💵 Consequences of Incorrect Rate & Dividend Withholding

Consequences of Incorrect RWT Rate

RWT Rate Too Low:

What happens:

• Insufficient tax withheld throughout year
• Tax shortfall discovered when file annual return
• Owe residual income tax to IRD

Example:

• Total income: $75,000 (marginal rate 33%)
• Interest: $3,000
• RWT rate selected: 17.5% (incorrect - too low)
• RWT withheld: $525
• Should have withheld: $990 (33%)
• Shortfall: $465 owed at year-end

Consequences:

• Terminal tax bill
• May trigger provisional tax for following year
• Possible use of money interest (UOMI) if significant
• Cashflow problem if unexpected

RWT Rate Too High:

What happens:

• Excess tax withheld throughout year
• Overpayment discovered when file annual return
• IRD refunds excess

Example:

• Total income: $35,000 (marginal rate 17.5%)
• Interest: $2,000
• RWT rate selected: 33% (default - too high)
• RWT withheld: $660
• Should have withheld: $350 (17.5%)
• Overpayment: $310 refunded

Consequences:

• Interest-free loan to IRD (no interest paid on refunds)
• Reduced cashflow throughout year
• Delayed until file return (may be months)
• Less money working for you

Dividend Withholding Tax

How Dividend Tax Works:

When NZ companies pay dividends, they generally withhold tax. But dividends are special because of imputation credits.

What You Actually Receive:

Gross dividend example:

• Company declares 50 cents per share dividend
• You own 1,000 shares
• Gross dividend: $500

But you don't receive $500. Here's why:

• Company already paid 28% company tax on profits
• Dividend paid from after-tax profits
• May have withholding tax deducted

Imputation Credits Explained:

The concept:

• Company pays tax at 28%
• Pays dividend from after-tax profit
• Attaches imputation credits = tax already paid
• Credits offset your personal tax on dividend
• Prevents double taxation

Example with full imputation:

• Company earns $100 profit
• Pays $28 company tax (28%)
• Has $72 after-tax
• Pays you $72 dividend
• Attaches $28 imputation credit
• Your taxable income: $100 ($72 + $28)

How Imputation Affects Your Tax:

If your tax rate is 17.5%:

• Tax on $100: $17.50
• Imputation credit: $28
• Refund due: $10.50
• Net result: $72 dividend + $10.50 refund = $82.50

If your tax rate is 28%:

• Tax on $100: $28
• Imputation credit: $28
• Exactly matches - no refund, no extra tax
• Net result: $72 dividend

If your tax rate is 33% or 39%:

• Tax on $100 at 33%: $33
• Imputation credit: $28
• Additional tax due: $5
• Net result: $72 dividend - $5 = $67

Dividend Statement:

Companies provide dividend statements showing:

• Cash dividend paid to you
• Imputation credits attached
• Gross dividend (cash + credits)
• RWT withheld (if any)

Keep these statements for tax return.

📊 RWT vs PIR and Common Mistakes

RWT vs PIR - Key Differences

When Each Applies:

RWT (Resident Withholding Tax):

• Direct interest income (bank deposits, bonds)
• Direct dividends from shares you own
• Rates: 10.5%, 17.5%, 30%, 33%, 39%

PIR (Prescribed Investor Rate):

• PIE fund distributions (managed funds, KiwiSaver)
• Portfolio Investment Entities only
• Rates: 10.5%, 17.5%, or 28%

Why PIR is Different:

PIR advantage:

• Capped at 28% even if personal rate higher
• If you earn over $180,000 (39% bracket), PIE still only taxes at 28%
• Significant tax saving for high earners

PIR rates:

Note: PIR uses both taxable income AND total income - use the test that results in higher rate.

Selecting Correct PIR:

For PIE investments (KiwiSaver, managed funds):

• Provide PIR when opening account
• Fund manager applies PIR to returns
• Check annually and update if income changes

Example:

• Salary: $55,000
• PIE fund returns: $3,000
• Total income: $58,000
• Falls in "over $48k" category
• Correct PIR: 28%

Common Mistakes

Mistake 1: Not Selecting RWT Rate

Problem: Leaving bank on default (usually 33%).

Impact: If income under $70k, overpaying tax. If income over $180k, underpaying.

Solution: Actively select RWT rate matching marginal tax rate. Complete IR456 form with all banks.

Mistake 2: Forgetting to Update RWT When Income Changes

Problem: Set RWT rate years ago, income changed, never updated.

Example: Set 17.5% as student, now earning $80k but RWT still 17.5%.

Impact: Significant underpayment, large tax bill at year-end.

Solution: Review RWT rate annually. Update when income changes significantly (new job, pay rise, retirement).

Mistake 3: Confusing RWT and PIR

Problem: Thinking they're the same thing.

Reality: Different systems for different investment types.

Solution: Remember: RWT for direct investments (term deposits, shares), PIR for PIE funds (KiwiSaver, managed funds).

Mistake 4: Not Claiming Refund

Problem: Overpay RWT, don't file tax return, never claim refund.

Reality: IRD doesn't automatically refund - must file IR3 to claim.

Solution: File tax return even if not required (e.g., only PAYE income). Can claim refund within 4 years.

Mistake 5: Ignoring Dividend Statements

Problem: Receive dividend statement, file away, don't include in tax return.

Reality: Must declare dividends and imputation credits on IR3.

Impact: Miss out on imputation credit refunds if in lower tax bracket.

Solution: Keep all dividend statements, include on tax return, claim imputation credits.

Mistake 6: Wrong PIR Rate

Problem: Selected PIR years ago, income increased, now in higher bracket.

Example: PIR set at 10.5%, now earning $60k.

Impact: Insufficient tax on PIE returns, tax bill at year-end.

Solution: Check PIR annually with all PIE fund providers. Update if income changes.

👤 NZ Scenario and Checklist

NZ Scenario: James, Investor with Multiple Income Sources

Background:

• James: 35, software developer in Wellington
• Salary: $85,000
• Savings: $50,000 in term deposit at 5.5%
• Shares: $30,000 in NZ companies
• KiwiSaver: $80,000 in growth fund

Year 1 - Before Understanding Withholding Tax:

Term deposit:

• Interest earned: $2,750
• RWT rate: 33% (bank default)
• RWT withheld: $908
• Net interest received: $1,842

Dividend income:

• Dividends received: $1,200 cash
• Imputation credits: $467
• Gross dividend: $1,667

KiwiSaver:

• PIR rate: 28% (correctly set)
• Returns: $6,000 (after PIR tax)

Total income:

• Salary: $85,000
• Term deposit (gross): $2,750
• Dividends (gross): $1,667
• Total: $89,417
• Marginal tax rate: 33%

Tax Outcome Year 1:

Tax on total income:

• Tax due: ~$21,400
• PAYE from salary: $20,020
• RWT from interest: $908
• Imputation credits: $467
• Total tax paid: $21,395
• Small refund: $5

Problem: James didn't realize RWT rate was correct. Let him leave it unchanged.

Year 2 - After Pay Rise:

New situation:

• Salary: $100,000 (promotion)
• Term deposit interest: $2,750
• Dividends: $1,200 cash + $467 credits
• Total income: $104,417
• Marginal tax rate: 33% (still)

James didn't update RWT rate - still 33%

Year 3 - After Another Pay Rise:

New situation:

• Salary: $185,000 (senior role)
• Term deposit interest: $2,750
• Dividends: $1,200 cash + $467 credits
• Total income: $189,417
• NEW marginal tax rate: 39%

But RWT still 33% (not updated)

Tax Outcome Year 3:

Tax on interest:

• Interest: $2,750
• Should be taxed at 39%: $1,073
• Actually withheld at 33%: $908
• Underpayment: $165

Tax on dividends:

• Gross dividend: $1,667
• Tax at 39%: $650
• Imputation credits: $467
• Additional tax due: $183

Year-end tax bill: $348 (interest + dividend shortfall)

James Learns and Takes Action:

Updates RWT rate:

• Completes IR456 form with bank
• Changes RWT from 33% to 39%
• Takes effect immediately for future interest

Bonus discovery - KiwiSaver advantage:

• KiwiSaver PIR still 28% despite 39% personal rate
• Saves 11% tax on KiwiSaver returns
• On $6,000 returns: saves $660 annually vs if taxed at 39%
• Reason to favor PIE investments for high earners

Lessons from James:

• Review RWT rate annually, especially after pay changes
• Underpaying creates year-end tax bill
• High earners benefit from PIE investments (capped at 28% PIR)
• Imputation credits valuable but must declare dividends
• Simple form (IR456) prevents problems

Withholding Tax Checklist

Annual Review:

• ☐ Calculate expected total income for year
• ☐ Determine marginal tax rate (10.5%, 17.5%, 30%, 33%, or 39%)
• ☐ Check current RWT rate with all banks
• ☐ Verify PIR with all PIE fund providers
• ☐ Update if rates don't match income bracket

When Income Changes:

• ☐ New job with higher/lower salary
• ☐ Pay rise pushing into new tax bracket
• ☐ Retirement (income drops)
• ☐ Self-employment income changes
• ☐ Update RWT and PIR within 3 months

For Each Bank/Investment:

• ☐ Know current RWT rate set
• ☐ Have completed IR456 form on file
• ☐ Review when open new accounts
• ☐ Check statements show correct withholding

For Dividend Income:

• ☐ Keep all dividend statements
• ☐ Note cash received and imputation credits
• ☐ Include on tax return (IR3)
• ☐ Claim imputation credit benefit
• ☐ Understand may owe or get refund depending on rate

For PIE Investments:

• ☐ Verify correct PIR with each provider
• ☐ KiwiSaver: Check with provider
• ☐ Managed funds: Verify on application
• ☐ Update annually if income changes
• ☐ Remember PIR caps at 28% (benefit for high earners)

At Tax Time:

• ☐ Gather all interest statements (RWT certificates)
• ☐ Collect all dividend statements
• ☐ Include gross amounts on tax return
• ☐ Claim all withholding tax credits
• ☐ Claim all imputation credits
• ☐ File IR3 even if just PAYE + small investment income

Red Flags:

• ☐ Haven't reviewed RWT rate in 2+ years
• ☐ Income increased significantly but RWT unchanged
• ☐ Don't know current RWT rate
• ☐ Getting large tax refunds (probably overpaying RWT)
• ☐ Getting unexpected tax bills (probably underpaying RWT)
• ☐ PIR set years ago, never updated

Final insight: Withholding tax on investment income in NZ: deducted at source before payment. RWT (Resident Withholding Tax) applies to interest and dividends: rates 10.5%, 17.5%, 30%, 33%, 39% matching personal tax brackets. Select rate based on total income - too low creates year-end tax bill, too high means overpaying all year. Term deposit example: $10k at 5% = $500 interest, RWT at 33% = $165 withheld, receive $335 net. Dividend withholding includes imputation credits: company pays 28% tax on profits, credits attached to dividends, prevents double taxation. Lower bracket taxpayers get refunds, higher brackets pay top-up. RWT vs PIR: RWT for direct investments, PIR for PIE funds (KiwiSaver, managed funds). PIR advantage: capped at 28% even if personal rate 39% - significant benefit for high earners. Common mistakes: not selecting RWT rate (defaulting to 33%), not updating when income changes, confusing RWT with PIR, not claiming refunds, ignoring dividend statements. James scenario: senior dev earning $189k didn't update RWT from 33% to 39%, underpaid $348, learned to review annually, discovered KiwiSaver PIR advantage saves $660/year. Withholding tax checklist: review annually, update when income changes, verify correct rates with all institutions, keep statements, file returns claiming credits.