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February 6, 2017

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Tax, Contractors & Schedular Payments

April 4, 2017

From the 1st of April 2017 there are some changes to tax legislation that will affect all new contractors and those who hire them. The changes are an expansion of the existing rules around schedular payments and the taxing of these payments.

 

There are three main changes to the schedular payments regime. The first change is that for contractors, the IR330 form is being replaced by the new IR330C form. The old form will remain in use for declaring tax codes for salary and wage earners while all contractors will fill out the new form which is tailored specifically for them and their updated tax requirements.

 

The second change is that now, rather than just using the default rates of tax deductions outlined in Schedule 4 of the Income Tax Act, contractors now have the freedom to select their own tax rate (above a minimum of 10%). As every individuals requirements are different, this new flexibility will enable many to get their taxes right from day one and minimise the large fluctuations of annual tax refunds or payments due that can result from the default rates.

 

The third change is the addition of a new activity to the schedular payments regime, number 19, labour hire business.

 

If You Already Receive Schedular Payments...

Nothing changes until you switch jobs or sign a new contract and need to fill out the new IR330C form that replaces the old IR330 form you would have filled out previously. When you fill in the new form you can either keep the old default rate of withholding tax that you have now or choose a new rate from 10% up.

 

If you want to change your current rate without changing jobs, you can fill out the new form and give it to your employer so that they can adjust the deductions that they make from your schedular payments.

 

If You Work for a Recruitment Agency...

One of the main changes in the new rules is that they now explicitly apply to contractors who are hired through a labour hire business (employment recruiter or agency). This essentially closes what many considered a loophole in the legislation.

 

The agency will deduct tax from the payments they make to you. This applies regardless of whether you are an individual, company or trading through a trust. You will need to fill out the new IR330C and select a tax rate that fits your circumstances.
 

If you complete the IR330C but do not select a tax rate, the default rate of 20% will be deducted. If you do not complete the form then from the 1st of April the non-notification tax rate of 45% applies. In order to not lose half your income to tax, you need to accurately complete the form as soon as possible.

 

If You are a Self-Employed Contractor...

If you work directly for a business as an independent contractor and are not in an identified activity, you now have the ability to choose to have tax deducted from your schedular payments.

 

Both you and your employer must agree to this new approach as there is no legal requirement for them to take on the extra tax compliance burden for you. If you both agree, you need to complete the IR330C and submit it to your employer to notify them of your preferred tax rate. If you have multiple employers, each of them must agree separately to your new tax deductions and you will need to complete a separate IR330C for each employer.

 

If your employer doesn't agree, you must continue to pay your own taxes as you currently do.

 

If You Employ Contractors...

You need to check that your internal systems are up to scratch and able to handle the new requirements.

 

The first thing you need to do is check that your payroll software is capable of handling custom tax rates. You will then need to bring your payroll team up to date on the new requirements, new forms and new processes that you and your hires will have to go through. Once all of the paperwork has been completed, you will process them as with any other employee and declare the deductions on your Employer Monthly Schedule (EMS), you will of course ignore all of the deductions other than the withholding tax, as the contractor is liable for their own ACC, child support, KiwiSaver and other payments.

 

As an employer of contractors, you may need to update your agreements and contracts to reflect the new requirements of the updated legislation.

 

If you are a contractor, you can not apply for a certificate of exemption from the IRD for the tax on your schedular payments. Instead, you will need to apply for a special tax rate of 0%. This applies regardless of how you trade, either individual, trust or company.

 

If you have any questions, engage professionals like the MBP Payroll Administration team and our human resources partners for tailored advice on everything from software to contracts and everything in between.

 

This advice is general in nature. Every situation is unique and requires tailored advice. MBP have the expertise to help you make informed decisions about your schedular payments and tax rates. MBP Payroll Assist is an affordable option for business owners looking to outsource their payroll compliance to and expert team of payroll and PAYE experts. Get in touch for a free consultation by emailing mailbox@mercerbp.co.nz or call us on (07) 378 6655.

 

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