Commissioner’s operational position on IS 19/01 – Income Tax – How schedular payment rules apply to non-resident directors’ fees

The Commissioner has released Interpretation Statement  IS 19/01: Income Tax – How schedular payment rules apply to non-resident directors’ fees.

The Interpretation Statement gives guidance on when tax must be withheld from directors’ fees paid to non-residents, and how much tax must be withheld when required to do so.

The view taken in IS 19/01 differs from the existing practice, which was to treat directors’ fees paid to a non-resident individual as having a source in New Zealand only to the extent that the directorship services are performed in New Zealand.

The Commissioner’s position now is that in most cases directors’ fees a New Zealand company pays to a non-resident individual are schedular payments (subject to certain exclusions) and will have a source in New Zealand, regardless of whether the directorship services are performed in New Zealand or from overseas.

Directors’ fees not subject to section YD 4(17D) of the Income Tax Act 2007

The Commissioner will apply the following operational position to directors’ fees that:

• are paid by a New Zealand company to a non-resident individual, and
• do not have a New Zealand source under section YD 4(17D), because New Zealand is not entitled to tax that income under a Double Tax Agreement (DTA).

New Zealand companies and non-resident individuals who have been taking a position that is not consistent with IS 19/01 can continue to apply that position to payments of directors’ fees until 31 March 2019.

From 1 April 2019, New Zealand companies and non-resident directors must apply the position as stated in IS 19/01. In most cases, directors’ fees paid to non-resident individuals will have a source in New Zealand, regardless of where the directorship services are performed, and tax must be deducted from these fees.

Directors’ fees subject to section YD 4(17D) of the Income Tax Act 2007

Section YD 4(17D) treats directors’ fees as having a New Zealand source where:

• a New Zealand company pays directors’ fees to an individual who is resident in a country that has a DTA with New Zealand, and
• that DTA permits New Zealand to tax those directors’ fees.

Section YD 4(17D) applies from income years beginning on or after 1 July 2018.

For non-resident individuals with a standard balance date of 31 March, section YD 4(17D) will not apply to directors’ fees paid to them before 1 April 2019, because this is the start of their next income year beginning on or after 1 July 2018.

For non-resident individuals with non-standard balance dates, section YD 4(17D) will apply to directors’ fees paid to them from the beginning of their next income year on or after 1 July 2018.

For further information or advice regarding IS 19/01, please contact Inland Revenue or your tax advisor.