Appendix – Current state
This appendix summarises the current tax rules and processes applying to the parties involved in investments and withholding tax.
If tax is deducted at a person’s marginal tax rate (the rate that applies to their top dollar of income) from their investment income, it is unlikely that they will have to pay any more tax at the end of the tax year. However, if tax is not deducted from their investment income at their marginal tax rate, they may need to request a personal tax summary (PTS) (or file a tax return if they also meet other criteria for needing to file). The following table from the Inland Revenue website sets out when a person is required to request a PTS:
|You must request a PTS if you...||and you received...|
|received income from $14,001 to $48,000||more than $200 of interest taxed at less than 17.5%|
|received income from $48,001 to $70,000||more than $200 of interest taxed at less than 30%|
|received income over $70,000||more than $200 of interest or dividends taxed at less than 33%|
|received income over $48,000||more than $200 of taxable Māori authority distributions|
|paid child support through Inland Revenue||more than $200 of interest, dividends or taxable Māori authority distributions|
The PTS only contains information about salary and wages, and taxpayers have to enter details of their other income (such as investment income that has been incorrectly taxed) in order to confirm their tax position.
At the end of the tax year, organisations that deduct tax from interest income are required to send their customers a certificate showing the interest income and the withholding tax. Each organisation that a person has been paid more than $50 of interest by will send the person at least one certificate (they may send more than one if the person has invested in multiple products). The person is then required to look at all of the certificates to determine if they have received interest income totalling $200 that has had withholding tax deducted at a rate that is lower than their marginal tax rate. If they have, they are required request a PTS and potentially file a tax return.
The portfolio investment entity (PIE) tax regime has specific rules around the availability of each different portfolio investor rate (PIR). If a person selects a higher PIR than they need to, the PIE tax deducted is a final tax and cannot be refunded. However if a person selects a lower PIR than they are allowed to, their PIE income is not covered by the PIE rules and they have to pay income tax on it. If their income tax rate is 30% or 33% they would end up paying more tax than the highest PIR of 28%. Taxpayers may be unaware that they have selected a lower PIR than they should, and may inadvertently not include their PIE income in a tax return.
If people do not provide their IRD number to the PIE administrator they will be put on the top PIR of 28%. The PIE administrator is required, at least once a year, to ask these investors to provide their IRD number, but there is no real incentive for those on the 30% or 33% income tax rates as the PIE tax non-declaration rate is 28% (the same as the top PIE rate for people who have provided their IRD numbers).
Even if tax has been deducted correctly from a person’s investment income and they don’t have any further tax obligations, they may still have social policy obligations resulting from that income. For example, even though PIE tax is a final tax, the income from some PIEs (essentially those PIEs where the funds are not locked in for superannuation purposes) has to be included in a person’s social policy calculations. People may be unsure which PIE income they should include in their social policy income estimate and end-of-year calculation.
Social policy entitlements such as Working for Families Tax Credits are calculated during the year based on an estimate of income for the year. Estimates are often wrong, so a square-up calculation needs to be made at the end of the year when a person’s income is finalised. The person will then have to either pay back some of the money received during the year if they had underestimated their income or receive an extra payment if they overestimated.
Payers of investment income deduct withholding tax from the payments to investors. They remit the withholding tax to Inland Revenue with their monthly withholding tax returns. The payers provide the following information to Inland Revenue:
- summary information (total income paid, total tax deducted) to Inland Revenue for RWT, NRWT, AIL and PIE tax each month; and
- more detailed information (identifying the recipients and giving the investment income and tax withheld for each recipient) for RWT and NRWT (on interest) and PIE tax at the end of the year with their annual reconciliation return.
Payers provide an annual summary return to Inland Revenue for interest subject to AIL and Māori authority distributions. Payers are not required to provide any detailed information to Inland Revenue on interest subject to AIL, dividends, Māori authority distributions and interest paid to recipients who are exempt from withholding tax.
Currently a number of the withholding tax returns are paper forms. The detailed information that accompanies the end-of-year reconciliation can be provided to Inland Revenue electronically or on paper. There is a 20 megabyte size limit for files attached to emails sent to Inland Revenue. This means that larger payers of withholding tax cannot email their information to Inland Revenue as their files are often much larger than 20 megabytes. The only way to provide large files of electronic information to Inland Revenue is to store it on a CD or a USB stick and deliver that to Inland Revenue. The information provided is only validated once Inland Revenue processes the information.
If errors are detected during the year to 31 March they can often be corrected in the next monthly summary return, but if an error occurs before 31 March and is not found until after 31 March the return for the period to 31 March must be adjusted to correct the error so that the total information for the income tax year is correct. This can result in a significant amount of additional work for both the payer and Inland Revenue.
Payers of interest provide tax certificates to their customers at the end of the tax year. When customers receive their certificates from one provider, some quickly decide to call their other investment providers to ask for their tax certificate. This puts pressure on payers to get the tax certificates out as soon as possible after year end to avoid spikes in customer calls. The certificates are usually posted to the customers, which can be a significant cost.
If customers have an exemption certificate from RWT they have to show the payer a copy of the certificate before the exemption can be applied to their account. They are also required to advise the payer if the certificate is cancelled. The issue and cancellation of exemption certificates are published in the New Zealand Gazette each quarter, and payers should check this and update their records. This can cause issues if the Gazette shows a customer has had their exemption certificate cancelled in the previous three months and the customer has already provided a copy of their replacement exemption certificate, as the payer may incorrectly think the cancellation applies to the new certificate.
When companies pay dividends to their shareholders they deduct RWT at 33% (less any imputation credits attached). The company sends a shareholder dividend statement to each shareholder, setting out the dividends paid, the imputation credits attached and RWT deducted. The company also sends a summary showing the total dividends paid and the RWT withheld to Inland Revenue. The company must keep records of the dividend payments to each shareholder in case it is requested but otherwise does not provide the detailed information to Inland Revenue.
The dividends are subject to RWT at 33% (less any imputation credits attached) regardless of the shareholder’s marginal tax rate. This means that shareholders may be overtaxed when the dividend is paid and then have to file a tax return to claim a refund some time later.
Inland Revenue receives annual information about RWT that has been deducted. This information is manually uploaded and validated. This usually takes some time.
The annual interest and RWT information is due to Inland Revenue after Inland Revenue has prepared the summaries of earnings (SOEs) and PTSs for individual taxpayers. Accordingly, the investment income and tax information cannot be included in the SOEs and PTSs provided to taxpayers.
The timing of receiving and processing RWT information means that the square-up processes for RWT do not match the timing of other square-up processes, such as those for social policy payments. This process is inefficient and reduces Inland Revenue’s ability to effectively manage compliance in a number of areas.
The information that Inland Revenue receives has a number of limitations. If a person has not provided their IRD number to their payer it is difficult for Inland Revenue to associate the income with the person. Income from joint accounts (accounts owned by more than one person) is only reported to Inland Revenue under one IRD number, which makes it hard for Inland Revenue to correctly associate the income with all of the owners of joint accounts.
Māori authorities can attach credits to taxable distributions to their members. A taxable Māori authority distribution is paid out of the Māori authority’s taxable income for the 2004–05 or later tax years. Māori authorities advise their members of any taxable distributions made to them by sending them a notice.
Taxable Māori authority distributions are taxable income to the member that receives them. The member’s tax liability in relation to the distributions may be covered by the credits attached to the distribution and in some cases the RWT deducted from it.
Māori authority credits represent the tax paid by the Māori authority on its income. The member receiving a credit can use it to offset their own tax liability (ensuring that the income isn’t subject to double taxation). Tax credits are a maximum of 17.5% of the gross distribution – which means that up to $17.50 of Māori authority credits can be attached to every $82.50 of income distributed.
Taxable Māori authority distributions are also subject to RWT if the:
- Māori authority decides not to attach any credits to the distribution,
- credits attached are less than 17.5% of the gross distribution,
- Māori authority does not hold the member's IRD number and the distributions exceed $200, in which case the withholding tax rate is 33%, reduced by any Māori authority credits attached, up to a maximum rate of 17.5%.
The member can offset the Māori authority credits and any RWT against their own income tax liability. They may get a refund if their marginal tax rate is less than 17.5%, or may have to pay more if their marginal tax rate is higher than the rate of credits or RWT.
The Government understands that while some Māori authorities do still have balances relating to years before 2004–05 these balances are running out. As a result it is likely that most Māori authority distributions in the future will be taxable, with Māori authority credits attached.
8 Child support obligations and entitlements for a year are usually calculated before the beginning of the year based on the liable parent’s income for a previous year rather than being based on an estimate.