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