New Zealand has a withholding tax system. This means that instead of a person who receives income paying their tax liability to Inland Revenue (IR) in a lump sum at the end of the tax year, their payer withholds a portion of the payment and pays it to IR on their behalf. This happens most commonly in the context of employers paying their employees’ salary or wages. However, it also occurs with other types of payments, such as:
- dividends;
- regular payments from a business to a contractor; or
- a bank making interest payments to an accountholder.
This article helps business owners understand the different scenarios in which they may need to:
- withhold tax from payments; or
- have tax withheld from payments to them.
Pay as You Earn (PAYE)
Every time you pay your staff their salary or wages, you may need to withhold a certain percentage of the payment for their:
- income tax liability;
- KiwiSaver contributions;
- student loan repayments;
- ESCT; and
- child support payments.
The amount you withhold is based on their tax code and income.
Your employees will provide you with this information by completing a tax code declaration (IR330) when commencing their employment. If you do not receive a completed IR330, you must withhold 45% of their payment. Alternatively, you can figure out how much PAYE to withhold from each pay check by using IR’s calculator if you know your employee’s:
- superannuation fund;
- contribution rate; and
- ESCT rate.
Schedular Payments to Contractors
If your business makes regular payments to a contractor who provides services (e.g. an IT contractor), you also need to deduct tax from these payments. A contractor must provide you with a tax rate notification for contractors form (IR330C), which will inform you of their tax rate. If they do not provide you with an IR330C, you must deduct 45% from their payment for tax (or 20% if the contractor is a non-resident company).
Resident Withholding Tax (RWT)
New Zealand residents pay tax on interest they earn from bank accounts and dividends they earn from shares and other investments. Like with employers paying wages, the bank, fund manager or custodian responsible for paying the interest or dividend withholds part of the payment and passes it onto IR on the payee’s behalf.
The RWT rate on interest payments for individuals is that person’s income tax rate (i.e. 10.5%, 17.5%, 30% or 33%). For companies, it is 28%. The RWT rate on dividends is 33% and is calculated as follows:
33% x (dividend + tax paid or franking credit attached) – tax paid or franking credit attached.
Regardless of whether you are receiving interest or dividend income, you will need to provide the payer your IRD number. For interest payments, you will also need to elect your RWT rate (based on your income tax rate) by providing the payer with a ‘Choose your RWT deduction rate’ form (IR456). It is important that you provide your IRD number because otherwise the payer must deduct 45% from your interest payments.
Key Takeaways
Instead of a person who receives income paying their tax liability to Inland Revenue (IR) in one lump sum, their payer withholds a portion of the payment and pays it to IR on their behalf throughout the year. Typically, the payer will be the person’s employer. Working out the amount you must withhold from your employees’ pay checks can be difficult. If you have any questions about your business’ tax responsibilities in New Zealand, please contact LegalVision’s New Zealand corporate lawyers on 0800 005 570 or complete the form on this page.
FAQs
As an employer, you withhold a certain percentage of your employees’ salaries each pay check, based on their individual income tax rate. It is very important to apply the correct tax rate. You pay this sum to Inland Revenue (IR) on their behalf.
Pay as You Earn (PAYE) is another name for withholding tax.
You pay tax on interest you earn from bank accounts and dividends you earn from shares and other investments. The bank, fund manager or custodian responsible for paying the interest or dividend withholds part of the payment and passes it onto IR on your behalf.
The RWT rate on interest payments for individuals is that person’s income tax rate (i.e. 10.5%, 17.5%, 30% or 33%). For companies, it is 28%. The RWT rate on dividends is 33% and is calculated as follows: 33% x (dividend + tax paid or franking credit attached) – tax paid or franking credit attached.
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