To make sure that investment income is taxed appropriately, people should provide their IRD number to the payer of investment income. A customer who doesn’t provide an IRD number is taxed at a non-declaration withholding tax rate of:
- 33% for interest, dividends and some Māori authorities distributions, and
- 28% for portfolio investment entity (PIE) income.
These rates are equal to the top tax rate for these types of income, except for Māori authority distributions which are taxed at a top rate of 17.5% provided the recipient has provided their IRD number, and are intended to encourage people to provide their IRD number to the payer.
However if someone doesn’t provide their IRD number, they may not have their investment income taken into account when social policy entitlements are calculated. This may mean they receive more social assistance or pay less in child support and student loan repayments than they should, and have a debt they then have to pay back.
The non-declaration rate for interest and PIE income would increase to 45%
To encourage taxpayers to provide their IRD number, the Government proposes to increase the non-declaration tax rate to 45% for interest and PIE income. This 45% rate would only apply to a taxpayer who doesn’t provide their IRD number. A taxpayer who provides their IRD number but doesn’t elect a withholding rate will have tax deducted at the top marginal rate of 33% (for interest) and 28% (for PIE income).
A taxpayer earning interest income taxed at the non-declaration rate could claim back the excess tax withheld by filing a tax return at the end of the year.
A PIE income non-declaration rate of 45% could be seen as unduly harsh as PIE tax is usually a final tax. Under the current PIE rules, tax charged at a higher rate cannot be refunded even if a tax return is filed. The options for addressing this are:
- Make PIE income that has been taxed at the non-declaration rate part of the recipient’s taxable income. They could then include it in their tax return and get a tax credit for the 45% PIE tax deducted.
- Leave the tax deducted at the non-declaration rate as a final tax as this would provide the strongest incentive for a person to provide their IRD number.
The non-declaration rate for dividends and Māori authority distributions wouldn’t change
The non-declaration rate on dividends and taxable Māori authority distributions would remain at 33%.
Additional rates would be likely to result in costly changes to companies’ systems as they haven’t been set up to collect tax at different rates. Many Māori authorities also have significant administrative constraints and would be likely to have difficulty complying with more complicated requirements.