The expression “the only constant is change” is as true in the labour market as anywhere else in modern life. Over the past 20 years New Zealand has seen a rise in the percentage of people employed in the professions, scientific and technical fields. One result of this trend is that a larger percentage of the workforce is now employed in sectors which are not subject to withholding tax.
The Government is now taking steps to remedy this, as part of a business tax issues review. In an officials paper prepared by the IRD and Treasury, data shows that overall the numbers of self-employed people have not changed much – it is the industries they are working that has changed. The proportion of self-employed health / scientific / technical professionals has risen from 12.5% in 1996 to 19.5% in 2014, while the Agriculture and Manufacturing sectors recorded declines over this period.
The proposed response has implications both for doctors who contract, and the organisations that contract them, says Leicester Gouwland, director of William Buck.
The first change concerns the actual rate of tax. In future, contractors who are subject to withholding tax can choose their own withholding rate, starting from a minimum of 10%. This change is to allow contractors to match their tax rate to their current income.
The withholding tax will not apply if the health worker contracts directly to the employing business. However in these situations, the government plans to allow these contractors to opt into these rules, provided the business paying the contractor agrees.
For contractors who are contracting directly with a business, greater choice over how they manage their taxes now becomes available, Mr Gouwland says.
If they opt into the withholding tax regime, their taxes will be managed in a way similar to having PAYE deducted, whilst still being self employed and being able to claim business expenses. They will still need to prepare income tax returns, and if the withholding tax paid is insufficient to meet their tax liability, a further payment will be required. If the amount of top-up is under $2500, the contractor will not need to pay provisional tax.
Clearly, the contractor will need to ensure that the withholding tax is at a rate that is likely to meet their overall annual tax requirement.
This withholding tax option will suit those contractors with predictable income and expenses.
There will be more compliance cost for the employing business, which is why the business’s approval is needed if a contractor wishes to opt in. However, if the business is deducting PAYE from employees already, the extra cost should be minimal.
The second change concerns contractors working through labour hire firms. These contractors will be subject to the withholding tax rates, and will not be able to opt out. This has implications for health workers contracted via a bureau. Their pay will be subject to withholding tax, and this will apply whether the contractor is contracting personally, or via a company.
The implications for labour hire firms are that they will need to alter the way they pay contractors. Generally this will not be a significant change as PAYE deduction systems will already be in place,. Clearly though, this will mean these businesses will incur increased compliance costs, and tax risk, if errors are made.
Submissions on the changes have now closed, and will be reviewed in a bill phase from August. It is intended the provisions will apply from 1 April 2017.
For further information contact your local William Buck advisor on +64 9 366 5000 or email@example.com