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12 Nov 2015
In this article I’m not going to deal with witholding tax (“WHT”) on interest and dividend income. I’m going to concentrate on WHT on payments to contractors, mainly because we see that the very people who are effected by WHT, are often quite unfamiliar with it.
The first thing to note is that WHT is no longer called WHT. It has now become known as a “Schedular Tax”, because it is a tax deduction from a range of activities in Schedule 4 of the Income Tax Act. But Schedular Tax is really just like PAYE, except that it is taxed at fixed tax rates depending on the activity, whereas PAYE is a variable rate depending on the person’s level of income. The other important difference is that PAYE is deducted from employee earnings, whereas Schedular Tax is deductible from payments made by a business to contractors. All businesses need to be aware of the schedule and whether there is a type of contractor there that they could be effected by.
It’s also important to appreciate that Schedular Tax is not an optional deduction. If you’re making a payment to a contractor of the type that is listed, you MUST deduct the tax. Like all taxes, if you don’t deduct it and pay it on to IRD, late payment penalties and interest apply.
The Schedule is not easy to find. There is a brief, albeit incomplete, list on the back of the IR330 tax code declaration form, but the complete list is in Schedule 4 to the Income Tax Act. Your accountant can give you this list, or you can get it from our website http://www.pkffa.co.nz/publications/special-interest/rates-of-tax-for-schedular-payments/
The Schedule is broken down into the following headings:
If you do make any of the payments referred to, you really have to examine the schedule carefully, as there are interesting exclusions from the lists. For example, “labour-only building work” does not include labour only electricians or plumbers. And “natural products” do not include mussel spat.
Contractors can get exemption from having the tax deducted in two ways:
It is very appealing for employers to class their labour providers as contractors. This removes employment compliance issues, it may remove the need to deduct PAYE, and it passes some costs such as ACC on to the contractor. By and large, it often suits the relationship far better than an employment relationship. However, although the two parties might get together and agree that the relationship is not an employment one, the IRD may not accept it. The cost of getting this wrong can be considerable, and it’s a cost that is invariably born by the employer. It’s a difficult and contentious distinction, and if you think that any of your workforce are contractors, get this checked by your accountant.
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