income you will be required to complete a form IR450
if you discover that you have deducted RWT from payments to a holder of a certificate of exemption you can get a refund of the RWT on form IR454
deductions of RWT are recorded on a certificate IR15 which must be provided to the recipient of the interest payment
your copy of the IR15 certificate is reconciled with the annual RWT reconciliation statement (IR15S) that must be completed by 31 May
a certificate of exemption application is made on IR451
all payers who deduct RWT are required to issue tax deduction certificates by 20 May following the end of the relevant year. Tax deduction certificates include all interest paid from all the payer’s products, e.g. term deposits, saver accounts etc
an IR15P has to be filed with payment of taxes
Beware of the penalties for failure to make deductions or to pay deductions by the due date - they can be severe.
18.3.4 Pitfalls with Payment
The withholding tax obligations are generally triggered when the interest, dividends or royalties are paid. For withholding tax purposes, “paid” is broadly defined to include distributed, credited to account or dealt with in a person’s interest or on behalf of a person. This can include a journal entry to a person’s account even if payment is not due until sometime after the journal entry has been posted. Ensure that the withholding tax liability is not triggered early by posting journal entries to general accrual accounts and not the person’s named account.
18.3.5 Payroll Payments
You must deduct withholding tax from a contractor unless the contractor invoices you through a limited liability company, or you have evidence that the contractor holds an exemption certificate (See 26.2.2). When deducting withholding tax from the contractor’s payment you need to deduct this amount from the GST exclusive amount due.
Example
A contractor (industrial cleaning) performs 25 hours of work at $20 per hour
$500.00
$75.00
$575.00
($100.00)
Cost
Plus GST at 15%
GST Inclusive Amount Due
So withholding tax = $500.00 x 20%
Net payment due to the worker