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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

Saurav Wadhwa is the Managing Director of IBBZ Accounting. IBBZ Accounting is one of the finest tax consulting firm based in Auckland, New Zealand. IBBZ Accounting has multiple business awards. 
Saurav Wadhwa is Masters in Taxation and Post Graduate in Law. Has dual membership with New Zealand Institute of Chartered Accountants and CPA Australia. He has a passion for Helping New Zealand Businesses. 


 


Awards and Recognition


 


As of Aug 2020 total number of 115 businesses saved from tax debt associated problems. Their written testimonials and Google Reviews provides authenticity of these numbers.


2019 IBBZ Accounting was Finalist in two categories: Excellence in Customer Service and Excellence in Business Planning. Westpac Auckland Business Awards


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


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


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


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



 


News Paper Articles.


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


InTheBlack Aug 2018 issue - CPA Australia In Practice Publication 


 


Contact us on info@ibbz.co.nz  or 09 272 8050

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