Withholding Tax (or TSP) is like PAYE for certain type of contractors. This was more or less a flat rate earlier.
From 1 April 2017, 2 key things have changed:
What is a schedular payment?
Schedular payments are payments made to contractors who perform certain activities. These payments are required to have tax deducted but they’re different to salary or wage payments.
Schedular payments apply to contractors across a broad spectrum of industries; from cleaners, farm workers and gardeners, to entertainers, sportspeople, labour-only builders and fishing boat workers.
Details of what type of payments can be considered is included in the IRD form IR330C.
Who is obligated to deduct Tax on Schedular Payments (TSP) from Schedular Payments
If you have a contractor working for you who is subject to TSP, you are responsible for finding the correct rate, taxing them and passing it on to the IRD. Contractors with TSP are still responsible for their own ACC earner’s levy and student loan repayments. Contractors must also make sure that they don’t have any further tax obligations, as TSP may not make up their entire liability especially if they earn over $55,000 per year.
Some contractors may be exempt - but its their responsibility to secure the certificate of exemption from the IRD and pass it on to you.
What is the rate of deduction?
The withholding rates are in quite a broad range depending upon the type of Schedular Payment; from 33% for examiners' fees, to 10.5% for personal service rehabilitation payments.
With the new rules however, contractors can choose to elect a lower withholding tax rate, down to a minimum of 10% (15% for non-resident contractors). This is done by the contractor electing a rate on their Tax Rate Notification for Contractors form (IR330C) which they provide to parties they invoice. The idea being that the lower rate will more accurately reflect the contractor's end of year marginal tax rate.
Who do these new rules apply to?
The TSP rules have also been extended to apply to contractors that work for 'labour-hire firms'. In addition, the current exemption that applies if a contractor is invoicing through a company does not apply to payments by labour-hire firms. Labour-hire firms will now have to deduct withholding tax (TSP) from payments made to a contractor's company at the standard rate of 20%, unless the contractor elects a lower rate of no less than 10% or applies for a Special Tax Rate, which could be as low as of 0%.
A labour-hire firm has a wide definition and essentially includes "a person which has as one of its main activities the business of arranging for a person to perform work or services directly for clients of the entity". Essentially , if the labour-hire arrangement is not incidental to the main business of the labour-hire firm, the withholding tax rules will apply. There is however an exclusion from the new labour-hire rule for transactions with associated persons to prevent overreach of the rules.
The Inland Revenue has allowed for a lead-in time of up to 1 July 2017 for those labour-hire firms that were not able to get their payroll systems in place in time for 1 April 2017.
What forms do we have to fill?
IR330C - Tax Rate Notification from Contractors. The form is simple and clear, however if you're in doubt, please do consult our advisors at Core Business Services Ltd, Chartered Accountants if you have any doubt about the contents of this article.
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