Other matters raised by officials
RESIDENT WITHHOLDING TAX RATES: REMEDIAL AMENDMENTS
The Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 made changes to resident withholding tax rates (RWT) on interest income so they align with the new tax rate structure enacted in 2008. However, a number of minor technical issues have come to light, which are outlined below. Officials recommend that these be fixed.
The changes recommended are all consistent with the original policy intention.
Issue: Clarification of transition to new resident withholding tax rates for individuals and companies
Submission
(Matter raised by officials)
Amendments should be made to clarify the transition to the new 38% RWT rate for individuals and the transition to the new 30% and 38% RWT rates for companies.
Comment
An amendment should be made to clarify the transition to the new 38% RWT rate for individuals who elected the 39% rate before 1 April 2010.
A similar clarification of the transition to the new 38% and 30% rates is required for companies that chose the 39% or 33% RWT rates before 1 April 2010 or 1 April 2011 respectively.
These changes should apply from 1 April 2010, except for the transition to the new 30% company RWT rate, which should apply from 1 April 2011.
Recommendation
That the submission be accepted.
Issue: Clarification of RWT rates for trustees, Māori authorities and portfolio investment entities
Submission
(Matter raised by officials)
Amendments should be made to clarify the applicable RWT rates for trustees, Māori authorities and portfolio investment entities (PIEs).
Comment
It should be clarified that the optional 30% RWT rate for companies for the 2010–11 income year does not apply to a company that is a trustee or a Māori authority (as the RWT rates set out in table 2 of schedule 1, part D apply to these instead).A further change is required to ensure that trustees which are PIEs are able to use the 30% company RWT rate set out in table 3 of schedule 1, part D.
Officials recommend that these changes apply from 1 April 2010.
Recommendation
That the submission be accepted.
Issue: Inland Revenue’s ability to instruct interest payers to change a person’s RWT rate – minor drafting
Submission
(Matter raised by officials)
The wording of new section 25A of the Tax Administration Act should be amended to make it clear that the section applies to all individuals and not just those who have elected an RWT rate.
Comment
The Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 introduced a new provision which allows Inland Revenue to identify individuals who are on an RWT rate that is inconsistent with their marginal tax rate and instruct interest payers to shift those individuals to the appropriate rate.
An amendment is required to ensure the section more accurately reflects the policy intent, which is that the provision should apply to all individuals who are interest recipients, whether or not they have elected an RWT rate.
Officials recommend that the amendment apply from 1 April 2010.
Recommendation
That the submission be accepted.
Issue: Optional 30% RWT rate for companies – minor drafting
Submission
(Matter raised by officials)
Comment
The Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 introduced a provision which allows for an optional 30% RWT rate to be applied by interest payers with respect to companies.
A minor amendment should be made to ensure the section more accurately reflects the policy intent, which is that the provision should apply in respect of the payer from 1 April 2010.
Recommendation
That the submission be accepted.
TAX TREATMENT OF PAYMENTS TO PUBLIC OFFICE HOLDERS
Submission
(Matter raised by officials)
Schedule 4 to the Income Tax Act 2007 should be amended to provide a rate of tax for schedular payments made to public office holders.
Background
Schedular payments are generally payments for certain services when the relationship between the parties is not strictly one of employer and employee. Schedular payments made to non-employees are subject to withholding tax. They are treated as PAYE income payments for the purposes of the PAYE rules.
The categories of payments subject to withholding tax were previously set out in the schedule to the Income Tax (Withholding payments) Regulations 1979. With the rewrite of the Income Tax Act the regulations were revoked, and the rates of tax to be withheld from schedular payments are now set out in schedule 4 of the Income Tax Act 2007.
Comment
Payments to public office holders were previously covered under “honoraria” in the 1979 withholding payments regulations, but they are not explicitly included in schedule 4 of the Income Tax Act 2007.
This means that there is now no authority for the payers of fees to public office holders to withhold tax from those payments. That problem has been compounded by the definition “honorarium” inserted into the Income Tax Act 2007 by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009. The new definition explicitly limits the scope of the definition for the purposes of new provisions introduced in that Act relating to payments to volunteers, as well as for the purposes of schedule 4, part B (Rates of tax for schedular payments). These matters need to be rectified as a matter of urgency.
A related issue has been raised in relation to the tax treatment of payments that reimburse costs incurred by public office holders. Under the previous law, reimbursements were also subject to withholding tax. However, the regulations allowed the Commissioner to determine that a specified amount or proportion of a withholding payment had been incurred in the production of the payment and that amount or proportion was not subject to withholding tax. The ability for the Commissioner to make those determinations has been preserved in the Income Tax Act 2007.
Reimbursements of costs incurred, when paid to employees or to volunteers, are now treated as exempt income (sections CW 17 and CW 62B of the Income Tax Act 2007, respectively). This means that only the amount of remuneration or honorarium paid to these persons is treated as a PAYE income payment. This has the same effect as the Commissioner’s determinations, but avoids the need for determinations to be made on a case-by-case basis. Other recipients of reimbursement payments are required to account for the payments when filing their income tax return and can claim a deduction for the actual costs incurred or apply for a determination, as indicated above.
Public office holders will often have income from multiple sources and be required to file individual income tax returns. It is therefore not unreasonable to require them to individually account for reimbursements and claim a deduction for the related costs incurred. However, there would appear to be a low risk to the revenue in requiring that tax be withheld at source only from the amounts that are effectively remuneration for them.
Recommendation
That the submission be accepted.