RWT on dividends between companies

With amendments being made to sections RE 2(5), this now limits the definition of “resident passive income”. This section excludes fully imputed dividends paid to a corporate shareholder if the paying company chooses to exclude the dividend from the definition.

This will allow a company to opt out of withholding RWT on a fully imputed dividend paid to another company.

The above amendments were needed because of company tax rate being lowered from 33% to 28%. Dividends were effectively overtaxed by the amount of RWT withheld.

RWT on dividends and interest payments made by closely held companies to their shareholders

Currently subject to the attachment of imputation credits, the RWT rate on dividends is a flat 33%. Due to the company tax rate being lowered to 28%, even fully imputed dividends must have RWT deducted.

This leads to over-taxation for individual shareholders who are not on the top personal tax rate. Any excess RWT then needs to be claimed as a refund when the tax return for the relevant income year is filed, which not only means refund delays but also a compliance burden on those individuals who may not otherwise have had to file a return.

Proposed solution

There have been discussions to allow a close company to elect to remove RWT on dividends and interest payments. One possible solution to do this is the company directors providing a guarantee RWT portion shall be paid. In the absence of non-payment, they will be personally liable for the payment. One this proposal is passed, there shall be forms published by the IRD which will allow small business to elect for RWT exemption. This will really help small businesses to declare divided without complication and compliance cost of managing and paying RWT. Recipient will be able to pay the RWT portion of tax via their tax return.

Watch this space for further development on this front

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