For the purpose this these changes a contractor is someone who suppliestheir labour to a third person as an “independent contractor”. Those in the trades are commonly referred to as contractors and may not necessarily be effected by these changes (although labour-only subcontractors are).
The changes are:
- Contractors are now able to elect to have withholding tax deducted (technically this is called “Schedular payments”) from their income – with the consent of the payer
- If you work for a labour-hire company then they MUST deduct Withholding tax
- You can elect the amount of withholding tax to be deducted – down to a minimum of 10% for most contractors or apply to the IRD for a lower rate
- If you provide your services through your own company you are now subject to the same rules (previously you were exempted), but you will be able allocate the Withholding Tax deducted directly to shareholders on your tax return
All up this is a good thing. Paying your tax as you go (like an employee does) is safer for you and better for the government. These changes make sense for the most part!
Withholding tax is simply pre-paid income tax. If you have had too much tax deducted it will be refunded and if you do not have enough tax deducted you will have to pay “terminal tax” to fund the difference. The fact that you have withholding tax deducted does not change the amount you earn in any way – it just changes the cash flow and the timing of tax payments.
Choosing your Withholding Tax Rate
Contractors can choose their own tax rate (within limits). As long as the paperwork is all in order, the payer will withhold tax at the rate the contractor chooses.
If you are starting a new contracting job or if you want to change your tax rate, you need to fill out a Tax rate notification for contractors (IR330C) form. If you’re not sure what rate to select, the IRD estimation tool can help you choose your tax rate.
If you do not complete the IR330C, your payer will deduct tax at the no-notification rate, which is much higher than the standard rate. The rate is 45%, except for non-resident contractor companies where it’s 20%.
Contractors can no longer apply for a “Certificate of Exemption” from Withholding Tax. Instead, you must apply for a Special Tax Rate certificate using form IR23B. You can elect a 0% rate (question 5) if you meet the conditions. We expect that the IRD will be inundated with these forms and could be backlogged with requests. Furthermore, those new to self-employment and companies that pay all their income to shareholders may be declined as they can’t provide sufficient evidence that they “have a good record of filing returns and making payments on time”. In these cases we recommend electing the 10% rate until you receive your STR certificate. If you don’t qualify you may be able to reduce your Provisional Tax payments by the same amount (see below) or just treat it as forced savings (I feel a holiday in Fiji coming in mid-2018!).
Impact on Provisional Tax
As a self-employed person you will probably be paying Provisional Tax (advanced payments of your estimated tax liability throughout the year – Aug 28, Jan 15 and May 7). Your Provisional Tax obligation is usually calculated based on the amount of your unfunded terminal tax from the PRIOR YEAR. If, at the end of the year, you have more than $2500 in tax to pay and you did not pay your expected provisional tax on time then you will be assessed with Use of Money interest. Therefore reducing your Provisional Tax payments for 2017/18 may still result in interest, even though you paid the same amount of tax with provisional and withholding tax combined).
If you are working for a labour hire business and are happy to simply continue with the Provisional Tax system then we recommend applying for a STR certificate at 0%. If this is delayed the you should nominate a WT rate of 10% (the lowest you can elect without an STR) on form IR330C until the STR certificate has been received.
If you are not working for a labour-hire business then you can’t apply for an STR certificate. The good news here is that Withholding Tax is optional and your client can’t mandate it (unless they are a labour-hire company).
If you are stuck with (or choose) a WT deduction and your 2018 income is likely to be MORE than your 2017 income then we DO NOT recommend that you reduce your provisional tax payments. It is safer to pay the extra WT knowing that you are safe from UOM interest. Any overpaid tax will eventually be refunded. For others (2018 income expected to be the same as or lower than 2017) you may want to reduce your provisional tax payments by the amount of WT deducted in the previous 4 months – but keep in mind that you may inadvertently end up with UOM interest if you make an error or your income ends up higher than 2017.
If you operate through a company we can allocate any WT payments directly to you on the tax return, so if you do reduce your personal Provisional Tax payments the WT amounts will still be attributed to you at the end of the day (even though they are issued to the company). If in doubt, DON’T reduce your payments!
With these changes it continues to highlight the importance of good accounting records and tax planning. For a free initial consultation with a Business Express professional please call 04-831-1232.