Making sense of withholding tax

If, say, a builder has various contractors working for him, as and when required – should he deduct withholding tax from their bills and pay this to the IRD?

The withholding tax rules work in parallel to the PAYE rules that apply to salary and wage earners. The withholding tax rules apply to what tax legislation refers to as “schedular payments” – payments made to individuals who are not employees, but whom a person has engaged to do certain types of work for them. 

The term “schedular payment” arises from the fact that a schedule to the income tax legislation lists the types of payments that attract withholding tax. This schedule contains a list of activities and the rate at which you must deduct tax from payments made to a person for performing that activity.  A list of the main activities that are subject to withholding tax and the applicable tax rate is on the reverse of Inland Revenue’s IR330. 
Payments for the supply of labour in the building industry are only one of the many types of payments that are subject to withholding tax. Among the other types of payments that attract withholding tax are payments to commercial cleaners, agricultural and horticulture contractors, commission sales agents, entertainers, models, company directors, freelance writers, and honoraria.

If you’re paying a person for performing an activity that is not listed in the schedule, you don’t need to deduct withholding tax from the amount you’re paying. You will only have an obligation to deduct withholding tax from payments to contractors if they are undertaking an activity listed in the schedule.  For the building industry, this means you are making a payment for “labour-only building work”. This is where the arrangement you have with the contractor is exclusively or substantially for the contractor to supply you with labour and the work is of a type listed in the schedule. This list includes, but is not limited to, carpentry, roofing, bricklaying, fencing, tiling, painting, wallpapering, and plastering. For example, if you engage a tiler to lay tiles or a painter to paint a house, and they respectively supply the tiles and paint, you don’t need to withhold tax from payments you make to them. However, if the tiler or painter only supplied their labour, and you or some other person supplied the materials, you may be required to deduct withholding tax from the payments to them.

Generally, you won’t be required to deduct withholding tax if the labour-only contractor is trading through a company. However, there are some limited circumstances where a payment to a company can attract withholding tax. You also won’t need to deduct withholding tax if the contractor provides you with a certificate of exemption from withholding tax (an IR331).       
  
For labour-only building work you must deduct 20% of the payment as withholding tax.  However, the contractor must provide you with a completed tax code declaration IR330 form for the 20% rate to apply.  If the contractor fails to provide you with a completed IR330, you are required to deduct a further 15% withholding tax making for a total tax deduction of 35% of the payment.  You will pay the withholding tax you deduct from the contractor payments to Inland Revenue at the same time that you pay any PAYE you deducted from employees’ wages. If you have no employees, you will need to register as an employer and, assuming the total amount of payments you make to contractors each year is less than $500,000, pay the withholding tax you have deducted to Inland Revenue by the 20th of the month following the month you made the payment to the contractor. 

Article supplied by Scott Mason, tax expert at Crowe Horwath. This article provides general information only, current at the time of dissemination. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.