What is Withholding Tax in New Zealand?

Withholding tax is one of the main ways Inland Revenue (IRD) collects income tax in New Zealand. Instead of waiting until the end of the year, tax is taken out of certain payments before they even reach you. The payer makes the deduction and sends it to IRD, which helps keep both businesses and individuals on track with their tax obligations.

How Does Withholding Tax Work in NZ?

When you earn certain types of income, the business or organisation paying you may be required to deduct a set percentage before you receive your payment. This amount goes straight to IRD and is credited against your overall income tax liability.

Example:

A contractor invoices a client for $1,000. If the contractor’s agreed withholding rate is 20%, the client pays $800 to the contractor and $200 directly to IRD. At the end of the financial year, that $200 is counted towards the contractor’s tax bill.

What Are the Main Types of Withholding Tax in New Zealand?

New Zealand has several different types of withholding tax, depending on the kind of income:

• PAYE (Pay As You Earn) – for wages, salaries, and employment income.

• Resident Withholding Tax (RWT) – for investment income like interest and dividends.

• Non-Resident Withholding Tax (NRWT) – for NZ-sourced income paid to overseas residents.

• Residential Land Withholding Tax (RLWT) – for offshore sellers of NZ residential property.

• Schedular Payments – for certain contractors and self-employed workers.

  
  

Let’s break these down in more detail:

How Does PAYE Withholding Tax Work?

PAYE is the system most New Zealand employees deal with every payday. It applies to income such as wages, salaries, bonuses, and some allowances. Employers are responsible for calculating and deducting PAYE, then passing it directly to IRD on behalf of their staff.

For most employees, PAYE deductions are enough to cover their annual tax, meaning they don’t usually need to file a tax return unless they have other sources of income (such as rental income, overseas income, or significant investments).

The key point: PAYE takes care of tax obligations for the majority of New Zealanders automatically but anyone with extra income outside their job should double-check whether they still need to file a return.

What Is Resident Withholding Tax (RWT)?

RWT is deducted from certain investment income (referred to as resident passive income) paid to New Zealand residents. This typically includes:

• Interest from bank accounts and investments.

• Dividends from shares in companies.

  
  

What Is Non-Resident Withholding Tax (NRWT)?

NRWT applies to certain types of New Zealand income (like dividends, interest, and royalties) paid to non-residents. The responsibility to deduct and forward this tax falls on the NZ-based payer. In many cases, NRWT is a “final tax,” meaning no further income tax return is required for that income.

What Is Residential Land Withholding Tax (RLWT)?

RLWT was introduced to make sure offshore sellers of New Zealand residential property meet their tax obligations under the bright-line property rules.

• When it applies: When an “offshore person” sells residential land in New Zealand within the bright-line period.

• What counts as residential land: Property with a dwelling (or intended for one), bare land that could be built on, or land with a planned dwelling. It excludes land used predominantly as business premises or farmland

• Who handles it: The responsibility to calculate, withhold, and pay RLWT typically falls on the conveyancer or solicitor acting in the transaction, not the purchaser or vendor directly.

How Does Withholding Tax on Schedular Payments Work?

This applies to contractors who are not employees. Common examples are in industries like construction, IT, entertainment, or cleaning.

• Contractor’s choice: A key feature is that contractors can often pick their own withholding rate, provided it meets a specified minimum (e.g., 10% for resident contractors). This provides flexibility and avoids the need to apply for a special tax code

• Voluntary agreements: Even if you’re not normally covered, you and your payer can agree to have withholding tax deducted from your payments. This can simplify a contractor's tax obligations.

  
  
  
  

Benefits of Withholding Tax

• Reduces risk of tax debt – Tax is collected up-front, so there’s less chance of underpayment at year-end.

• Simplifies record-keeping – You receive income net of tax, with deductions already reported to IRD.

• Helps manage cash flow – Credits build up during the year, offsetting your final tax bill.

Withholding Tax Rates and Adjustments

• Interest and Dividends: The Resident Withholding Tax rate depends on your income bracket. If you don’t select a rate, IRD may apply the default (which could be higher than necessary).

• Contractors: You can choose your own withholding rate (within IRD’s rules) by completing an IR330C form and giving it to your payer. This flexibility helps match deductions to your expected income and expenses.

Tip: Always review your withholding tax rate. Choosing the wrong rate can result in unexpected tax to pay or delays in receiving a refund.

Exemptions and Special Cases

• Charities and exempt organisations may qualify for exemptions.

• Non-residents are usually taxed at non-resident withholding tax (NRWT) rates, which vary depending on international tax agreements.

• Contractors can receive full payments without tax deducted if they have a valid reason (for example, a history of good tax compliance and being in a loss position) and have successfully applied to Inland Revenue for a 0% special tax rate.

  
  

Obligations and Penalties

The responsibility to deduct and pay withholding tax usually sits with the payer (for example, the employer, client, or bank).

If withholding tax isn’t deducted or passed on to IRD correctly, the penalties can be steep. IRD can charge both interest and fines and in cases of deliberate non-compliance, the consequences are even more serious.

Some common mistakes to avoid are:

• Not updating your RWT rate when your income changes.

• Assuming all contractors are automatically covered, some must apply to be put on schedular payments.

• Failing to pass deductions on to IRD promptly, which can result in penalties for businesses.

Conclusion

Withholding tax is designed to make tax compliance easier but the details can be confusing, especially for contractors and businesses managing multiple payment types.

If you’re unsure whether the right rate is being applied, or if you’re eligible for an exemption, it’s best to get tailored advice.

Need help managing withholding tax or setting the correct rates for your business? Our team can guide you through the process and keep you on the right side of IRD.

Contact Us