Paying resident withholding tax 

Resident withholding tax (RWT) is the tax deducted on interest paid to New Zealand tax residents on their deposit accounts. Your bank, fund manager, or a custodian deducts RWT from your interest or dividend amount before they pay you.

The amount of RWT you have to pay varies for each person depending on your tax status, the type of interest or dividends you earn, and the information given to your bank or fund manager. If you pay the wrong tax rate, you could face extra bills at the end of the tax year. You need to tell your provider (bank, fund manager or financial advisor) your IRD number and the tax rate you should pay based on your income. In the case of a joint investment shared with someone else, you pay the tax rate of whoever earns the most money.

The rates for RWT are:

• Income of $14,000 or less: 10.5%
• Income between $14,001 to $48,000: 17.5%
• Income between $48,001 to $70,000” 30%
• Income over $70,000: 33%

It is important that you let your provider know your RWT rate, as if no rate is elected, you will pay a default of 33%, which may be more than you would otherwise pay. In certain circumstances, the tax rate can be 0% for some people. Your provider will deduct tax on your behalf at least once a year when they calculate the interest or dividends you have earned.

Are you eligible for the R&D Tax Incentive?

This 2019-20 income year, the government introduced a new research and development (R&D) Tax Incentive that businesses can apply for. The government aims to encourage innovative businesses and a more productive economy by raising R&D expenditure to 2% of New Zealand’s Gross Domestic Product (GDP) by 2027.

The scheme offers a credit rate of 15% on any eligible research and development practices, with a $120 million cap on eligible expenditure. The incentive includes state-owned enterprises, industry research cooperatives, levy bodies, and minority-owned subsidiaries of select crown entities.

To be eligible for the new R&D Tax incentive, the following requirements must be met:

• A core R&D activity must be intended to create new knowledge, or improved processes, services or goods.
• The R&D is trying to resolve a scientific or technological uncertainty, where experts in the area do not know the answers or possibilities.
• A minimum spend of $50,000 on R&D. However, to ensure that even small businesses can qualify for the R&D tax credit, there is no minimum spend if the business uses an approved research provider. A list of approved research providers can be found on the Inland Revenue website.
• A systematic approach is used to undertake R&D. This involves a methodical approach that is planned, structured and documented, which could involve prototyping, experimentation or analysis that tests and evaluates possible solutions.
• The activities being undertaken in R&D are predominantly taking place in New Zealand. Overseas expenditure is limited to 10% of your total R&D expenditure.
• You own the results of the undertaken R&D or are able to use the results at no extra cost.

Updated government tax policy work programme 2019-20

In August this year, the government released an updated tax policy work programme for 2019-2020. The updated version is aimed to encourage productive investment and maintain the quality and efficiency of the tax system. Some of the key workstreams covered in the programme include:

Land:
The current land protocols will be reviewed in an aim to improve the efficient use of land and the taxation of land is fair and supports productive investment. This includes clarifying holding costs for taxable land, facilitating compliance with existing land rules, and taking measures to improve revenue collection by improving information flows.

Business:
The government aims to focus on prioritising economic performance and minimising the impact of the tax system on businesses by reducing compliance costs. The programme deals with increasing the integrity and neutrality of the system and improving the economic achievements of small businesses and firms.

Environment/Sustainable Economy:
This workstream will look at how different tax regimes could make positive environmental impacts, noting where greater environmental taxation could change behaviour and raise money for environmental purposes. This includes a review of the Emissions Trading Scheme and revising the Waste Disposal Levy.

Changes to IRD interest rates

From 29 August 2019, the interest IRD charges when tax is unpaid or underpaid is increasing from 8.22% to 8.35%. This is often referred to as use of money interest (UOMI) AND applies to most tax obligations such as income tax, PAYE, FBT, withholding taxes and GST. The new rate comes as part of the Order in Council changes made on 1 July 2019.

Along with the use of money interest rates payable on underpayments of tax being increased, the rate of interest for overpayments of tax will decrease from 1.02% to 0.81%. Late payment penalties will also apply if a taxpayer does not pay on time. IRD late payment penalties work as such:

• One per cent the day after payment was due.
• An additional four per cent if the tax, including late payment penalties, is still outstanding after seven days.
• A further one per cent every month after.

The last IRD interest rate change was in March 2017. The new rates are based on the floating first mortgage new customer housing rate and the 90-day bank bill rate. Both are determined by the market and can move independently of each other and the Official Cash Rate.

Taxpayers can be entitled to a deduction for their UOMI payments for the interest paid on underpayments of tax, provided the deduction is made in the year the UOMI is paid.

Simplifying provisional tax for small businesses

Inland Revenue is making provisional tax simpler for New Zealand small businesses through the Accounting Income Method (AIM). Now in its second year, AIM allows business owners to pay a tax bill only when they’re making a profit.

Under the previous rules of provisional tax, payments must be made three times a year and in equal amounts. As most businesses don’t earn their income equally across the year, this can cause strain on the business’s cash flow if taxes are paid earlier than profit is made.

AIM does not replace existing methods, but is available alongside previous ways of paying provisional tax. It is currently provided through three accounting software providers and aims to take the guesswork out of provisional tax by using a business’s real-time account information. This can then provide them with more certainty that they are paying the right amount of tax at the correct time. AIM also reduces a business’s exposure to penalties and interest on provisional tax.

AIM is currently provided as part of software accounting packages from MYOB, Reckon and Xero. To find out whether AIM will assist your business, speak with your accountant or tax agent.

What to know about the IRD’s new automatic tax assessments

From 20 May 2019, Inland Revenue has begun to automatically assess the 2019 tax position for over 380,000 tax-paying individuals. These assessments are a part of the IRD’s business transformation program, which aims to modernise and streamline the process of New Zealand’s tax system.

These new assessments will finalise the end-of-year information for the annual tax year ending 31 March 2019. Individuals that are affected will be those that have a reportable income only, such as salary or wages, interests or dividends, and NZ super. The end-of-year assessment uses employer and bank information to show you how much you’ve earned and how much tax you’ve paid, as well as providing you with a tax calculation. Individuals with a myIR account will be notified when their tax assessment is ready to view.

Upon receiving an automatic tax assessment, you should check it immediately as the IRD will need to be informed of any discrepancies or income that is not shown in the assessment. You will have until your terminal tax date to do this, which is 7 February 2020, or 7 April 2020 if you are using a tax agent.

No further action is needed for tax assessments that are correct, as the IRD will automatically pay any refund directly into your bank account within 48 hours of the assessment completion. In cases where tax is owed, Inland Revenue will confirm the amount that is owed and the due date. There will be a range of payment options available to individuals, including payment plans.

In cases where you have other sources of income, do your own tax return, or are self-employed, then you should not receive an automatic assessment and will still need to file your own income tax return. Consulting a tax advisor for further assistance may be helpful in these circumstances.

What businesses need to know about the new R&D Tax Incentive

The Taxation (Research and Development Tax Credits) Act 2019 has received the Royal Assent, and was passed into law on 7 May 2019. The R&D Tax Incentive will apply to eligible R&D activities conducted by businesses from the 2019/20 income year. Here is what eligible businesses need to know about the recent legislation.

The aim of the tax incentive is to raise New Zealand’s expenditure on research and development to 2% of GDP over the next 10 years. This is in the hope that it will create a more productive and sustainable economy. However, in order to reach this target, more businesses will need to increase their expenditure on R&D. The main features of the incentive are:

• A credit rate of 15% applied against income tax liability.
• A minimum expenditure threshold of $50,000 per year, with a $120 million cap.
• Limited form of refunds for the first year of the scheme that is similar to the R&D tax-loss cash-out scheme run by IRD.

Core R&D activities are defined as having a material purpose of creating new knowledge or new and improved processes, or to resolve technological or scientific uncertainty.

For most businesses, expenditure on eligible R&D activities that are undertaken from 1 April 2019 will qualify for the tax incentive. These businesses will be eligible to transition into the new regime at the start of their 2019-20 income year and should start recording their R&D expenditure now to ensure that their records are ready to file.

Calculating your provisional tax

For business owners or those who are self-employed, your income tax is paid in several instalments instead of a lump sum at the end of the year. This is referred to as provisional tax.

Provisional tax must be paid for individuals who owed more than $2,500 of tax at the end of the year for their previous return. It is then payable in the following year after the individual tax return has been completed. The income that provisional taxpayers often earn includes self-employed income, rental income, overseas income, or income earned as a contractor or from a partnership.

Provisional tax payments are based on your business profits during a certain payment period. There are a number of ways to work out provisional tax. These include:

Standard option:
Calculated by either last year’s residual income tax + 5%, or your residual income from two years ago + 10%, the standard method is useful if your income is steady or will increase over the next year.

Estimation option:
When you know that your income will decrease over the next year, the estimation method is used. Add up all the taxable income that you expect to receive in the next year, then work out the tax on this amount and deduct any PAYE and other income tax credits you would be entitled to.

Using each of these methods to calculate provisional tax is followed by filing your return and commence making provisional payments through myIR.

Secondary tax changes

The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill passed its third reading on 13 March and will now come into effect on 1 April. The bill amends incorrect secondary tax codes, relieving workers with more than one job who have previously been paying too much tax annually.

The IRD will now be looking closer at tax paid by wage and salary earning individuals throughout the year to ensure proper PAYE tax codes are applied. The legislation will now enable automatic tax refunds for about 750,000 people per year. This bill also removes the need for people who solely earn employment or investment income to file a personal tax summary (PTS) to get a tax refund.

Other changes included in the bill further relate to the IRD and updating the tax system as a whole. Some of these changes are:

• New KiwiSaver contribution rates of 6% and 10%, making the savings scheme accessible to people over 65.
• Depreciation roll-over relief for properties affected by the Canterbury earthquakes in 2010 and 2011 extended until 2024.
• Clarifications of how the IRD can collect, use and disclose taxpayer information.
• Introduction of a ‘short process ruling’, meaning small businesses can easily apply for a binding ruling from the IRD on any tax matters.
• Confirms the annual rates of income tax for the 2018/19 tax year remain the same as previous years.

Payday filing

Payday filing is a new method of submitting and processing employment information to the IRD, meaning you will have to file more information and more frequently. This process will be implemented on 1 April. This system allows software providers to send employment information and changes to employees’ details to the IRD each pay cycle instead of monthly. The due dates for employer deductions filing and payment remains the same as the 20th of each month or if you file twice a month, the 5th and 20th. There are three ways to file online:

• Direct from payroll software.
• File upload to myIR.
• Onscreen in myIR (if you have smaller pay runs).

With this new system, employers will need to file the pay details of employees and other relevant employment information every payday. It is also required to produce new and departing employees’ address information, contact details, etc. You will need to ensure your employees are aware that the information is now requested from the IRD. Filing will now be done electronically, from payday compatible software or through myIR, if your annual PAYE/ESCT is $50 000 or more.

Payday Filling is very straightforward, there are two methods to using the system. Employers can use myIR by going through the payroll returns account through file upload, where payday filing compatible software is required, or online data entry. Alternatively, you can go directly from your payday filing compatible software. With this option, employers will file directly from their software. It should be noted that paper filers can’t shift to Payday Filing before April 2019.