Common asked questions on NRWT
What if you have borrowed funds to do business overseas?
For example you have borrowed $50,000 from Australian institution to conduct business in Australia. As a general rule NRWT should apply as you will be getting deductions in your assessable income for the amount of interest paid to the overseas investor. But in this case, Double Tax Agreement (DTA with Australia) may provide some relief, NRWT will not apply if the financial institution has a branch in New Zealand or you have permanent place of establishment in Australia.
Overseas Rental Investment?
If you have rental investment in a country other than New Zealand, and you have borrowed funds to fund the purchase of that property in that country, then you will be liable to pay NRWT on interest. Above explanation on borrowed funds to do business overseas will apply.
Deduction for the payment of NRWT?
NRWT is business expense (an ancillary tax) and is allowed as deductible expenditure, deduction is available as per section DB 1 (2) (e) of ITA 2007
What is Gross up calculation?
In general terms if you have borrowed funds from overseas they will demand payments and leave you with the tax obligations, unless you are big financial institution and dealing with the general public. For example, if you have a rental investment and in the year 2012-2013 paid interest of $5000 to an overseas financial institution (assuming no exemption in DTA for NRWT and 10% tax apply).
Section RF7 states the payment should be multiplied by tax, so in this case NRWT should be $500 ($500 – 10% of $5000)
However, writer interpretation of NRWT is, it is a withholding tax, so $500 should have been withhold and non resident should have only received $4500, but this never happened. So gross up calculation will be required:
$5000 divide by 90, and multiply by 100 = $5,555, and then 10% of that will be paid to the commissioner as NRWT. It is more than $500 so the tax should be paid on monthly basis.