110289 Topic 7: Paying Tax
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Methods of Payment
Withholding Tax / Source deduction
- • The payer must withhold a certain proportion of the gross payment and pay only the net amount to the payee (e.g., PAYE, RWT, NRWT).
- • Make the tax payment as “painless” and convenience for taxpayers
- • Cash flow advantages for the Government.
Taxpayers who do NOT have tax deducted at source (eg. business income), are responsible for paying their own income tax
Methods of Payment - Due date
- • Tax payments MUST be made on or before a specific due date.
- • If a due date falls on a weekend / public holiday, it is acceptable to be posted on the next business day.
Pay As You Earn
PAYE is a down payment deducted from salary and wage earners by employers, and paid over to Inland Revenue.
s BE (1) A person who makes a “PAYE income payment” MUST withhold an amount from the payment under the PAYE rules.
If the payment is made to an employee, PAYE MUST be deducted
s RD 3 (1) (a) A “PAYE income payment” means:
- • Payments of salary or wages (s RD 5)
- • Extra pays (s RD 7)
- • Schedular payments (s RD8) – ie. Payments to company directors
Pay As You Earn - Amount of tax deduction from salary or wages
- • The rate of deduction depends on the employee‟s tax code and the amount of payment
- • Many salary and wage earners (non-filing taxpayers) do NOT need to complete an IR3, as the employee tax code will ensure the correct amount of tax is deducted.
Resident Withholding Tax
RWT is withheld from resident passive income (ie, interest and dividends) paid to NZ residents.
RWT deductions are credited against total income tax liability, and may be refunded - not a final tax
RWT must be paid to Inland Revenue by the 20th of the following month of deduction. If RWT deductions from interest < $500 per month, RWT deductions are only required @ 20 Oct and 20 April.
The recipients of “resident passive income” must provide the payer with their IRD number, so that the amount of RWT deducted can be correctly matched with their tax records
Non Resident Withholding Tax
NRWT is withheld on certain types of income paid to non-residents, such as dividends, interest, and royalties.
The entity paying the “non-resident withholding income” pays the NRWT collected to Inland Revenue.
The rates of NRWT vary depending on the type of income, and whether there is a Double Tax Agreement.
• Taxpayers who earn income that does not have tax deducted at source (eg. business income), may be required to pay provisional tax
• Provisional taxpayer - Residual income tax (RIT) is more than $2,500, or elect to pay provisional tax
• Provisional taxpayer must pay their income tax in advance by way of instalments during the tax year.
• Provisional tax paid for a tax year is credited against the income tax liability for that year
Terminal tax is the balance of income tax to pay for a tax year, after allowing for all available tax credits, and after provisional tax payments.
Independent Earner Tax Credit
Tax relief to middle-income NZ residents, who do not receive core assistance from the Government
From 1 April 2009, the IETC delivers $10 per week ($520 p.a.) to individuals, who earn between $24,000 and $44,000 p.a. and who do not receive a benefit, Working for Families tax credits, or NZ Superannuation.
Abates at 13c for every dollar of income in excess of $44,000; Phases out at net income of $48,000.
Charitable or Other Public Benefits Gifts
- For charitable purposes
- To an approved organisation and donations to schools
- Gifts of money of $5 or more
- Receipts must be attached
- Tax credit is 33.33% of amount paid, but must not exceed the individual‟s taxable income
- Use the Tax Credit Claim Form (IR526)
Family Scheme Tax Credits - Rationale:
• To provide financial help to families with children 18 years and under who are financially dependent;
• Assistance targeted on low and middle-income families
Family Scheme Tax Credits - WFF is made up of the following credits:
- • Family Tax Credit [FTC]; paid for each dependent child who is living at home and aged 18 years or younger.
- • In-Work Tax Credit [IWTC] (gradually replacing Child Tax Credit[CTC] from 1/4/06); an extra payment to full-time income earners,who receive no other government assistance.
- • Parental Tax Credit [PTC]; provides support to working familieswith a new-born child.
- • Family Credit Abatement [FCA]; reduces overall familyassistance by 21.25c for ever dollar of a family‟s income inexcess of $36,350 per year
Family Scheme Tax Credits - WFF calculation
WFF Tax Credit = FTC + (IWTC or CTC) + PTC – FCA
Calculation of Taxable Income
- Annual Gross Income
- – assessable income allocated to tax year
- - amount derived / timing regime
- Annual Total Deductions
- – expenditure or losses incurred
- - general permission/general limitations
- - in deriving assessable/business income
= Net Income, or Net Loss (if negative)
Less losses brought forward
Calculation of Tax Liability - Steps to calculate tax liability
1) Net income = Annual gross income – Annual total deductions
2) Taxable income = Net income – Available tax losses
3) Income tax liability = Taxable income X Basic tax rate
4) Terminal tax = Income tax liability – Tax credits
Satisfying Tax Liability
“Satisfying” is similar to “settling” the tax liability.
The liability is first satisfied by available tax credits, then through the payment of terminal tax.
- Tax credits (in specific order)
- - Non-refundable credits (i.e., foreign tax credits)
- - Credits for supplementary dividends (not important in this course)
- - Imputation Credits (Company tax passed to shareholders)
- - Remaining (refundable) Credits (i.e., PAYE, RWT/NRWT, Provisional tax)
Satisfying Tax Liability - The order exists to enable
- • Non-refundable credits to be set off first;
- • Imputation credits not used can be carried forward;
- • Refundable credits not used can be repaid.
Satisfying Tax Liability - Tax payable, Tax refund
- Income tax liability exceeds tax credits
Tax refund (surplus credits)
- Tax credits exceed Income tax liability
- • non-refundable credits will not be repaid
- • imputation credits (individual) – carried forward
- • Refundable credits (ie. PAYE and Provisional tax)
Provisional Tax - Who is obliged to pay?
Applies to taxpayers earning income not taxed at source, e.g. business income
Who is obliged to pay?
- Provisional taxpayer, i.e. a taxpayer whose Residual Income Tax (RIT) is $2,500 or more, or who elects to be a provisional taxpayer.
- RIT (NZT 14.4.3); amount of income tax due for a year after deducting all tax credits except provisional tax
Provisional Tax - Methods of calculation, When are payments due?
- - Standard (“uplift”/”safe harbour”)
- - Estimation
- - GST ratio
- When are payments due – generally:
- - Standard and Estimation - 3 instalments; B,D,F
- - GST ratio – 6 instalments; A,B,C,D,E,F
Provisional Tax- Methods of Calculation
Provisional Tax - example using standard method
"An individual uses the standard method for calculating provisional tax for the 2015 year, RIT for the pervious year (2013-14 tax year) is $25,340 (more than $2,500). The year
end is 31 March"
$25,340 X 105% = $26,607 and will be payable in 3 equal instalments
- 1st due on 28 August 2014 $8,869
- 2nd due on 15 January 2015 $8,869
- 3rd due on 7 May 2015 $8,869
UOMI (Use of money interest)
- To minimize any advantage or disadvantage to overpay or underpay tax
- Not a penalty
- Applies to all provisional taxpayers whose current year RIT is over $2,500.
- If you use the standard (uplie) method for calculating provisional tax, and your RIT is less than $50,000, then UOMI only applies from the terminal tax date.
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