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Tax Talk: Withholding Tax Changes – Labour Hire Firms

Significant changes to the withholding tax regime come into force from 1 April 2017.  The key changes are allowing recipients of withholding payments to elect their withholding rate (with minimum rates applicable) and to extend the regime to all payments made to contractors by labour hire firms.

Under the current (and continuing rules), common schedular payments subject to withholding tax are:

  • Company directors’ fees
  • Payments for labour-only work in the building industry
  • Commissions paid to insurance agents or salespersons
  • Payments for the majority of agricultural, horticultural and forestry activities
  • Contract payments to non-resident contractors

Under the present regime, taxpayers may have tax withheld at a rate that does not accurately reflect their ultimate tax liability.  While it has been possible for contractors to alter their rate by obtaining a special tax code, the process requires a taxpayer to apply to Inland Revenue with extensive supporting information.

Self-selected Rates 

From 1 April 2017, those receiving schedular payments will have the ability to change the rate of tax withheld by their payer.  The relevant form is an IR 330C (Tax rate notification for contractors), which must be completed by a contractor and provided to their payer should they wish to have a different withholding rate applied to their income.  Entities making schedular payments are required to provide an IR 330C to new contractors and to existing contractors that request the form. A contractor may change their withholding rate up to two times in an income year, with any further changes requiring consent from their payer.

The minimum withholding rate that can be elected by resident contractors is 10%, and 15% for non-residents.  Should a payee require a withholding rate lower than the prescribed minimums, they must apply for a special tax code using an IR 23BS (Special tax code application) form.

If an IR 330C is not completed by a schedular recipient, then the standard rate will apply.  If a taxpayer does not provide the payer with their name and IRD number, the rate of withholding is required to be 45%.

Regime Extended: Labour hire firms 

The withholding regime has been extended from the 1st of April 2017 to include all payments by a labour hire firm to anyone providing work or services to clients of that business under a labour hire arrangement.  For example:

  • A contract involving an IT support company making professionals available to an insurance company to work for them for a period of time, at the direction of the insurance company, would be classified as a labour-hire arrangement.

The following example would not be classified as a labour-hire arrangement:

  • An IT company has a contract with an insurance company to implement a new system, and the IT company contracts IT professionals and controls them to work on and complete the project.

This type of arrangement is different to a labour-hire arrangement, because the workers are not performing work or services directly for the clients of the IT company.  The contract between the IT company and the insurance company is ‘one to achieve a particular result or outcome’.

The standard withholding rate for payments made by labour hire firms will be 20%. However, as in the case for other schedular payees, a different rate may be elected.

No Company Exception 

The schedular payment exemption for companies will not apply to labour-hire arrangements.  That is, payments to a company for labour-only services will be subject to withholding tax.  Payments to companies for other services will still be exempt from withholding tax.

Labour hire firms - Extensions of time 

Labour hire firms that would incur unreasonable costs to have systems in place to comply with the new withholding obligations may delay implementation until 1 July 2017.  ‘Unreasonable costs’ are described by Inland Revenue as ‘unusual costs’ or ‘costs that you wouldn’t normally incur in your business’.

Non-Resident Entertainers

The ability for a payee to elect their own withholding rate will not apply to non-resident entertainers.  The standard rate of 20% will still apply, and this will be treated as their final tax, which eliminates the need to file a return.