Resident Withholding Tax (RWT) is a tax deducted at the source from interest and dividend income earned by New Zealand tax residents. The RWT rates are aligned with your total annual taxable income, ranging from 10.5% for income up to $14,000, to 39% for income exceeding $180,000. If you do not provide your IRD number, a non-declaration rate of 45% applies.
What is Resident Withholding Tax?
Resident Withholding Tax (RWT) is a mechanism used by the Inland Revenue Department (IRD) to collect income tax from interest and dividends before the money even hits your bank account. For most New Zealanders, this tax is most commonly seen on savings accounts, term deposits, and bonds.
The logic behind RWT is to ensure that tax obligations are met throughout the year rather than resulting in a massive tax bill at the end of the financial year. It operates on a “pay-as-you-earn” basis for your passive income. When your bank pays you interest, they automatically deduct the RWT based on the rate you have selected and pass it directly to the IRD on your behalf.
It is critical to understand that RWT is not a separate or additional tax; it is simply a payment method toward your total income tax liability. Because New Zealand operates a progressive tax system, the rate of RWT you choose should ideally match the income tax rate that applies to your total annual income.
Current Resident Withholding Tax Rates
Your RWT rate is determined by your total taxable income. This includes your salary or wages, business income, benefit payments, and the interest income itself. As of the current tax year, the rates are structured to mirror the personal income tax brackets.
The Standard Rates
- 10.5%: Applies if your total taxable income is $14,000 or less.
- 17.5%: Applies if your total taxable income is between $14,001 and $48,000.
- 30%: Applies if your total taxable income is between $48,001 and $70,000.
- 33%: Applies if your total taxable income is between $70,001 and $180,000.
- 39%: Applies if your total taxable income is $180,001 or more.
The Non-Declaration Rate
If you open a bank account but fail to provide your IRD number to the financial institution, you will be taxed at the non-declaration rate of 45%. This is significantly higher than the top personal tax rate and acts as a penalty to encourage tax compliance. It is crucial to ensure your bank has your IRD number on file to avoid this excessive deduction.
Company Rates
For companies, the default RWT rate is generally 28%, which aligns with the corporate tax rate in New Zealand. However, companies must also ensure they have provided their IRD number to avoid the non-declaration rate.
Choosing the Right RWT Rate
Selecting the correct resident withholding tax rate is a personal responsibility. While banks may set a default rate (often 33% or the non-declaration rate if details are missing), it is up to the individual taxpayer to elect the rate that matches their income bracket.
To choose the right rate, you must estimate your total income for the financial year (1 April to 31 March). If you expect your income to cross a threshold, you should adjust your RWT rate accordingly.
Scenario: The Rising Earner
Consider a scenario where you earn $45,000 a year. Your RWT rate should be 17.5%. However, if you receive a pay rise or a bonus that pushes your total income to $55,000, your marginal tax rate on the income above $48,000 changes to 30%. In this case, you should update your RWT rate to 30% to ensure you are paying enough tax on your interest income.
Scenario: The Retiree
Many retirees rely on NZ Superannuation and interest from term deposits. If NZ Super and a small amount of interest are your only income sources, you may fall into the 17.5% bracket. However, if you have significant savings generating large interest returns, that interest is added to your total income, potentially pushing you into the 30% or 33% bracket. It is a common mistake for retirees to leave their rate at 17.5% when their total income actually requires a higher rate.
RWT vs. PIR: Understanding the Difference
A common point of confusion in New Zealand personal finance is the difference between Resident Withholding Tax (RWT) and the Prescribed Investor Rate (PIR). While both are taxes on investment returns, they apply to different vehicles.
- RWT (Resident Withholding Tax): Applies to direct income assets like bank savings accounts, call accounts, term deposits, and bonds.
- PIR (Prescribed Investor Rate): Applies to Portfolio Investment Entities (PIEs), such as KiwiSaver funds and managed funds.
The rates for PIR are slightly different. The maximum PIR is currently 28%, whereas the maximum RWT rate is 39%. This difference can make PIE funds an attractive option for high-income earners (those earning over $48,000), as the tax cap on these investments is lower than their marginal income tax rate.
What Happens If You Pick the Wrong Rate?
Selecting the wrong resident withholding tax rate is common, but the consequences vary depending on whether you have overpaid or underpaid.
If Your Rate Is Too High
If you have elected a rate of 33% but your income only justifies 17.5%, you are effectively overpaying tax throughout the year. Fortunately, you will not lose this money.
At the end of the financial year, the IRD performs an automatic assessment. They will see that you have paid too much tax relative to your total income and will issue a tax refund. While you get the money back, the downside is cash flow; the government holds your money interest-free until the wash-up process is complete.
If Your Rate Is Too Low
This is the more problematic scenario. If you are on a 17.5% rate but earn enough to be in the 33% bracket, you are underpaying your tax obligations. This creates a tax liability.
When the IRD performs their end-of-year assessment, they will calculate the deficit. You will be issued a “terminal tax” bill that you must pay. If the underpayment is significant or if the IRD believes you deliberately selected a lower rate to defer payment, you could face use-of-money interest (UOMI) charges or late payment penalties.
Since 2020, the IRD has become more proactive. If they notice a mismatch between your reported income and your RWT rate, they may instruct your bank to update the rate automatically. However, the primary responsibility still rests with you.
RWT on Joint Accounts
Joint accounts present a unique challenge for Resident Withholding Tax. When two people hold an account together (e.g., a husband and wife, or business partners), the bank can usually only apply one RWT rate to the account.
The Highest Earner Rule
The general rule of thumb and best practice is to set the RWT rate based on the account holder with the highest income. For example, if one partner earns $100,000 (33% tax bracket) and the other earns $20,000 (17.5% tax bracket), the joint account should be set to 33%.
If you choose the lower rate of 17.5%, the higher earner will be underpaying tax on their share of the interest. This will result in a tax bill at the end of the year. Conversely, if you choose the higher rate, the lower earner will overpay tax on their share. However, this overpayment will be refunded by the IRD after the end of the tax year during the automatic income assessment.
It is almost always safer to overpay and receive a refund than to underpay and face a bill.
Exemptions and Special Status
Not everyone is required to have RWT deducted at the source. Some entities and individuals can apply for an RWT exemption certificate (IR15c).
Who Can Be Exempt?
Exemptions are typically reserved for entities that are expected to have a gross income of over $2 million, or for charitable organizations and non-profit bodies that are tax-exempt. Occasionally, individuals who can prove they will have no tax liability may apply, but this is rare for standard bank interest.
If you hold a valid certificate of exemption, you must show this to your bank. Without the physical or digital record of the certificate, the bank is legally required to deduct tax. If you have an exemption, you are responsible for filing a tax return and paying any required tax on that income yourself at the end of the year.
How to Update Your Rate
Changing your RWT rate is a straightforward process in the digital age. You do not need to visit a branch for most banks.
- Online Banking: Most major NZ banks (ANZ, ASB, BNZ, Westpac, Kiwibank) allow you to change your tax rate via their mobile app or internet banking portal. Look for “Tax Details” or “Account Settings.”
- Phone Banking: You can call your bank’s secure line and request a rate change.
- In-Branch: You can visit a branch with your ID to request the change manually.
Remember, if you change your rate midway through the year, the adjustment only applies to future interest payments. The tax already deducted at the old rate will remain as is until the IRD performs the end-of-year wash-up.
Frequently Asked Questions
What is the RWT rate for a trust in NZ?
For most trusts, the RWT rate should be 33% or 39%, depending on the trustee income. With the recent increase in the trustee tax rate to 39% (effective for the 2024/25 income year), trusts should review their elected rate to ensure it aligns with their tax obligations.
Do I pay RWT on term deposits?
Yes, Resident Withholding Tax applies to interest earned on term deposits. The tax is usually deducted when the interest is paid, either at maturity or at regular intervals (monthly/quarterly) depending on how you set up the deposit.
Is RWT the same as income tax?
RWT is a method of collecting income tax, not a separate tax. The RWT deducted from your accounts is credited towards your total annual income tax liability. If the RWT rate matches your income tax bracket, you will have paid the correct amount of tax.
How do I know what my RWT rate is currently?
You can check your current RWT rate by logging into your internet banking and viewing your account details or tax settings. Alternatively, you can check your myIR account on the Inland Revenue website, which tracks the investment income reported by your bank.
Can I get a refund on Resident Withholding Tax?
Yes, if you have selected a rate that is higher than your actual income tax rate, you will have overpaid tax. The IRD will automatically calculate this after the end of the tax year (31 March) and issue a refund to your nominated bank account.
Does RWT apply to KiwiSaver?
No, KiwiSaver is a Portfolio Investment Entity (PIE), so it is taxed under the PIE tax rules using a Prescribed Investor Rate (PIR). RWT applies to bank accounts and term deposits, while PIR applies to managed funds and KiwiSaver.
