Recently, we informed you of changes to taxation for contractors, and payers of contractors. Together with Margaret Holmes, Director of accounting specialists, Engine Room, we held an event for RWA Technology People contractors to explain how these major changes influence the way contractors calculate taxes and we’ve shared some of the key discussion points here.
FAQs: What Contractors Want to Know about New Taxation
Our event was highly interactive, and there was plenty of discussion around this topic. Here are some of the key questions, with Margaret’s responses.
Q. How much control do we have as a contractor over selecting a withholding tax rate?
A. The standard rate of withholding tax is 20 percent. To get that rate, you have to provide your contracting agency with the IRD number that’s on the invoice. If you invoice out of a company, it’s the company IRD number. If you invoice as a sole trader, it’s your personal IRD number. If you don’t do that, the contracting agency has to deduct 45 percent tax. The good news is that you can actually choose a lower tax rate if you think that having 20 percent deducted will result in you paying too much tax, e. g. 12 or 15 percent, you can choose down as low as 10 percent.
Q. How many times can you change your withholding tax rate over a year?
A. Twice. You can apply for a special tax rate at any time, but you can self-select a lower or higher tax rate down to ten percent, up to twice a year.
Q. This is new legislation, but what’s been your experience with contractors applying for exemptions for this?
A. Somebody told us they’d applied for an exemption certificate and the IRD replied saying they didn’t need an exemption certificate because it doesn’t apply to them. This is because they applied for certificate of exemption, whereas it’s the special tax rate that they should have applied for. It’s certainly been our experience with other people who’ve applied for special tax rate, that if you can provide proof that you are a good tax payer, I think they don’t actually decline. There’s also the situation where a recruiter agency occasionally puts a contractor into a contract, and then that organization who’ve engaged the contractor, puts that contractor in somewhere else, and so the recruitment agency will apply for an exemption certificate [i.e. the special tax rate certificate]. We haven’t had an answer on this yet but I don’t think it will be a problem, as long as you can prove that you’re doing the right things.
Q. Can you deduct the withholding tax that’s been taken away from your provisional tax calculation?
A. Yes, absolutely. If you have myIR (your login for the IRD), you’ll be able to see whether withholding tax payments are going against your provisional tax automatic calculation, and if you need to pay any top-ups.
Q. Can you confirm transition dates for provisional tax payments and withholding tax?
A. On 7th of May you will need to make payment relating to your earnings in the year end of 31st March 2017, it’s the last payment on your provisional tax for the 2017 financial year. Going forward, you shouldn’t have to pay any provisional tax on the 28th of August.
Q. Do we have to continue to pay GST to the IRD?
A. Yes. To calculate this correctly, you need to base your GST return on your invoices rather than the money coming into your bank account from the recruitment agency. For example, if you’ve selected a withholding tax amount of 20%, when you submit your invoices to RWA, 20 percent tax will be taken off of the GST-exclusive amount, and then the GST would be put back on.
If you have any further questions regarding contracting, please get in touch with the team at RWA or if you’d like some more advice regarding the legislation, please contact the Inland Revenue Department.
Don’t forget to check the photos from this highly interactive and information heavy event in our Facebook gallery.