What Is Withholding Tax?

Withholding tax (WHT) is a form of income tax deduction, often referred to as tax on schedular payments. It applies primarily to freelancers or contractors who earn income through labour-only contract work, as opposed to regular salary or wages. Instead of making one large tax payment at the end of the year, the payer withholds a portion of the payment and sends it to Inland Revenue on your behalf.

The standard WHT rate is 20%. However, if you're working through a labour-hire firm or covered by specific legislation, a different rate may apply. This includes professions such as entertainers, labourers, and farm workers.

To ensure the correct tax rate is applied, contractors must complete the IR330C form and submit it to their payer. Don’t worry if you use the wrong tax code—Inland Revenue will notify you if adjustments are needed.

If your industry doesn’t fall under the withholding tax regime, you won’t need to have this tax deducted.

How Does It Work?

Payers must register with the IRD as employers and submit regular payroll returns to record income and deductions. Unlike salary earners, contractors are responsible for other deductions, like ACC, which is reflected in the "Earnings Not Liable for ACC" column.

Are There Exemptions?

Yes, some contractors are exempt from having tax withheld. This includes:

• Resident contractors with a certificate of exemption.
• Non-resident contractors automatically exempt or with a certificate of exemption.
• Non-resident entertainers and sportspeople approved by the IRD for an exemption.

What Is Resident Withholding Tax (RWT)?

Resident withholding tax applies to income from interest or dividends, such as what you might receive from your bank or investment account. This tax is deducted by the payer (e.g., your bank or fund manager) before they transfer the payment to you.

RWT ensures that tax is deducted from investment income throughout the year. It also helps the IRD track undeclared income. If you fail to declare investment income, the IRD may take enforcement actions.

When setting up a new bank account or investment, always provide your IRD number. Not doing so means you could be taxed at a default rate of 33% or even 45%, potentially higher than necessary.

What Is Non-Resident Withholding Tax (NRWT)?

Non-resident withholding tax applies to New Zealand-based payments of interest, dividends, and royalties made to foreign investors. These payments, classified as non-resident passive income, are taxed by the payer on behalf of the non-resident.

To handle NRWT, payers must:

• Register with the IRD.
• Deduct NRWT from payments.
• Pay the deductions to the IRD.

Rates for NRWT depend on double tax agreements (DTAs) between New Zealand and the foreign investor’s country. Standard rates apply when no DTA is in place: 15% for interest and royalties, and 30% for dividends.

What Is Dividend Withholding Tax (DWT)?

When companies distribute dividends to shareholders, they must account for dividend withholding tax. Since the corporate tax rate is 28% but dividends are taxed at 33%, the company must pay the additional 5% when declaring dividends.

For more details, read our blog on dividends and imputation credits.

What's next?

If you have any further questions, please get in touch. Business Like NZ has been providing professional, yet affordable tax and business advice to the Auckland region and beyond for years!