As pre-cursor to determining the tax treatment applicable to directors’ fees, it is necessary to establish whether the recipient of the fees is resident in New Zealand or non-resident for tax purposes. The question of where a person or entity is a tax resident cannot be answered simply by asking where that taxpayer lives or, in the case of an entity, is registered. You should speak with an expert if are uncertain about your own tax-residency, or the tax residency of a director to whom you are paying directors’ fees.
Withholding tax treatment of resident directors’ fees
Directorship services provided by an individual personally
Although the Companies Act requires that directors be natural persons, directors’ fees can be invoiced in a variety of different ways, including by third-party companies or other entities.
New Zealand directors often provide services as either employees or, more commonly, as independent contractors. In both scenarios, the tax treatment that applies to the fees received for those services is relatively straightforward:
- If a person performs directorship services as an employee of the company, the remuneration of the individual that performs those services will be taxed under the PAYE rules, as for other employees. An exception to this general position applies for shareholder/employees.
- If the individual provides directorship services as an independent contractor, tax will be withheld from the payment, although the withholding will take place under the “schedular payments” rules rather than under the PAYE rules. This is because, under the Act, directors’ fees are not salary or wages of an employee, and are taxed separately at a flat rate of 33%.
Directorship services provided by an entity and performed by an individual
Although directorships must be performed by a natural person, it is possible for an entity to contract with the company to provide those services, and therefore for that entity to be the party that receives the directors’ fees. Other companies, partnerships, and public, local, or Maori authorities can all contract with a company to provide directorship services. IS 17/06 states that directors’ fees paid for services provided by a company will generally not have to have tax withheld.
However, exceptions from this general position apply to:
- fees for directorship services provided by an agricultural, horticultural or viticulture company;
- a company that is a non-resident contractor (see below);
- payments made by labour-hire businesses to a company engaged to provide directorship services to one of its clients under a labour-hire arrangement; and
- directors’ fees paid for directorship services provided by a partnership.
Tax will generally have to be withheld (and paid to Inland Revenue) for directors’ fees that have these additional characteristics.
Withholding tax treatment of non-resident directors’ fees
Both non-resident individuals and non-resident entities can receive payment for providing directorship services to a New Zealand company. The company receiving these services may have an obligation to withhold tax from those payments, and those obligations need to be considered carefully.
Determining the source of the fees
Before considering whether an amount of non-resident directors’ fees is subject to withholding tax, it is important to determine whether the amount being paid has a New Zealand source (i.e. an amount derived from a business or activity in New Zealand). Only if the payment is so derived will the tax rules impose an obligation to withhold on the payer of the fees.
Draft IS 18/XX states that:
- directors’ fees that a New Zealand company pays to a non-resident individual have a New Zealand source (regardless of where the directorship services are performed);
- directors’ fees paid to a non-resident entity, which the entity derives from a business carried on in New Zealand, will be derived from New Zealand only if the business is wholly carried on in New Zealand; alternatively, if the business is only partly carried on in New Zealand the directors’ fees will only be derived from New Zealand to the extent that they are apportioned to that New Zealand business under the Act (IS 18/XX notes that a business of providing directorship services is likely to only be carried on in New Zealand to the extent that directorship services are physically performed in New Zealand);
- directors’ fees derived from a contract will have a New Zealand source to the extent that the directorship services are physically performed in New Zealand (again, apportionment may be relevant – the amount of directors’ fees apportioned to New Zealand is the amount that would have been paid to an independent third party for performing the New Zealand directorship activities); and
- directors’ fees attributable to a permanent establishment that a non-resident entity has in New Zealand will be derived from New Zealand.
Application of the withholding tax rules
If a payment of directors’ fees has a New Zealand source then it will generally be subject to withholding, unless:
- the amount is taxed as salary, wages, or extra pay made to an individual;
- a double tax agreement (DTA) precludes New Zealand from taxing amounts derived from New Zealand by a non-resident contracting entity (this will generally be the case if the non-resident entity is resident in a country with which New Zealand has a DTA and does not have a permanent establishment in New Zealand) if the non-resident contractor has not be present in New Zealand for more than 92 days in a 12-month period;
- contract payments that the contractor has received for any and all New Zealand contract activities total less than $15,000 in a 12 month period; or
- the non-resident contractor has been issued a certificate of exemption from the Commissioner of Inland Revenue.
Payments to non-resident contractors
As set out above, tax may be withheld from a payment if it is a New Zealand-sourced amount paid to an entity that is a non-resident contractor. A “non-resident contractor” includes a non-resident person (including an entity) that undertakes a contract, agreement or arrangement to perform services in New Zealand, or otherwise to supply the use of (or the right to use) personal property or services of another person in New Zealand. This means that when a New Zealand company makes a payment for directorship services that were performed in New Zealand to an offshore entity, the entity will be a non-resident contractor and the payer must withhold tax from the payment.
Withholding amounts of tax
When a person is required to withhold tax from directors’ fees, they will generally be required to withhold and pay tax to Inland Revenue. The payee should provide the payer with an IR 330C form, which sets out the relevant rate of withholding tax (generally between 10% (for residents) or 15% (for non-residents), and 33%). A non-declaration rate of 45% will apply if the payee does not provide an IR 330C complete with their name and IRD number to the payer.
Where a New Zealand company contracts with a non-resident entity for directorship services, those services may be provided by an individual as an employee of the contracting company. In these instances, the person who performs the directorship services will be the individual rather than the contracting company. It is important to be aware that the party receiving the fees remains the contracting company.
GST treatment of directors’ fees
As well as the withholding tax treatment of the directors’ fees, Inland Revenue has provided guidance on the GST treatment of such fees.
In BR Pub 15/10, Inland Revenue sets out the GST treatment of directors’ fees, and makes it clear that the GST treatment depends on whether the relevant directorship services are provided in the course of a taxable activity (whether carried on by the individual performing the services, or by another entity who has contracted to provide the services).
BR Pub 15/10 states that GST is chargeable where:
- a director supplies directorship services and is registered (or liable to be registered) for GST in respect of a taxable activity they undertake (i.e. the director carries on a taxable activity that includes the supply of directorial services, noting that the supply of directorship services alone is not itself a taxable activity) that has a turnover of $60,000 or more in a 12-month period, and they undertake the directorship services as part of that taxable activity; or
- a director provides services, in the course of their taxable activity that has a turnover of $60,000 or more in a 12-month period, to a third party and the third party provides those services to the company (in which case GST is chargeable both by the director and the third party, provided that they are each registered for GST).
In contrast, GST is not chargeable where:
- a director supplies directorship services in the capacity of an employee of a third party employer and is required to account for directors’ fees received to their employer. In this case, the employer will be deemed to supply the services and will have to charge GST for the supply (provided that it is, or is liable to be, registered for GST); or
- the director supplies services in their capacity as a partner in a partnership. In this case, the partnership will be deemed to make the supply of services and, if it is registered (or liable to be registered) for GST, will be required to charge GST on the supply of the services.
BR Pub 15/10 does not specifically deal with the GST implications of paying fees to non-resident directors. A non-resident director (being a person or an entity) who performs directorship services outside of New Zealand and has no presence in New Zealand will generally not be liable for GST on the fees the receive. However, that director may be liable for GST on the fees if they perform services in New Zealand as part of a taxable activity. In addition, in certain circumstances the New Zealand company receiving the directorship services (and paying the directors’ fees), may be liable for GST in respect of the supplies of directorship services that it receives under “reverse charge” rules. Ultimately, the GST implications of directors’ fees paid to a non-resident director need to be considered carefully in light of the context of both the director and contracting company, and it may be worthwhile seeking independent, tailored advice.
The company that engages the directorship services may claim an input tax deduction for directors’ fees provided that it is registered for GST and was charged GST on the directors’ fees (and has a tax invoice to prove it).
Inland Revenue is seeking comment on the draft guidance on non-resident directors’ fees contained in IS 18/XX – Income tax – how schedular payment rules apply to non-resident directors’ fees. The deadline for comment is 5 October 2018. Please contact one of our tax experts if you would like to discuss the draft guidance or need assistance drafting a submission.
Read more of our related insights.View all insights