Deadline looms for tax rules compliance

Labour-hire companies have just a few weeks to comply with new tax rules, writes Leicester Gouwland.

Little has been said so far about tax changes affecting thousands of New Zealand’s ‘‘one-manband’’ businesses.

These came into effect on April 1, 2017, and affect many small business owners who are contractors. They also affect those businesses paying the contractors, particularly labour-hire businesses.

Previously, contractors were responsible for their own tax payments (using the provisional tax system), if the current withholding tax system did not apply to the industry in which they worked.

Labour-only contract builders are an example of an industry where a contractor was previously subject to withholding tax.

A recent tax change means labour-hire businesses need to deduct withholding tax from contractors. This requirement applies to contractors who trade through companies as well.

Previously, some contractors were eligible for a certificate of exemption from having withholding tax deducted from their contracting receipts. Now, labour-hire contractors are no longer eligible for this exemption.

A special tax code may be applied for in circumstances where withholding tax is inappropriate, including a rate of zero per cent.

Labour-hire firms need to act to make the changes to their systems, to meet rules applied from April. Those labour-hire businesses who cannot reasonably comply in time, will be able to defer deduction of the withholding tax until they are ready. However, it must be no later than July 1, 2017.

And further changes will affect contractors. Firstly, those who are in industries subject to withholding tax can now decide their own rate of withholding, rather than having the current position of having a standard rate applied to them, and having to apply for a special tax code if the standard rate is inappropriate.

The minimum rate for New Zealand residents is 10 per cent.

The second change is that contractors not in industries subject to withholding tax (and not hired by a labour-hire company), can opt into the new withholding tax rules, provided the employing party agrees.

This election can apply to contractors trading using companies and to other receipts such as expense reimbursements.

Both contractors and their employing businesses need to get up to speed quickly.

Leicester Gouwland is director of chartered accountants and finance specialists, William Buck Christmas Gouwland.