Good news for contractors: from April 1, 2017, contractors subject to the schedular payment rules are now able to elect their withholding tax rate without having to apply to Inland Revenue for a special tax code.
This provides increased flexibility, makes it easier for taxpayers to self-manage their tax obligations and aims to minimise the overall cost to the system.
Prior to April 1, a contractor subject to the schedular payment rules was subject to a flat rate of withholding. This rate often did not match a contractor’s actual income tax liability. Contractors could obtain their own special tax code to alter their rate, but this process could sometimes be cumbersome on the part of a taxpayer by requiring them to apply to Inland Revenue and provide supporting information.
Now, new rules for contractor withholding rates apply. Contractors subject to the schedular payment rules must complete a new tax rate notification form (IR330C) for any schedular payments they will receive on or after April 1, 2017 and provide this form to the payer of their schedular payments.
Contractors can pick a rate they would like tax to be deducted at, and can pick any rate between 10 percent and 100 percent. Inland Revenue has provided a tax rate estimation tool for contractors on its website, which prescribes a tax rate based on a contractor’s estimated income and expenditure for the year.
There are the following limited circumstances where a contractor will not be able to elect their own rate:
Where a contractor has not provided their name and IRD number, a 45 percent rate of withholding applies
When a contractor has not met a liability under an Inland Revenue Act, the commissioner can prescribe a rate of withholding
A minimum rate of withholding applies to contractors (for non-resident contractors and contractors with temporary work visas, the minimum rate is 15 percent, and for all other contractors the minimum rate is 10 percent)
If a contractor has changed their rate twice in a 12-month period, the consent of the payer is required for any further rate changes.
If a contractor has not elected their own rate, a ‘standard rate’ applies based on the relevant rate listed in schedule four of the Income Tax Act 2007.
Payments by labour-hire firms to their contractors will also now be subject to the schedular payment rules. Contractors of labour-hire firms were previously required to manage their own tax obligations, including provisional tax. Labour-hire firms will therefore also be required to withhold payments made to contractors under the amendments outlined above.
Neil Russ leads Buddle Findlay’s tax practice. He specialises in corporate and international tax issues, as well as structured transactions. In addition to his tax expertise Neil has a multi-jurisdictional background in banking and capital markets transactions.