What is NRWT and on what items NRWT apply?
Non resident withholding tax is a tax on passive income of non-resident of New Zealand.
It applies on
Interest
Dividend
Royalties
Generally many small businesses pay NRWT on interest, which means if you are doing business in New Zealand and it has been pretty hard for you to get the funding you can borrow the money from overseas. You will get deduction on the borrowed money against your assessable income.
Dividend- in order to get funding you may decide to dilute your shareholding and get overseas investor. NRWT may apply on all dividends payments made to overseas investors.
Dividend rules are covered under RF8 to RF12 of ITA 2007.
Royalties- you may decide to use brand name, copyrights, patents, designs, specialist knowledge or information of the Non Resident. Any such payments will give you deductions against your assessable income. It also covers payments to authors, editors or composers for each copy of a work sold, performed or broadcast. NRWT will apply on all such kind of payments
It doesn’t matter what such payments are called for accounting purposes (for example, management fees, technical fees, administration charges, head office charges), if they fit the definition of a royalty, NRWT may be deducted.
Fees associated with a loan agreement may not be interest subject to the NRWT rules. The Commissioner addressed this topic in Public Information Bulletin No 126, May 1984, supplement 1 at p 4.
The main reason of this tax is to encourage fairness in our tax system. For example if you have borrowed funds from an overseas investor/financial institution or parent company, on the amount of interest paid you will get deduction in your tax return. Which means, your tax liability is reduced? That is why tax is imposed to ensure the fairness.
Definition of interest:
Section YA 1 interest is broadly defined to mean every payment received by a lender from and in respect of money lent with the exception of:
• repayment of the money lent, and
• a redemption payment.
The term “money lent” is also defined by s YA 1. The effect of the definition is that most of the generally accepted forms of loan arrangement are within the terms of the definition. The notion of money lent is defined to mean:
• any amount of money lent, advanced, deposited or otherwise let out (on current account or otherwise)
• the giving of credit, including the forbearance of any debt, on current account or otherwise
• any amount advanced, deposited, let out or for which credit is given pursuant to an arrangement similar to the above, and
• any amount paid to, or for the benefit of or on behalf of, another person in consideration of an agreement that that person, or an associated person of that person, pay back a greater amount.
In Dawson v C of IR (1978) 3 NZTC 61,252 the High Court accepted the Commissioner’s concession that interest, like income, must be money or capable of conversion into money.