Penalties applicable to non-resident contractor when exempt from tax in New Zealand

Sections 141(2), 141AA, 183A(1) and 183D(1) of the Tax Administration Act 1994

Introduction

A penalty of $250 per employer monthly schedule will be imposed if an employer fails to make a required deduction from the withholding payment to a non-resident contractor. This penalty is capped at $1,000 per employer monthly schedule. The amendment applies only in cases where the non-resident contractor that the withholding payment is made to is totally relieved from paying tax in New Zealand. It replaces the present shortfall penalty because that penalty is not appropriate in these circumstances.

Background

New Zealand employers are required to withhold non-resident contractors' withholding tax from contract payments to non-resident contractors, regardless of whether the non-resident qualifies for total tax relief under a double tax agreement. The Commissioner of Inland Revenue is able to issue an exemption certificate in these situations, but in some situations obtaining the certificate may be overlooked.

If the contractor qualifies for total relief under a double tax agreement the contractor is refunded the tax paid when a tax return is filed at the end of the year. However, if the New Zealand employer does not withhold tax, a shortfall penalty was payable. The shortfall penalty was imposed on the New Zealand employer even if no New Zealand tax was payable by the non-resident contractor.

The new section changes this by providing for a different penalty to apply. A penalty is needed because it ensures that non-resident contractors apply for a certificate of exemption, which in turn provides useful information to the Commissioner.

Key features

New section 141AA of the Tax Administration Act 1994 imposes a penalty on an employer who makes a withholding payment to a non-resident contractor for the purposes of the Income Tax (Withholding Payments) Regulations 1979 if that employer does not withhold the correct amount of tax. The penalty applies only if the non-resident contractor is exempt from all liability to pay tax in New Zealand on their income.

The employer is liable for a shortfall penalty of $250 for each return period for which the employer failed to make a required tax deduction from a withholding payment. The amendment provides that in these circumstances the employer will not be subject to the normal shortfall penalty provisions. The penalty is capped at $1,000 per employer monthly schedule.

Application date

The amendment applies to withholding payments made on or after 1 April 2005.