The low-down on the new contractor withholding tax rules
By Shelley-ann Brinkley - 7 April 2017
If you are a contractor, or engage the services of a contractor, are you up to speed with the changes to the withholding tax rules?
From 1 April 2017, contractors can elect their own withholding
tax rate. This means they no longer have to have tax deducted
from their payments in line with their flat rate under the
withholding tax rules (otherwise known as the Schedular Payment
Schedular payments apply to contractors across a broad spectrum
of industries; from cleaners, farmworkers and gardeners, to
entertainers, sportspeople, labour-only builders and fishing boat
workers. The withholding rate can be equally as broad;
from 33% for examiners' fees, to 10.5% for personal service
With the new rules however, contractors can choose to elect a
lower withholding tax rate, down to a minimum of 10% (15% for
non-resident contractors). This is done by the contractor
electing a rate on their Tax Rate Notification for Contractors form
(IR330C) which they provide to parties they invoice. The idea
being that the lower rate will more accurately reflect the
contractor's end of year marginal tax rate.
The changes to the withholding tax rules do not however apply to
non-resident entertainers who will continue to be subject to
withholding tax at the flat rate of 20%, with no ability to reduce
The withholding tax rules have also been extended to apply to
contractors that work for 'labour-hire firms'. In addition,
the current exemption that applies if a contractor is invoicing
through a company does not apply to payments by labour-hire
firms. In other words, labour-hire firms will have to deduct
withholding tax from payments made to a contractor's company at the
standard rate of 20%, unless the contractor elects a lower rate of
no less than 10% or applies for a Special Tax Rate, which could be
as low as of 0%.
A labour-hire firm has a wide definition and essentially
includes "a person which has as one of its main activities the
business of arranging for a person to perform work or services
directly for clients of the entity". Essentially , if
the labour-hire arrangement is not incidental to the main business
of the labour-hire firm, the withholding tax rules will apply.
There is however an exclusion from the new labour-hire rule for
transactions with associated persons to prevent overreach of the
The Inland Revenue has allowed for a lead-in time of up to 1
July 2017 for those labour-hire firms that were not able to get
their payroll systems in place in time for 1 April 2017.
Special Tax Rate
Contractors subject to the withholding tax rules cannot apply
for a Certificate of Exemption, instead they now have the ability
to elect a 0% withholding tax rate, which means the contractors
will pay their income tax through the provisional tax system.
A good option for those contactors who are able to manage three
sizeable tax payments throughout the year, with a wash-up in the
annual tax return, but perhaps not such a good option for those
contractors who will struggle to ensure they have the cash-flow to
cover the payments when they fall due.
The election of a 0% withholding tax rate is done by completing
an IRD Special Tax Code Application form (IR23BS) and submitting
the form to the IRD.
The outcome of having a Special Tax Rate (rather than a
Certificate of Exemption) means the payments to the contractor must
be recorded on the payer's Employer Monthly Schedule, even though
no withholding tax is deducted. This is an added compliance
hassle for payers, however from a tax base protection perspective,
this ensures the contractor's income information is still provided
to Inland Revenue and therefore reduces the risk of
Voluntary Withholding Agreements
A further change sees those contractors who are not currently
subject to the withholding tax rules, able to elect into the rules
if they so choose and have payers deduct withholding tax from
payments made to them. In order to do this however, the payer
has to agree. Therefore, if this was going to cause
unnecessary compliance for the payer, the payer could choose not to
withhold. The standard rate under a voluntary withholding
agreement is 20%, unless the contractor elects a rate no lower than
The withholding tax changes will be positive for contractors in
the long run. However we foresee there will be a few teething
issues to overcome, such as the interplay with the attribution
rules; when a contractor's income must be returned in the
contractor's individual tax return, yet the withholding tax has
been withheld under the contractor's company IRD number.
Also contractors who have been paying tax via the provisional
tax system but will now have withholding tax deducted will, in the
first year or two, need to consider estimating their provisional
tax down which opens them up to IRD's use-of-money interest
Over time, these and other practical issues will be ironed out;
it just means in the short term closer attention will need to be
paid to contractors and those who make payments to contactors.
To discuss how the above impacts you, contact your Hayes Knight
advisor or the Hayes Knight Tax Team.
Associate - Tax Consulting
T +64 9 414 5444