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Income Tax Act 2007

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

RE 10C: Obligations of custodial institutions in relation to certain payments of investment income

You could also call this:

“Custodial institutions' tax responsibilities when passing on investment income”

This section talks about what custodial institutions must do when they receive investment income and then pass it on to end investors.

When a custodial institution gets investment income and has RWT-exempt status, they need to take out the right amount of tax before giving the money to the end investor. They must then pay this tax to the government.

The rules don’t apply to some special financial systems called designated FMIs.

Custodial institutions can make deals with other companies to take out the tax, but if those companies don’t do it, the custodial institution is still responsible.

The law explains what counts as a custodial institution and an end investor. It also says what types of income this applies to.

If a non-resident custodial institution has a branch in New Zealand that gets the investment income, that branch has to take out the tax.

This section is more important than some other rules about paying trustees and nominees.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS341106.

Topics:
Money and consumer rights > Taxes
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Part R General collection rules
Withholding tax on resident passive income (RWT)

RE 10CObligations of custodial institutions in relation to certain payments of investment income

  1. This section applies for the purposes of sections RE 4 and RF 4 (Non-resident passive income received by agents and others) when—

  2. a person who is a custodial institution receives a payment of investment income; and
    1. the institution has RWT-exempt status; and
      1. the institution pays on or transfers the amount received to an end investor.

        1. This section does not apply to a custodial institution that is the specified operator of a designated FMI to the extent that the designated FMI is a settlement system. The exclusion extends to a nominee or agent of the specified operator.

        2. For the purposes of subsection (2) and this subsection,—

        3. FMI settlement means a settlement within the meaning of section 5 of the Financial Market Infrastructures Act 2021:
          1. settlement system—
            1. means a system or arrangement for effecting FMI settlements or processing settlement instructions in accordance with rules; and
              1. includes a payment system:
              2. designated FMI, rules, settlement instruction, and specified operator have the same meanings as in section 5 of the Financial Market Infrastructures Act 2021.

                1. At the time the payment or transfer is made and to the extent to which the amount of tax has not already been withheld, the custodial institution that makes the payment to the end investor must withhold the amount of tax for the payment and pay it to the Commissioner.

                2. A custodial institution that is required to withhold an amount of tax for a payment may, before the date on which the payment is received by the institution, enter into an agreement with another person (person B) for person B to withhold the amount of tax and pay it to the Commissioner. However, if person B does not withhold the amount of tax and pay it to the Commissioner, the withholding obligation remains with the custodial institution.

                3. When a payment of investment income is paid on or transferred through interposed custodial institutions before being paid to an end investor, the custodial institution that is last in the chain may enter into an agreement with another custodial institution that precedes them in the chain, for the latter institution to withhold the amount of tax for the payment and pay it to the Commissioner. In this case, the withholding obligation passes to the latter institution, and the final custodial institution’s obligation is discharged.

                4. For the purposes of this section and sections RE 4 and RF 4, a custodial institution means an entity—

                5. that holds financial assets or financial instruments as a bare trustee on account for another person; and
                  1. whose activities are supervised or regulated under the Financial Markets Conduct Act 2013, the Financial Market Infrastructures Act 2021, the Financial Markets Authority Act 2011, the Financial Advisers Act 2008, or the Banking (Prudential Supervision) Act 1989, or are supervised or regulated under corresponding legislation in another jurisdiction.

                    1. For the purposes of this section and sections RE 4 and RF 4, an end investor—

                    2. means an investor to whom a payment of investment income is made who is—
                      1. a direct investor, whether resident or non-resident, who is the beneficial owner of the investment:
                        1. a custodial institution that is not resident in New Zealand; and
                        2. includes a trustee, PIE, or PIE proxy if the person or entity has an obligation to provide investment income information to the Commissioner.

                          1. For the purposes of subsection (7)(a)(ii), if the non-resident custodial institution has a branch located in New Zealand that receives a payment of investment income, the branch is treated as the person who must withhold the amount of tax for the payment under subsection (3).

                          2. For the purposes of this section, and sections RE 4 and RF 4, investment income means—

                          3. resident passive income under section RE 2(1)(a) to (c) subject to the withholding obligations set out in sections RE 3 and RE 4:
                            1. non-resident passive income under section RF 2(1) (Non-resident passive income) subject to the withholding obligations set out in section RF 3 (Obligation to withhold amounts of tax for non-resident passive income):
                              1. attributed income of investors in portfolio investment entities under sections CP 1, CX 56, and CX 56B (which relate to attributed PIE income).

                                1. This section overrides sections RE 7 and RE 8 (which relate to amounts paid to trustees and nominees).

                                Notes
                                • Section RE 10C: inserted, on , by section 181 of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section RE 10C(2): replaced, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C(2B) heading: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C(2B): inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C(3): amended (with effect on 1 April 2020), on , by section 132(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section RE 10C(6)(b): replaced (with effect on 1 April 2020), on , by section 132(2) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section RE 10C(6)(b): amended, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C(6)(b): amended, on , by section 300(1) of the Reserve Bank of New Zealand Act 2021 (2021 No 31).
                                • Section RE 10C(7)(a)(ii): replaced (with effect on 1 April 2020), on , by section 161(1) (and see section 161(3) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section RE 10C(7B) heading: inserted (with effect on 1 April 2020), on , by section 161(2) (and see section 161(3) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section RE 10C(7B): inserted (with effect on 1 April 2020), on , by section 161(2) (and see section 161(3) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section RE 10C list of defined terms designated FMI: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C list of defined terms FMI settlement: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C list of defined terms rules: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C list of defined terms settlement instruction: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C list of defined terms settlement system: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).
                                • Section RE 10C list of defined terms specified operator: inserted, on , by section 163(1) of the Financial Market Infrastructures Act 2021 (2021 No 13).