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New Zealand law explained for everyone

Income Tax Act 2007

General collection rules - Withholding tax on resident passive income (RWT)

RE 18B: Capital value increase under inflation-indexed instruments: RWT cap

You could also call this:

“Maximum tax on inflation-related increases in investment value”

When you receive an interest payment from an inflation-indexed instrument, the person paying you must withhold some money for tax. They need to withhold the smaller of two amounts:

  1. The amount left after they take out the regular tax (called RWT) from your interest payment.

  2. An amount that’s worked out using a special calculation.

This calculation looks at how much the value of your investment has gone up because of inflation. It uses a formula that compares the current payment to the previous payment (or to the starting value if it’s the first payment).

The formula multiplies the increase in value by a tax rate. This tax rate is set by the government and can be found in the tax rules.

The purpose of this is to make sure that you’re not taxed too much on the part of your interest that’s just keeping up with inflation, rather than being extra profit.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM6201310.

Topics:
Money and consumer rights > Taxes
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RE 18: Payments made by RWT proxies, or

“How to calculate tax on dividend payments when acting as an RWT proxy”

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RE 19: Choosing other rates, or

“Choosing a different tax rate for your passive income”

Part R General collection rules
Withholding tax on resident passive income (RWT)

RE 18BCapital value increase under inflation-indexed instruments: RWT cap

  1. For an interest payment under an inflation-indexed instrument, the payer is obliged, in addition to withholding under section RE 12, to withhold and pay to the Commissioner the lesser of the following amounts of tax:

  2. the net amount of the interest payment (the current coupon payment) remaining after the withholding of RWT under section RE 12:
    1. the amount given by the formula in subsection (2).

      1. The formula for the purposes of subsection (1)(b) is:

        CV increase × tax rate.

        Where:

        • In the formula in subsection (2),—

        • CV increase is the amount calculated under the formula in subsection (4), if it is positive:
          1. tax rate is the basic rate set out in schedule 1, part D, clause 3 or 4 (Basic tax rates: income tax, ESCT, RSCT, RWT, and attributed fringe benefits).

            1. The formula for the purposes of subsection (3)(a) is:

              CV current coupon payment − CV previous coupon payment.

              Where:

              • In the formula in subsection (4),—

              • CV current coupon payment is an amount that is or will be payable for the money lent under the instrument, to the extent to which the amount has accrued at the time of the current coupon payment and the amount is determined by a fixed relationship to 1 or more indices of general price inflation in New Zealand:
                1. CV previous coupon payment is—
                  1. an amount that is or will be payable for the money lent under the instrument, to the extent to which the amount has accrued at the time of the interest payment before the current coupon payment and the amount is determined by a fixed relationship to 1 or more indices of general price inflation in New Zealand; or
                    1. the face value of the instrument, if there has been no interest payment before the current coupon payment.

                    Notes
                    • Section RE 18B: inserted, on , by section 142 of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section RE 18B(1) heading: inserted (with effect on 30 June 2014), on , by section 226 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).