MHK Chartered Accountants' Update On Payments to Company Contractors

Tax legislation came into effect from 1 April 2017 whereby payments made by labour-hire firms to its contractors attract withholding tax at the standard rate of 20%, unless the contractor provides an elected rate.  Previously, such payments did not attract withholding at source and contractors were required to account for their own tax.

Aaron Neels, Director of MHK Chartered Accountants Auckland, comments that this is an important change, as previously payments made to companies were generally not subject to withholding tax with a few exceptions. “Previously, such payments did not attract withholding at source and contractors were required to account for their own tax.  The requirement to deduct tax generally applies from 1 April 2017.  If adequate systems have not been put in place by labour-hire firms to administer the tax, the application date is the earlier of 1 July 2017 and the date that a system has been put in place.”

A labour-hire firm is a person or entity that has as one of its main activities the business of arranging for a person to carry out work directly for clients of the labour-hire firm.  This activity is described as a “labour-hire arrangement”.  The work can be performed for a client of another entity under the labour-hire arrangement (for example, where one labour-hire firm arranges for another labour-hire firm to provider workers for their client).

Entering into labour-hire arrangements must not be an incidental activity of the labour-hire firm for withholding tax to apply.  The firm can have more than one activity as long as labour-hire arrangement is one of the main activities.  For example, a solicitor instructs a barrister to act on a client’s behalf.  The solicitor is contracting with a barrister to act for their client. However, the act of arranging for a contractor to perform work for a client is not the solicitor’s main activity. Therefore, any payments made by the solicitor to the barrister are not under a “labour-hire arrangement” and not subject to withholding tax. 

Contact MHK Chartered Accountants for clarifications on any particular circumstance or concerns you may have.

MHK Chartered Accountants are Auckland Fringe CBD Chartered Accountants who specialise in business structuring and legally minimising all types of taxation obligations, and offer a no-obligation discussion free of charge.  For more information on tax accountants, accounting firms Auckland and accountants please go to http://aucklandaccountant.net.nz.