RWT on use-of-money interest

Sections NF 1(2)(a), 1(2)(a)(x), 1(3) and 1(3A) of the Income Tax Act 1994 and the Income Tax Act 2004

Introduction

The Commissioner of Inland Revenue is no longer required to deduct resident withholding tax ("RWT") from use-of-money interest ("UOMI") paid to a taxpayer in respect of overpaid tax.

Background

The amendment is intended to reduce both compliance costs for taxpayers and administrative costs to Inland Revenue.

When UOMI paid by the Commissioner was introduced, it was intended that it be assessable and subject to the RWT rules. This ensured that, from the taxpayer's perspective, UOMI paid by the Commissioner was treated, as much as possible, like interest received from a bank.

In practice, however, it resulted in an overly complex system with significant compliance costs for taxpayers, especially in relation to RWT credits. Inland Revenue was also faced with increased administrative costs.

Key features

Section NF 1(2)(a) has been amended to exclude UOMI paid by the Commissioner from being subject to the RWT rules. Sections NF 1(2)(a)(x), 1(3) and 1(3A) have been repealed, as they become unnecessary as a result of the amendment.

UOMI paid by the Commissioner is no longer subject to withholding at source, although it is still gross income for tax purposes. It will now become part of a taxpayer's residual income tax calculation, and will either be added to the taxpayer's provisional tax payments or paid at the terminal tax date.

Application date

The amendment applies to interest payable as of 1 April 2005.