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RWT On Dividends: Tax and Accounting Treatment

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What is RWT (resident withholding tax)

It is a tax deducted on dividend before making a payment to the shareholder. For example, if company made a profit of $100 before tax, $28 would be income tax. Net profit after tax $72 will be a liability payable to shareholders. A payment of $72 will be made to the shareholders, the name of this payment is dividend.  The IRD is interested in collecting tax from this payment, with current highest tax rate being 33%, further 5% of deduction is imposed on the company. Hence, $5 will be deducted and paid to the IRD, this is called RWT.

What about non-cash dividend how would RWT apply

Non-cash dividend need to be grossed up

RWT = (tax rate × dividend paid / (1 – tax rate)) – tax paid or dividend attached

 

A non-cash dividend of $72 with imputation credits of $28, and no FDP credits:

RWT = (0.33 × $72 /(1 - .33)) - $28 = $7.46

 

Thus dividend would be $107.46 (72+28+7.46)

 

Are there any simple rules of RWT for small companies?

 

The government proposal is out there, which may allow the small companies to be exempted for RWT deduction. This will be done via declaration signed by the directors that they are responsible for the payment of RWT. This will allow dividend to be paid without deducting RWT, and the recipient can pay shortfall in their tax return. But nothing is final yet. Watch the space.

 

Clearing of overdrawn shareholder current account by dividend payment and RWT treatment

 

A non cash dividend can be paid to clear overdrawn shareholder current account. Att a same time pay cash dividend to settle RWT liability. This new method is useful to clear the SCA and no gross required. A new section inserted in the income tax act section 14B, can be used from 01-04-2017 onwards. 

A formula is 

tax rate × (cash dividend + non-cash dividend + tax paid or credit attached) – tax paid or credit attached

 

using above numbers 

RWT = 0.33*(67+5+28)-28 =$5

Accounting entry would be:

Credit to SCA $67

Credit to RWT liability $5

Debit Dividend $72

 

RWT On Dividends: Tax and Accounting Treatment

What is RWT (resident withholding tax)

It is a tax deducted on dividend before making a payment to the shareholder. For example, if company made a profit of $100 before tax, $28 would be income tax. Net profit after tax $72 will be a liability payable to shareholders. A payment of $72 will be made to the shareholders, the name of this payment is dividend.  The IRD is interested in collecting tax from this payment, with current highest tax rate being 33%, further 5% of deduction is imposed on the company. Hence, $5 will be deducted and paid to the IRD, this is called RWT.

What about non-cash dividend how would RWT apply

Non-cash dividend need to be grossed up

RWT = (tax rate × dividend paid / (1 – tax rate)) – tax paid or dividend attached

 

A non-cash dividend of $72 with imputation credits of $28, and no FDP credits:

RWT = (0.33 × $72 /(1 - .33)) - $28 = $7.46

 

Thus dividend would be $107.46 (72+28+7.46)

 

Is there any simple rules of RWT for small companies?

 

The government proposal is out there, which may allow the small companies to be exempted for RWT deduction. This will be done via declaration signed by the directors that they are responsible for the payment of RWT. This will allow dividend to be paid without deducting RWT, and the recipient can pay shortfall in their tax return. But nothing is final yet. Watch the space.

 

Clearing of overdrawn shareholder current account by dividend payment and RWT treatment

A non cash dividend can be paid to clear overdrawn shareholder current account. And at a same time pay cash dividend to settle RWT liability. This new method is useful to clear the SCA and no gross required. A new section inserted in the income tax act section 14B, can be used from 01-04-2017 onwards.

A formula is

tax rate × (cash dividend + non-cash dividend + tax paid or credit attached) – tax paid or credit attached

 

using above numbers

RWT = 0.33*(67+5+28)-28 =$5

Accounting entry would be:

Credit to SCA $67

Credit to RWT liability $5

Debit Dividend $72

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Saurav Wadhwa is a Principal Accountant at IBBZ Accounting Limited


 


Saurav Wadhwa 427x640


Saurav has 15 years of practical experience in tax & accounting services. 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.


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.


Awards



2014 IBBZ Accounting won the award of Best Small Business 2014. 


2015 Saurav won the award of Best Accountant of the Year.


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


2018 CPA Australia filmed Saurav Wadhwa and IBBZ Accounting for their marketing campaign to showcase successful accountants in New Zealand Public Practice.  


2018 IBBZ Accounting was Finalist in Westpac Auckland Business Awards: Strategy and Business Planning 2018


 


News Paper Articles.


Sunday Star Times -Fairfax Media -12-08-2018


InTheBlack Aug 2018 issue - CPA Australia In Practice Publication 



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

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Guest Tuesday, 18 December 2018