Accounting for tax on schedular payments

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Accounting for tax on schedular payments

Non-resident contractors' tax (NRCT) is withheld from each contract payment made to the non-resident contractor at the standard or special tax rate. Payers must ensure that they hold a fully completed Tax code declaration (IR330) on the non-resident contractor's behalf. When the payer does not hold a fully completed tax code declaration, tax must be deducted, under section RD 18 of the Income Tax Act 2007 (the Act), at the non-declaration rate of 30 cents for each dollar for independent non-resident contractor, or 20 cents for each dollar for companies.

The payer does not have to withhold any NRCT if the non-resident contractor produces a valid certificate of exemption. Alternatively, the non-resident contractor may produce a valid special tax rate certificate authorising the payer to withhold tax at a lesser or greater rate as specified on the certificate.

The tax deducted is paid to Inland Revenue in the same way as monthly or twice-monthly PAYE deductions, that is, it is treated the same as if PAYE had been deducted from an employee's salary or wage. The payee (non-resident contractor) should receive an end-of-year statement of income from Inland Revenue, which should confirm the amount of tax withheld by the payer on the non-resident contractor's behalf.

Failure to deduct NRCT will result in grossing up the payment made to the non-resident contractor, and the payer will be liable for the deficient tax deductions. Interest and penalties may be imposed in accordance with the provisions of Tax Administration Act 1994. There are both civil and criminal penalties for failing to deduct or failing to account. However, in a situation where the payee (non-resident contractor) subsequently refunds to the payer the NRCT that should have been deducted from the contract payments, we may refund to the payer the grossed-up portion paid to the Commissioner.

Interim tax

The NRCT withheld is an interim tax paid on account of a non-resident contractor's annual income tax liability. The tax is neither a minimum nor a final liability. The non-resident contractor's final New Zealand income tax liability is determined by way of annual assessment, at which stage a refund of any overpaid tax can be made or additional payment sought from the non-resident contractor, as appropriate.

When schedule 4 to the Income Tax Act 2007 applies

Schedule 4 of the Income Tax Act 2007 (the Act) identifies classes of schedular payments that are subject to tax. The categories of schedular payments do not attach themselves to any particular class of taxpayer, that is, they do not distinguish between residents and non-residents.

Sometimes a non-resident who performs contract services in New Zealand is held to be a non-resident contractor (to which Part A of Schedule 4 of the Act 2007 applies), as the services performed come within the definition of "contract activity or service". However, the nature of the payment may also be subject to tax under one of the specific clauses contained elsewhere in Schedule 4 of the Act. In circumstances such as these, the rate of tax applicable to that specific class of payment, as stated in Schedule 4 of the Act will apply. See Example 7 in the "Non-resident contractors' tax - examples" section.

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Date published: 29 Jul 2008

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Non-resident contractors tax (NRCT)

Non-resident contractors tax (NRCT)