Resident Withholding Tax (RWT) & Prescribed Investor Rate (PIR) Tax
In NZ it’s income tax that matters, this is tax on any income you are receiving – from employment, interest earnt on savings, dividends from shares and any other sources. The amount you pay is determined by the amount of income you receive from these sources. Similar to employers, banks, trading platforms and share registries (i.e. Link and Computershare) have a responsibility to deduct a proportion of your income as Resident Withholding Tax (RWT) before giving you back the difference. When you start saving, investing in shares or otherwise, you tell the bank and share registries what the correct RWT is for you.
What is my Resident Withholding Tax rate (RWT)?
As mentioned, your RWT rate is chosen by you and based on your estimate of your total income in the current financial year (1 April to 31 March).
For this reason, it’s important to choose an RWT rate that is reflective of your total income – wages, dividends from shares, interest from a bank account etc. Noting that it’s only on the income you’ve received. There is no capital gains tax unless you are classified as a trader – more on this below.
What is the RWT scale?
Estimated total annual income Tax rate
Income up to $14,000 10.5%
Then up to $48,000 17.5%
Then up to $70,000 30%
Then up to $180,000 33%
Over $180,000 39%
The first priority is your wages or salary. This is calculated by either you or your employer, based on a progressive rate from 10.5% to 39%. That means your “first” $14,000 are taxed at 10.5%, the next $34,000 (to a total of $48,000) are taxed at 17.5%, as shown in the table above effective 1 April 2021.
This is smoothed out over a year based on your pay period, which is why if you change jobs or have fluctuating income it’s a good idea to do a tax return. Inland Revenue will also tell you if you have underpaid or overpaid according to the information and payments they have.
How much tax do I pay investing in a Portfolio Investment Entity (PIE) fund?
The amount you pay depends on your Prescribed Investor Rate (PIR) and the share of tax credits you receive from companies in any given fund.
Tax on PIE funds is not directly related to the distributions (dividends) paid by a fund, or by the change in value of a fund. You might still owe PIE tax even if a fund loses value. It’s related to the amount of investment income received by the fund.
Imputation credits represent a credit to you for the tax paid on New Zealand profits from companies that the fund is invested in. These credits are designed to prevent double taxation, where a company has paid company tax, so you don’t do so too.
You might get lucky and receive a credit for some of the tax the company has paid, particularly if you have a PIR lower than 28% (the company tax rate). When these credits leave you in a surplus at the end of the year, you’ll receive a refund.
What is my Prescribed Investor Rate (PIR)?
Your Prescribed Investor Rate (PIR) is the tax rate applied to any income earned from an investment in a Portfolio Investment Entity (PIE) fund. e.g KiwiSaver or other PIE Investment funds, it’s important to check this annually to ensure you are on the correct rate. The PIR for individuals who are New Zealand residents is based on their income from the last two yearst (to 31 March) and will be either 10.5%, 17.5% or 28% (the highest). Your provider will use this rate to pay tax on your behalf.
So, when will I pay tax?
All income tax is due at the end of the financial year (31 March).
If investing in a PIE fund, tax is calculated at two points – when you sell a large portion of units in a fund and at the end of the financial year.