Background and legislation

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Background and legislation

Background

This page provides background and legislative tax information for those paying a non-resident contractor.

The term "non-resident contractor" applies to any person who is not a tax resident of New Zealand and who undertakes any contract activity under a contract, agreement or arrangement. The term does not apply to contracts of service between an employer and employee.

Non-resident contractors are liable for income tax in New Zealand on any income they derive in New Zealand from any business or contract wholly or partly carried on or performed in New Zealand. The liability arises under sections BB 1, BB 2 & 3, BC 7, BD 1, YD 4 and RB 3 of the Income Tax Act 2007 (the Act).

The non-resident contractors tax (NRCT) rules were introduced with effect from January 1982, and were initially focused on activities of non-resident contractors associated with large construction-related projects and, to a lesser extent, on the provision of equipment and personnel.

From 22 March 1990 the scope of "contract activity" was changed to include all contracts for service, whether or not they were in connection with a "contract project". This amendment ensured that any non-resident person who performed any contract for service in New Zealand is subject to Schedule 4 of the Act.

Schedule 4 requires the payer of the contract payment to deduct 15% tax from the gross contract payment at the time of the schedular payment to the non-resident contractor. The schedular tax rate increases to 30% non-declaration for a non-resident contractor and 20% non-declaration for a non-resident contractor company (see the "Accounting for tax" section for more information). The non-resident contractor may get relief from tax deducted at the time of payment by getting a certificate of exemption or special tax rate certificate from Inland Revenue.

Additional information on NRCT is available on Interpretation Statement IS10/04.

Legislation

In terms of section RA 4 of the Act, a person must satisfy any tax liabilities they have in accordance with subpart BE. Pursuant to section BE 1(1) of the Act, a person who makes a schedular payment must make a deduction from the payment in accordance with the PAYE rules. Those rules are defined in section YA 1 of the Act. Under Part R of the Act, a person who contracts with a non-resident contractor must deduct NRCT from contract payments that are schedular payments, as defined in Schedule 4 of the Act.

Sections RD 2 and RD 8 of the Act recognise that Schedule 4 forms part of the PAYE rules.

Under sections RD 2 and RD 8 of the Act, all payments of the classes specified in Schedule 4 are schedular payments for the purposes of the PAYE rules. The Schedule is made up of parts A - I. Part A of the Schedule consists of "payments to non-resident contractors", and prescribes the rate of tax deduction to be 15 cents for each dollar.

Note: Do not confuse NRCT with tax imposed under the non-resident withholding tax (NRWT) legislation. NRWT applies to interest, dividends, and royalties (as defined in section YA 1 of the Act) that non-residents derive from New Zealand. For more information about NRWT, see the various Tax Information Bulletins (TIBs issued on the subject or Non-resident withholding tax payer's guide (IR291).