Resident withholding tax and intermediaries or agents

2009 amendments clarify the tax credit and RWT rules for amounts received by agents acting for NZ residents with foreign investment fund interests.

Sections RE 10B, RM 8(3) to (6) of the Income Tax Act 2007; section NF 2E of the Income Tax Act 2004

The amendments clarify the operation of the tax credit and resident withholding tax (RWT) rules in relation to amounts received by intermediaries or agents acting on behalf of a New Zealand resident with foreign investment fund (FIF) interests.

The amendments apply to a natural person who begins an income year with more than $50,000 of attributing interests in a FIF, and who consequently is required to include FIF income from those interests as taxable income.

Background

If a New Zealand resident has more than $50,000 of FIF interests during an income year:

  • section EX 59(2) requires the resident to calculate FIF income using a FIF calculation method (section EX 59(2)); and
  • all distributions derived from the attributing FIF interests in that income year are no longer treated as dividends (section CD 36).

Section NF 7(5) of the 2004 Act permitted either the intermediary or agent, or the New Zealand beneficial recipient of the distribution to apply for a refund of any amounts withheld by the intermediary or agent. However, that provision applied only if the amount withheld was in relation to resident withholding income. As the effect of section CD 36 was that distributions from the FIF were no longer dividends, technically, no refund could be made.

It is considered there are likely to be a number of cases where the intermediary or agent may not necessarily be aware of the change in circumstances of the New Zealand resident at the time the distribution is on-paid to the New Zealand resident. In these circumstances, it is appropriate that amounts withheld from a distribution from a FIF by an intermediary or agent in the belief the distribution is resident passive income should be treated as a RWT credit.

Key features

A technical amendment is necessary for both the 2004 or 2007 Income Tax Acts to ensure that a tax credit is available for a New Zealand resident when an intermediary or agent for the resident:

  • received a distribution from attributing interests in foreign investment funds owned by the New Zealand resident; and
  • subsequently on-paid the distribution to the New Zealand resident; and
  • withheld an amount on account of resident withholding tax in the belief the resident was within the $50,000 threshold rule in section CQ 5(1)(d) or (e) and that the on-payment was resident passive income of the New Zealand resident.

The amendments provide that:

  • the intermediary, agent or the recipient can apply for a refund of the amount withheld if section EX 59(2) applies to the recipient; or
  • if no application for a refund is made by 31 March following the withholding, the amount withheld is treated as a RWT tax credit for the recipient.

Detailed analysis

Section RM 8 of the Income Tax Act 2007 Act has been amended to provide that the intermediary, agent or recipient of the distribution may apply for a refund of the amount withheld. However, the application must be made to the Commissioner on or before the 31 March following the date of the withholding.

If no application is made by the 31 March following the date the amount is withheld from the distribution from the FIF interests by the intermediary or agent, section RE 10B treats the amount withheld by the intermediary or agent as a RWT tax credit of the recipient. The amount withheld by an intermediary or agent is treated as RWT for the purposes of subpart LA, section LB 3, and the refund rules in sections RM 1 to RM 10.

Section RE 10B(2) also provides that the amount withheld is treated as tax paid in excess for the purposes of Part 10B of the Tax Administration Act 1994 (Transfers of excess tax). These amendments ensure both the recipient and the Commissioner can use the amount withheld to satisfy other tax obligations of the recipient.

Similar amendments have been made in section NF 2E in the Income Tax Act 2004 to permit the amount withheld to be treated as a RWT tax credit. This amendment also ensures that section NF 7(5) of the 2004 Act can operate as intended to validate past applications by the intermediary, agent, or recipient for a refund of the amounts withheld.

Application date

The amendments in section RE 10B and RM 8 apply from the beginning of the 2008-09 income year.

The amendment made in section NF 2E of the Income tax Act 2004 applies from the beginning of the 2005-06 income year.