TAX • 19 SEPTEMBER 2024 • 6 MIN READ

What is withholding tax?

SECTIONS

Withholding Tax (WT)

Resident Withholding Tax (RWT)

Non-Resident Withholding Tax (NRWT)

Dividend Withholding Tax (DWT)

Who are Beany?

Sometimes it can be a minefield trying to understand all the different kinds of taxes! Here we will look at the main types of withholding tax (taxes held back on your behalf), these are:

Withholding tax
Resident withholding tax
Non-resident withholding tax
Dividend withholding tax

Withholding Tax (WT)

This is a type of income tax deduction, and is also known as tax on schedular payments. It applies to freelancers or contractors for income earned from labour only contract work, rather than salary or wages.

This means that instead of paying income tax at the end of the year in a lump sum to Inland Revenue, the payer withholds a portion of the payment and pays to Inland Revenue on their behalf.

The standard withholding rate is 20%. If the contractor is working through a labour-hire firm, or if there is a particular rate set out in legislation, then this rate will apply to contractors such as entertainers, labourers, farm workers etc.

If you are (or intend to become) a contractor, you need to complete a tax rate notification, called an IR330C form to give to your payer. This will determine the correct rate required for the deduction. If you use the wrong tax code, don’t worry, Inland Revenue will let you know what the correct code should be.

If your industry is not listed, then there is no requirement to have withholding tax deducted.

The payer must register as an employer at IRD and file regular payroll returns to include the income and deductions. There is no requirement to deduct ACC or any other deductions, and so this should be recorded in “Earnings Not Liable for ACC” column, as the contractor is responsible for all other taxes.

Exemptions:

Some contractors are exempt from having tax deducted from their payments, this includes:

Resident contractors who have a certificate of exemption
Non-resident contractors who are automatically exempt or who have a certificate of exemptions
Non-resident entertainers and sportspeople who IRD have approved to have an exemption for

Resident Withholding Tax (RWT)

You might have come across this when you receive an interest certificate from your bank, or when we request a certificate as part of our year-end processing. Your payer (bank or fund manager) deducts RWT from your interest or dividend payment before they pay you (see below about dividend withholding tax). Dividends also include a deduction for imputation credits. We have a comprehensive blog on how dividends and imputation credits work in New Zealand.

It helps people who receive investment income to pay their tax throughout the year, and makes sure that people who don’t declare their investment income still have tax deducted from it. IRD follow up on undeclared investment income and can take action against people who don’t declare it.

Whenever you set up a bank account or investment, always make sure the payer has your IRD number. This is important for 2 reasons:

To keep you compliant with IRD as the tax information will be forwarded to them.
To make sure you are deducted tax at the correct rate – if you don’t supply your IRD number, you will be taxed at a default rate of 33% or 45%. For companies and individuals who aren’t in this income bracket, you will be deducted more than you should be.

At the end of the tax year, your income will be squared up to see if you’ve paid the right amount of tax.

If you want to find out more aout RWT, you can check out this IRD link.

Non-Resident Withholding Tax (NRWT)

NRWT is a tax withheld from New Zealand payments of interest, dividends, and royalties paid to non-residents (foreign investors).

These payments are also called non-resident passive income (NRP).

If you are a foreign investor who gets non-resident passive income, then your tax will be paid to IRD by your New Zealand based payer.

If you make non-resident passive income payments to foreign investors, you will need to:

Register as a payer at IRD
Deduct NRWT from the payments
Send the deductions to IRD

NRWT rates are decided by double tax agreements (DTAs). You’ll need to deduct NRWT at the rate that applies to the area you’re sending passive income to.

If there is no double tax agreement, or you don’t know the area you are sending passive income to, the rates are as follows:

15% for interest and royalties
30% for dividends

For further information, you can view the guide at IRD.

Dividend Withholding Tax (DWT)

When companies distribute dividends to its shareholders, they are required to distribute these at 33%. However, the company tax rate is currently 28%. So this extra 5% has to be payable as a top up by the company at the time it declares the dividend to the shareholders.

When you receive a dividend statement from a company or investment, you will notice there is usually always RWT and Imputation credits. This RWT is actually the dividend withholding tax – just to confuse you!

You can find out more about dividends in our blog – Dividends and Imputation Credits.

Who are Beany?

Need a helping hand? At Beany, we specialise in making accounting and tax a breeze. Our team of experts can handle your tax compliance so you can focus on what you do best – running your business. Let Beany be your trusted accounting partner. Get in touch with us or register today.