The new 39% tax rate and your investment earnings

You may already be aware that a new top tax rate of 39% applies to each dollar of personal taxable income earned over $180,000 from 1 April 2021.

What you might not be aware of is that you won’t be able to choose an equivalent 39% resident withholding tax (RWT) rate until 1 October 2021. This means you might find you have tax to pay at the end of the 2022 tax year.

Withholding tax on interest and dividends is an interim tax on your investment earnings. The tax is deducted by the payer of the investment earnings (e.g. BNZ) and that tax is then credited against the total amount of tax you owe for the year. If you had too much RWT deducted you might be entitled to a tax refund at the end of the year. On the other hand, if you had too little RWT deducted during the year then you may have tax to pay when you complete your tax return.

If you are a top income earner and subject to the 39% top tax rate, interest you earn in a personal capacity on investments with BNZ may be subject to tax at 39% from 1 April 2021. However, the maximum RWT rate you can choose to apply to your bank accounts stays at 33% until 1 October 2021. That means any interest you earn in the 6 months from 1 April 2021 to 30 September 2021 may have too little RWT deducted and you may need to top up the tax at the end of the tax year.

If you do need to top up at the end of the year it doesn’t mean that you’re paying more tax overall. It just means you’re paying the tax at the end of the year rather than having it deducted from your interest as you earn it.

While you will be able to select a 39% RWT rate from 1 October 2021, whether you should change your RWT rate will depend on your personal tax situation and the mix and structure of your investments. If you’re unsure, we do recommend you seek your own professional tax advice.

Prescribed Investor Rates (PIRs) which are the tax rates applying to investments in Portfolio Investment Entities (PIEs) have not changed. The top PIR remains at 28% regardless of the level of taxable income you earn and selecting a 39% RWT rate does not affect the amount of tax you pay on your PIE investment earnings.

It’s important to understand that the RWT rate applied to your investments won’t change automatically on 1 October 2021, you’ll need to ask us to change your tax rate if you want RWT to be deducted at the 39% rate. Most BNZ customers will be able do this themselves through Internet Banking or the BNZ app after 1 October 2021, but our team is happy to help if you need it.

The information and recommendations in this article are the personal views of the author and do not necessarily represent the views of BNZ, or its related entities. This article is solely for information purposes and is not financial, taxation or legal advice and should not be relied on as a substitute for such advice. If you need help with financial advice, please contact BNZ or your financial adviser.