Appendix 1 - Current law
The main rules in the Income Tax Act 2007 for applying NRWT to interest that are relevant to this issues paper are set out below.
RA 6 Withholding and payment obligations for passive income
Non-resident passive income
(2) A person who makes a payment of non-resident passive income must withhold and pay NRWT for the payment to the Commissioner under subpart RF (Withholding tax on non-resident passive income (NRWT)) by the due dates.
RA 9 Treatment of amounts withheld as received
Payments treated as received or derived
(1) An amount withheld from a payment under this Part, unless a provision in this Part states otherwise,–
(a) is treated as received–
(i) by the person to whom the payment is made; and
(ii) at the time the payment is made; and
(b) is treated for the purposes of this Act as derived by the person at the same time and in the same way as they derive the payment from which the amount is withheld; and
(c) includes a combined tax and earner-related payment.
RF 1 NRWT rules and their application
(1) The NRWT rules means—
(a) this subpart; and
(b) section LB 5 (Tax credits for non-resident withholding tax); and
(c) sections LJ 1 to LJ 3, LJ 6, and LJ 7 (which relate to tax credits for foreign income tax); and
(d) sections LK 1 to LK 5, and LK 7 (which relate to tax credits related to attributed CFC income); and
(e) sections 32M, 49, 100, Part 9, and sections 165B and 185 of the Tax Administration Act 1994.
(2) The NRWT rules apply to a person who makes a payment that consists of non-resident passive income.
RF 2 Non-resident passive income
Interest, certain dividends, and royalties
(1) Non-resident passive income means income having a source in New Zealand that a non-resident derives and that consists of—
(a) a dividend other than an investment society dividend:
(b) a royalty:
(c) an investment society dividend when the non-resident is not engaged in business in New Zealand through a fixed establishment in New Zealand:
(d) interest when the non-resident is not engaged in business in New Zealand through a fixed establishment in New Zealand.
Inclusion: Capital value increase under inflation-indexed instruments
(1B) Non-resident passive income includes an amount, arising at the time of a relevant coupon payment (the current coupon payment) equal to the amount given by the formula in section RE 18B(4) (Capital value increase under inflation-indexed instruments: RWT cap) in relation to the current coupon payment, if that current coupon payment is—
(a) non-resident passive income under subsection (1); and
(b) in relation to an inflation-indexed instrument.
(2) The following amounts derived by a non-resident are excluded from non-resident passive income:
(a) an amount of exempt income:
(b) interest arising because section EI 2 (Interest from inflation-indexed instruments) applies to an inflation-indexed instrument:
(c) an amount of excluded income under sections CX 56B and CX 56C (which relate to attributed PIE income), as applicable.
When subsection (4) applies
(3) Subsection (4) applies in an income year when a person derives non-resident passive income consisting of—
(a) a dividend other than an investment society dividend:
(b) a royalty for the use, production, or reproduction of, or for the right to use, produce, or reproduce, a literary, dramatic, musical, or artistic work in which copyright subsists:
(c) interest or a royalty derived by a life insurer from a company resident in New Zealand when the interest or royalty is treated as arising as a result of the life insurer’s election under section EY 49 (Non-resident life insurer becoming resident):
(d) interest or an investment society dividend when the person paying and the person deriving the interest or dividend are not associated persons.
(4) If the person is a filing taxpayer, the schedular income tax liability for the corresponding tax year under section BC 7 (Income tax liability of person with schedular income) for schedular income that is non-resident passive income is determined by the amount of tax required to be withheld under this Part.
Exception: minimum amount
(5) Despite subsection (4), if a person derives non-resident passive income consisting of interest, investment society dividends, or a royalty other than those described in subsection (3), the person’s income tax liability for the corresponding tax year is the greater of—
(a) the sum of the total non-resident withholding tax (NRWT) for which they are liable and the amount that would be their income tax liability for the tax year if they had not derived non-resident passive income in the tax year:
(b) the amount that would be their income tax liability in the absence of this subsection.
Company deriving minimum amount
(6) For the purposes of subsection (5) for a company, if the total amount of non-resident passive income and other income derived by the company in the corresponding tax year is not more than $1,000, the income tax liability of the company for the tax year is the sum referred to in subsection (5)(a).
Application of financial arrangements rules
(7) The financial arrangements rules do not apply to the calculation of an amount of non-resident passive income.
RF 3 Obligation to withhold amounts of tax for non-resident passive income
Withholding amount of tax
(1) A person who makes a payment of non-resident passive income must withhold the amount of tax for the payment and pay it to the Commissioner. The obligation to withhold arises under section RA 6(2) (Withholding and payment obligations for passive income) at the time of payment
RF 12 Interest paid by approved issuers or transitional residents
When this section applies
(1) This section applies in relation to an amount of non-resident passive income that consists of—
(a) interest that—
(i) is paid by an approved issuer under a registered security; and
(ii) is derived by a person not associated with the approved issuer except by being a beneficiary of a trust established for the main purpose of protecting and enforcing beneficiaries' rights under the registered security; and
(i) is not a payment to which section RF 12B applies:
(b) interest that—
(i) is paid by a transitional resident in relation to money borrowed by them while non-resident; and
(ii) is not paid in relation to a business carried on through a fixed establishment in New Zealand; and
(iii) is derived by a person not associated with the transitional resident; and
(iv) is not a payment to which section RF 12B applies.
(2) The rate of NRWT payable on the amount is 0%.
Interest paid under registered securities
(3) For the purposes of the NRWT rules, an amount of interest is paid by an approved issuer under a registered security only if it is treated as paid in relation to a registered security under section 86I of the Stamp and Cheque Duties Act 1971.
YA 1 Definitions
In this Act, unless the context requires otherwise,—
(a) for a person’s income,—
(i) means a payment made to the person by another person for money lent to any person, whether or not the payment is periodical and however it is described or calculated; and
(ii) does not include a redemption payment; and
(iii) does not include a repayment of money lent:
(b) for the RWT rules and the NRWT rules, includes a redemption payment:
(c) in sections DB 6 (Interest: not capital expenditure), DB 7 (Interest: most companies need no nexus with income), and DB 8 (Interest: money borrowed to acquire shares in group companies),—
(i) includes expenditure incurred under the financial arrangements rules or the old financial arrangements rules; and
(ii) does not include interest to which section DB 1(1)(e) (Taxes, other than GST, and penalties) applies:
(d) for land, has the same meaning as estate
money lent means—
(a) an amount of money that a person lends in some way, including by depositing it in an account, whether or not the lending is secured or evidenced in writing:
(b) an amount of credit that a person gives, including by not enforcing a debt, whether or not the giving is secured or evidenced in writing:
(c) an amount of money that a person lends, or credit that a person gives, under an obligation or arrangement, whether or not secured or evidenced in writing:
(d) an amount of money that goes from a person (person A) to another person (person B) in consideration for person B’s promise to pay person A an amount of money and that is less than the amount that person B promises to pay person A. For the purposes of this paragraph,—
(i) money goes from person A when it is paid to person B:
(ii) person B’s promise is not required to be secured or evidenced in writing:
(iii) person B includes any other person with whom person B is an associated person
(a) for an amount and a person, includes—
(i) to distribute the amount to them:
(ii) to credit them for the amount:
(iii) to deal with the amount in their interest or on their behalf, in some other way:
(b) … [Other definitions covered in this Section are not relevant for this purpose.]
YD 4 Classes of income treated as having New Zealand source
What this section does
(1) This section lists the types of income that are treated as having a source in New Zealand for the purposes of this Act.
Income from debt instruments
(11) The following amounts have a source in New Zealand—
(a) interest or a redemption payment derived from money lent in New Zealand:
(b) interest or a redemption payment derived from money lent outside New Zealand—
(i) to a New Zealand resident, unless the money is used by them for the purposes of a business they carry on outside New Zealand through a fixed establishment outside New Zealand:
(ii) to a non-resident, if the money is used by them for the purposes of a business they carry on in New Zealand through a fixed establishment in New Zealand:
(c) income from securities issued by the government of New Zealand:
(d) income derived from debentures issued by a local authority or public authority:
(e) income derived from a mortgage of land in New Zealand.