Are You Using The Correct Tax Rate?

The 2012 tax year commenced on 1 April 2011 so now is a good time for investors to check that their investment income for the new tax year is being taxed at the correct rate.

If the wrong rate is used to tax investment income it can result in an unwanted tax bill at the end of the year, and in the case of a Portfolio Investment Entity (PIE) if the wrong Prescribed Investor Rate (PIR) is used it can result in the investor paying more tax than they need to.

If, after checking the tax rates below, an investor feels that they are using the wrong rate they should contact their investment provider and discuss with them accordingly.

Resident Withholding Tax (RWT) Rates

Resident withholding tax is deducted from interest income. The appropriate RWT rates for the 2011 – 12 tax year are as follows:

Individual RWT Rates for the 2011-12 tax year

Income RWT rates for
2011-2012
income years
$0 – $14,000  10.5%
$14,001 – $48,000 17.5%
$48,001 – $70,000 30%
$70,001 and over 33%

Family Trust RWT Rates for the 2011-12 tax year

A family trust has the option of taxing its investment income in the name of the trust or distributing income to beneficiaries where it is taxed at the beneficiary’s marginal tax rate. A family trust therefore has the following options when selecting which RWT rate to use.

Family Trust RWT rate where the income is taxed in the name of the Trust

RWT rates for     2011-2012
income years
Trustee rate 33%

Where the income earned by a family trust is to be distributed to a beneficiary a trust can elect one of the following rates.

RWT rates for     2011-2012 income years
Elected rate where beneficiary income under $14,000 10.5%
Elected rate where beneficiary income between $14,001 – $48,000 17.5%
Elected rate where beneficiary income between $48,001 – $70,000 30%
Elected rate where beneficiary income $70,001 and over 33%

Company RWT Rates for the 2011-12 tax year

RWT rates for     2011-2012
income years
Company default rate  28%

Note a company also has the option to elect an RWT rate of 33%

Partnerships RWT Rates for the 2011-12 tax year

Provided the partnerships IRD number is given to the investment provider an investor may choose any of the rates that would apply as if the investment were held in a partner’s name.

Portfolio Investment Entities (PIEs) and Prescribed Investor Rates (PIRs)

Portfolio Investment Entities PIEs were created in October 2007 and were conferred with favourable tax advantages so as to encourage New Zealanders to invest and save.

Where an investor is invested in a PIE they must provide their correct Prescribed Investor Rate (PIR) to the investment provider, failure to notify the correct PIR may result in paying more tax on PIE investment income than is necessary.

Prescribed Investor Rate for 2011-12 tax year

There are four PIRs for the 2011-12 tax year: 0%, 10.5%, 17.5% and 28%. Individuals can select only one rate, Trust’s, on the other hand, can choose which rate to use from the four options.

The appropriate PIR to use for the 2011-2012 tax year is determined as follows:

Resident Individuals

To determine the correct PIR for individuals it is necessary to consider both their taxable and PIE income as follows:

Taxable income in either of the previous two years (ie 2010 & 2011) Taxable income and PIE Income in either of the previous two years (2010 & 2011) PIR %
Less than $14,000 Less than $48,000 10.5%
Less than $14,000 $48,001 to $70,000 17.5%
Less than $14,000 Greater than $70,001 28%
$14,001 to $48,000 Less than $70,000 17.5%
$14,001 to $48,000 Greater than $70,001 28%
Greater than $48,000  – 28%

Non Resident Individual

The PIR for a non resident individual is as follows:

PIR to Use
Non resident individual 28%

Family Trusts

A family trust has the opportunity to select its PIR as follows:

PIR to Use
Family Trust 28%, 17.5%, 10.5% or 0%

The Trust can choose the rate best suited to its beneficiaries

At the 28% rate the PIE tax is a final tax for a family trust.

If a trust elects a PIR of 0% beneficiary income will be taxed at the beneficiary’s marginal tax rate and trustee income will be taxed at 33%.

Companies

The PIR for a company is as follows:

PIR to Use
Company 0%

PIE income derived by a company must be included in the company’s tax return and is taxed at the company tax rate.

Joint Investments

Where investments are held jointly the PIR needs to be determined for each individual investor; the highest PIR of the joint investors is then applied to the joint investment.

Listed PIEs

Listed PIEs are companies listed on the New Zealand stock exchange, a flat PIR of 28% applies to listed PIEs.

No PIR Elected

If no PIR is elected then the default rate that is applied is 28%.

For further details, contact any of the partners or info@uhyhn.co.nz

2012-04-01T09:00:55+00:00April 1st, 2012|Tax|

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