Paying tax on interest
Both resident withholding tax (RWT) and non-resident withholding tax (NRWT) are about taxing passive income, mainly interest, dividends and royalties.
The government collects about $3 billion a year in withholding tax, an important part of which is the tax on interest being paid to New Zealand tax residents.
Normally, this tax is required to be deducted when an interest payment is made.
The rate of the tax depends on the type of entity receiving the interest. For most companies – but not including look-through companies – the rate is 28 per cent, which is the company tax rate.
For individuals, a rate can be chosen that aligns with their marginal tax rate; either
10.5 per cent, 17.5 per cent, 30 per cent, or 33 per cent.
If you don’t supply your IRD number, a penalty rate of 45 per cent is used. If you provide your IRD number but not a specified rate of tax, there is a default rate of 33 per cent.
For trusts, the RWT rate is 33 per cent. More information can be found on the IRD website by downloading the publication
IR283, ‘‘Resident withholding tax RWT on interest – payer’s guide.’’
In a number of situations, however, the tax doesn’t have to be deducted at the time interest is paid. This includes:
* Interest paid to someone who has exempt status. See the IRD publication AD270, ‘‘RWT exemption register guide,’’ for the rules and how to apply.
* Interest paid under a hire purchase agreement.
* Interest paid to someone who is not carrying on a taxable activity. For example, a shareholder in a company with an overdrawn current account.
* Interest paid between companies that are part of the same group of companies. * Where the interest paid is less than $5000. Once the $5000 threshold is reached, the RWT applies to all the interest paid.
❚ Paul Sheehan is a chartered accountant. For advice or more information, contact him on 03 355 2636.