Receiving interest and dividends with tax deducted
A business may receive:
- interest with tax deducted and/or
- dividends with tax deducted (and/or tax credits attached).
Both interest and dividends are passive income. For residents, the type of tax on this income is RWT (resident withholding tax). For details on how this is deducted, see:
About RWT on interest
If your business has money in an interest-bearing account, the bank or other financial institution will deduct RWT (resident withholding tax) from the interest due to you, before paying it to you.
At the end of the year, in your business's tax return, you can claim the RWT it has deducted from your interest as a credit against your tax payable.
Paying the right RWT rate on your interest
If you receive interest as income, you need to:
- make sure the interest payer has your IRD number, and
- elect (declare) which tax rate you want them to use, as shown below.
The RWT rate for interest depends on which entity you are.
Companies
If you are a company, then all your total earnings will be taxed at 33% (or 39% if elected).
All other entities
| If your total annual earnings are ... | then the RWT rate is ... |
|---|---|
| $40,000 or less |
19.5% |
| more than $40,000 and less than $70,000 |
33% |
| more than $70,000 |
39% |
If the interest payer does not have your IRD number, they will deduct RWT from your interest at the no-notification rate (39%).
If you end up paying too much or too little RWT, you can resolve this at the end of the tax year in your annual return, by paying more or claiming it back, or you can request a refund. See our Resident withholding tax (RWT) on interest - payer's guide (IR 283) for more details.
About RWT on dividends
If your business is a shareholder of another company, the dividends you receive may have imputation credits/FDPs (foreign dividend payments) attached and/or RWT deducted. In your annual income tax return, you can claim these as tax credits against any income tax you are liable to pay.
RWT rate on dividends
The RWT rate payable on income received as dividends is 33% of gross dividend.
Note: The company issuing a dividend can impute it, ie it can attach a certain ratio of imputation and other tax credits to the dividend amount. It will generally offset the total of these tax credits against the RWT amount payable on the dividends.
For example, if it fully imputes the dividend at 30:70 (attaches imputation credits equal to 42.85% of the dividend's cash value) then it need only deduct a further 3% of the gross dividend amount as RWT to cover the full 33% payable.
See the Imputation guide (IR 274) for more details about imputation ratios and RWT.
Effects of the company tax rate (CTR) change
If you receive dividends both before and after the issuing company starts to pay tax at the new 30% CTR, you may notice a change to the ratio between the RWT deducted and any imputation or other credits attached (as described above).
Under the 33% CTR that applies up to 2008, companies can impute their dividends at up to 33:67 (ie $33 of credits attached to every $67 of dividend). Because the CTR reduces to 30% from the 2009 income year onward, the maximum ratio becomes 30:70.
The overall cash amount of the dividend you receive does not change, as the overall tax payable remains 33% of the dividend. However, the proportions of the tax types that make up the 33% tax may differ.
The date that this change will apply varies depending on circumstances. You might receive dividends with up to 33:67 imputation credits (the old maximum) at any time up to 31 March 2010. See Imputation and the company tax rate change for more details.
Exemption from RWT
Under certain circumstances, you can apply for a certificate of exemption from RWT by completing an Application for exemption from resident withholding tax on interest and dividends (IR451). Exemption means you are paid the full amount of interest or dividends, with no RWT deduction. The following organisations may qualify for exemptions:
- Non-profit organisations
- Taxpayer with income over $2 million
- Taxpayer with loss to carry forward
- Financial institutions
Note
If we issue you a certificate because you either have income over $2 million or you have losses to carry forward, you will need to reapply each year.
Date published: 01 Oct 2008
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