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Attempts made to simplify RWT deductions for small business

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What are the new rules of RWT on Dividend payments for closely held small companies.

The changes on Dividend and RWT are outlined in Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill.

The bill received royal assent on 30-03-2017. This Act came in to force on the same date, and in practice from 01-04-2017 income year.

Exemption of RWT deduction on Dividend Payment between companies

There is no need to deduct RWT from a fully imputed dividend paid to corporate shareholder. This is optional thus the intended user is closely held small companies, it is unlikely large companies would be using this option. A new section RE 2 (5) (fb) is inserted in the Act:

“a dividend paid by a company and derived by another company, if the dividend is fully imputed and the paying company chooses to exclude the dividend from being resident passive income”

This change has been made mainly to make easier for closely held companies to distribute dividend. There was a flaw in the tax system. On fully imputed divided paying company will deduct RWT and pay this to the IRD, and the recipient company will seek refund for RWT. The change reduces the compliance cost for both companies.

RWT on concurrent cash and non-cash dividends

The current tax system does not adequately deal with cash and non-cash dividend. The non-cash dividend need to be grossed up for RWT calculations, regardless of there is sufficient cash dividend to cover RWT.

When a company pays a non-cash dividend, such as a taxable bonus issue, the dividend is still subject to RWT. The non-cash dividend is required to be grossed up because the RWT cannot practically be withheld from the non-cash amount.

When a company pays a non-cash dividend concurrently with a cash dividend, both dividends are subject to RWT. The two dividends are treated as separate dividends meaning that the non-cash dividend is still subject to the gross-up even when the concurrent cash dividend is sufficient to cover the RWT obligation on both dividends. This can result in the RWT obligation across both dividends being higher than it should be. It also adds complexity and compliance cost.

A new section RE 14B is inserted in the Act. It provides the payer with the option of combining cash and non-cash dividend payments and accounting for RWT as though they were a single dividend. The proposed new section will only apply when the cash dividend alone is sufficient to cover the total RWT owing, meaning that RWT will be paid by deduction rather than gross-up, and the payer has elected for the section to apply.

The amount of RWT that the payer must withhold is calculated using the following formula:
(tax rate × (dividends + tax paid or credit attached)) − tax paid or credit attached

tax rate is the basic rate set out in schedule 1, part D, clause 5 (Basic tax rates: income tax, ESCT, RSCT, RWT, and attributed fringe benefits);

dividends is the total amount of the cash dividend and the non-cash dividend paid before the amount of tax is determined;

tax paid or credit attached is the total of the following amounts:

(i) if a dividend is paid in relation to shares issued by an ICA company, the total amount of imputation credits attached to the dividends;

(ii) if a dividend is paid in relation to shares issued by a company not resident in New Zealand, the amount of foreign withholding tax paid or payable on the total amount of the dividends.

Example was provided in TIB Vol 29 No 5 June 2017 page 51

Amount of cash dividend required to satisfy the RWT liability
If a taxpayer provides a non-cash dividend and wishes to provide a cash dividend simply to satisfy the RWT liability on the noncash dividend then the following formula provides how much cash dividend is required: cash dividend = 0.4925* non-cash dividend – tax paid or credit attached
Example Co. X wishes to provide a non-cash dividend of $360. The non-cash dividend has imputation credits of $140 attached. Co. X wishes to provide a cash dividend solely to satisfy the RWT liability.
cash dividend = 0.4925 * 360 – 140 = $37.30
If Co. X provides a cash dividend of $37.30, the RWT payable is also $37.30.

The above simplifies the payment of RWT, this can be used to clear overdrawn shareholder current account. Intended users are the closely held small companies. However, there is still layer of complexity for deducting RWT.


Saurav Wadhwa is a Principal Accountant at IBBZ Accounting Limited

M Bus (TAX) PG Cert (LAW) CA CPA

Membership and Qualification:

- Masters in Professional Business Studies (Taxation) with Distinction from Auckland University of Technology

- Post Graduate Certificate in LAW, Law School at Auckland University of Technology

- Chartered Accountant(CA), New Zealand Institute of Chartered Accountants (NZICA)

- Certified Practicing Accountant(CPA), CPA Australia

- Bachelor of Commerce, Grad. Cert. in Business from Auckland University of Technology

Saurav Wadhwa

Saurav has many years of practical experience in tax & accounting services and is the co-founder of IBBZ Accounting Limited.  He is qualified both in law and accounting. Saurav has worked in various tax & accounting specialist roles for large corporates in New Zealand. He loves to work with Small Businesses.

His key focus is on:

  • Tax advisory for small and family operated businesses on a wide range of taxation issues.

  • Legitimate tax saving structures.

  • Advising on range of new business issues.

  • Ensuring business growth is attained.

  • Effective cash flow planning.

Saurav specialises in Tax Disputes resolution, Tax Relief applications, Tax Debt resolution/management, and representation in Tax Audit. Saurav can represent you in Taxation Review Authority,  in Tax Dispute Court Cases or he can represent you during Tax Audit Investigations.

Blend of skills in Tax laws and accounting, makes him perfect advisor for small businesses and individuals like you. Saurav understands how to safeguard your business from creditors risk, maximise the business growth and pay low taxes. He can be your good strategic and business partner. He is of a friendly nature and easily approachable.

Saurav understands the numbers very well. He is a qualified Chartered Accountant and registered with highest professional accounting bodies of Australia and New Zealand. He can help you to plan for the future to satisfy all your financial needs.

Consumed by a hunger for knowledge, Saurav has never stopped furthering his education or expanding his pool of knowledge. Nothing gives Saurav more satisfaction than assisting his clients to achieve their financial goals. His diligence, passion and accuracy has earned him a reputation as a reliable professional who strives to serve his clients above and beyond the call of his duties.

Saurav was nominated for the Best Accountant of the year and the Young Entrepreneur of the year, and his company IBBZ Accounting won the award of Best Small Business 2014. In 2015 Saurav won the award of Best Accountant of the Year.

In 2017 Saurav was appointed as a committee member to New Zealand Public Practice Board of CPA Australia. 

Saurav is a dedicated family man. Saurav is very fond of outdoor activities and enjoys pretty much all outdoor activities: running, bike, motorbike, snorkel, fishing, skiing etc. Saurav, is also a self-confessed workaholic, spends some of his free time thinking about his client’s affairs and forecasting their financial future.

He can be contacted on saurav@ibbz.co.nz  or 09 272 8050


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Guest Wednesday, 26 September 2018