Non-resident contractors' tax

You are here: Home › Non-resident contractors tax (NRCT)

Non-resident contractors' tax - examples

The following examples illustrate the different types of contract payments that are deemed to be "payments to non-resident contractors" and therefore subject to the rates of tax for schedular payments (formerly withholding payments) under Schedule 4 of the Income Tax Act 2007 (the Act). These examples do not discuss the non-resident contractor's New Zealand income tax liability in respect of any relief provided by the operation of a double tax agreement (DTA).

Note: Payers must deduct non-resident contractors' tax (NRCT) from all payments made to a non-resident contractor unless the non-resident contractor holds a valid certificate of exemption, or they have a valid special tax rate certificate specifying that a different rate of tax is to apply.

Example 1

A non-resident computer programmer is contracted by a New Zealand manufacturing company to undertake a two-month contract in New Zealand in relation to a Y2K project the company has with regard to its financial systems. The non-resident is in business in her own right as a computer programming consultant.

Schedule 4 of the Act applies to this contract. The contract performed in New Zealand comes within the definition of "contract activity", as the non-resident is performing a contract service. The non-resident therefore comes within the definition of a non-resident contractor.

Schedule 4 will still apply if the New Zealand company contracts a non-resident company to provide the computer programming services, and that non-resident company sends one of its employees to New Zealand to perform the services contracted. Schedule 4 does not distinguish between a non-resident individual and a non-resident company. Tax must be deducted from the contract payment made by the New Zealand company to the non-resident contractor.

Example 2

A non-resident demolition expert is contracted by a New Zealand company to demolish a tall industrial chimney at one of the company's sites in New Zealand. The non-resident is required to provide all the necessary equipment and personnel to carry out the contracted work. The non-resident brings an employee to New Zealand to assist in the demolition contract.

Schedule 4 applies to this contract. The contract comes within the definition of "contract activity or service", as the non-resident person is performing contract services in connection with a "contract project". The demolition expert is therefore considered to be a non-resident contractor.

Note: The salary paid to the non-resident contractor's employee, while the employee is present in New Zealand, is sourced here in terms of section YD 4 of the Income Tax Act 2007. The non-resident contractor must deduct PAYE from the salary derived, unless we are satisfied that the employee will be exempt from New Zealand tax under section CW 19 (1) of the Act or a double tax agreement.

Example 3

A non-resident company is the supplier of specialised services to the oil industry, and in particular the supply of remote operated vehicle (ROV) submarines, diving equipment and related services, all available for world wide hire. A New Zealand company contracts the non-resident company to supply an ROV on bare boat charter basis for a period of eight months for use in New Zealand. The contract provides for payment of a monthly rental fee.

The contract also contains provision for the non-resident company to supply suitably qualified personnel to operate the ROV if required by the New Zealand company. An additional fee is chargeable for these services if taken up.

Schedule 4 of the Act applies to this contract. The contract payment is being made for the supply of, or the right to use, personal property in New Zealand: such services come within the definition of "contract activity". The non-resident company is therefore considered to be a non-resident contractor.

The New Zealand company does not have a suitably qualified operator to operate the ROV, so it exercises its option under the contract for the non-resident company to supply an operator. The non-resident company has on call a number of independent operators (also non-residents) whom it may contract. The non-resident contractor contracts an independent operator who is qualified to operate the ROV. The non-resident contractor then subcontracts the operator's services out to the New Zealand company.

In this situation, the New Zealand company must apply Schedule 4 to the full gross payment it makes to the non-resident company for the hire of the ROV and the personnel. At the same time the non-resident company must also apply Schedule 4 to the contract payments it makes to the independent ROV operator, as the operator is a non-resident performing a "contract activity or service" in New Zealand, and is therefore also considered to be a non-resident contractor.

Example 4

A New Zealand company engages the services of a marketing company in Melbourne to undertake a marketing study in Australia of possible consumer interest in small appliances manufactured in New Zealand.

Schedule 4 does not apply to this contract. The contract services provided by the Melbourne company are not performed in New Zealand, and are therefore not subject to the Regulations. The income does not have a source in New Zealand.

Example 5

A large New Zealand company engages the services of a prestigious New York financial institution to research a variety of different offshore loan options that it may use when funding the purchase of new plant and equipment. All the research is undertaken in the financial institution's offices located in Manhattan.

Schedule 4 does not apply to this contract. All the contract services are performed outside New Zealand, so they are not subject to the Act. The income does not have a source in New Zealand.

Example 6

A non-resident company specialising in the manufacture of compressed fibre board fabricating plant and machinery sells plant and machinery to a New Zealand timber company in the business of manufacturing compressed fibre boards. Fabrication of the plant and machinery takes place outside New Zealand, and the non-resident company arranges for transport of the plant and machinery to the New Zealand client's premises. The plant and machinery, while being fully automated, still require specially trained personnel to operate and maintain them.

As part of the sale, the contract also requires the non-resident company to supply specialist engineering personnel to supervise the installation and commissioning of the plant and machinery at the resident company's New Zealand premises, including the necessary training of the New Zealand company's personnel in the use and maintenance of the plant and machinery.

Schedule 4 applies to that part of the contract payments that relates to providing personnel as supervisors to oversee installation of the plant and machinery, and for the training services, as both these activities are performed in New Zealand. The supervisory and training services come within the definition of "contract activity or service". The payments made for the actual supply of the plant and machinery are not subject to Schedule 4, as there is no source in New Zealand. The plant and machinery were fabricated outside of New Zealand.

Note: The salaries paid by the non-resident company to its employees while they are present in New Zealand are sourced here in terms of section YD 4 of the Act. However, the employees may be entitled to relief from New Zealand tax because of section CW 19 (1) of the Act or the dependent services article of a relevant double tax agreement.

Example 7

The New Zealand company in the previous example is so impressed with the machinery supplied by the non-resident company that it enters into a further agreement with the non-resident company to manufacture and market the compressed fibre board fabricating machinery in New Zealand. The non-resident company grants the New Zealand company exclusive rights to manufacture, market, and distribute the machine in New Zealand. The licence granted entitles the New Zealand company to the use of the trademark, technical information, specifications and plans, and access to the non-resident company's technical staff.

The New Zealand company pays a royalty to the non-resident company for the trademark and know how. The non-resident company charges the New Zealand company an hourly rate for the services of its staff in support of the New Zealand company's operations.

Schedule 4 does not apply to this contract. Schedule 4 does not apply to royalties (as defined in section CC 9 of the Act) as they are specifically excluded from the definition of "contract payment or service". The royalties paid for the trademark and know how are subject to non-resident withholding tax (NRWT), which is imposed under subpart RF of the Act. NRWT applies to interest, dividends, and royalties that are derived from New Zealand by a non-resident.

The fees paid to the non-resident company for the assistance provided by its staff also constitute royalties, as the fees come within the terms of paragraph (a) of the definition of "royalty" contained in section CC 9 of the Act. Paragraph (a) states that the supply of any assistance, furnished as a means of enabling the application or enjoyment of the trademark or knowledge, is a royalty.

Example 8

A non-resident freelance journalist comes to New Zealand to report on a major sporting event. A New Zealand newspaper company contracts the non-resident journalist to write a feature article on the event from the perspective of a visitor from overseas, for which a contract fee is payable. The newspaper will hold all rights to the story.

Schedule 4 applies to this contract. The contract is a contract for service, not a contract of employment, which the non-resident contractor performs in New Zealand (story written in New Zealand). The contract service comes within subparagraph (b) of the definition of "contract activity or service" and so the contractor meets the definition of a non-resident contractor. However, the non-resident contractor provisions of Part A of Schedule 4 clash directly with clause 1 of Part Fof the Schedule, which includes coverage of contributions by freelance journalists to newspapers. Clause 1 of Part F of the Schedule provides for a different rate of tax to that specified in Part E of the Schedule to the Regulations.

In such cases, the appropriate rate of tax set down in the specific clause is to be used. In this example, the rate applicable to the class of payment specified in clause 1 of Part B applying to contributions by freelance journalists would apply.