Pay The Right Tax
Getting returns on investments is exciting. It may feel like free money, but you have to pay tax on everything you earn. Mark Russell, from PwC, covers the tax basics when you’re starting out investing.
19 October 2021
If you earn wages or a salary, tax is straightforward. Your employer deducts tax by Pay As You Earn or PAYE each pay day, and generally you don’t have any further tax to pay, or even have to file a tax return. Everything happens automatically. Once you start investing, your tax obligations can change, but how they change depends on the specific investment. Here are some common kinds of initial New Zealand investments, and their tax rules.
With term or bank deposits, the bank deducts Resident Withholding Tax (RWT) from interest it pays to you. Inland Revenue then credits this against the tax due on the interest and your other taxable income. The bank will ask you to declare which rate of RWT applies to you, and will give you a guide to figure out the correct rate. Basically, you pick the rate that matches the tax rate that will apply to the interest. At the end of the tax year, if you chose the correct RWT rate and the interest is the only income you receive, other than wages and salary, you don’t need to file a tax return. If you chose a rate of RWT that was too low, Inland Revenue will automatically assess your income, and work out if you have additional tax to pay. If too much tax has been deducted, Inland Revenue will automatically refund you the excess.
Fixed interest (bonds)
With fixed interest, tax on the interest ‘coupons’ paid on bonds and other debt investments is the same as for term or bank deposits. If you sell a debt investment before its maturity date, any profit you make is likely to be taxable. Any loss can be claimed against your other taxable earnings. If there’s tax to pay, you must file a tax return and pay the tax directly to Inland Revenue.
Managed funds, including KiwiSaver
New Zealand managed funds, including KiwiSaver, are ‘Portfolio Investment Entities’ or PIES for tax purposes. This means the fund calculates and pays tax straight to Inland Revenue for your share of the fund’s income. The company or provider will ask you to confirm the tax rate it will use for you, known as the Portfolio Investor Rate or PIR. You should be given material to help you choose the correct PIR. If you select the right PIR, you don’t need to include any income from the fund in a tax return, even if you file a tax return for other reasons. You won’t have any additional tax to pay to Inland Revenue.
New Zealand shares
When you invest in New Zealand shares, you are usually taxed only on the dividends you receive. These will have ‘imputation credits’ attached for tax already paid by the company, and some Resident Withholding Tax deducted up to a total of 33 per cent. If New Zealand shares are your only investments, you don’t need to file a tax return. This applies whether you buy shares directly, or via a platform.
You’ll be taxed on rent from tenants, and you can claim deductions for expenses you incur in owning and maintaining the property. This might include interest on any borrowings used to buy the property, and fees paid to tenancy managers. You will need to file a tax return at the end of the tax year, and pay any tax due directly to Inland Revenue. You will also need to keep sufficient books and records to be able to show how you calculated the tax to Inland Revenue if it queries your position.
Paying tax to Inland Revenue
If the total amount of tax you had to pay to Inland Revenue for the last tax year after deducting credits for PAYE, RWT and overseas withholding tax credits is NZ$2,500 or more, then in the current year you’ll need to make instalment payments of tax during the year known as ‘provisional tax’. For example, for the tax year to 31 March 2020, provisional tax payments are typically due on 28 August 2019, 28 January 2020 and 28 April 2020. You can face penalties and interest if you miss those dates or pay the wrong amount, so it’s worth spending some time understanding those rules or getting an accountant to help.
Published 25 November 2019
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