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  1. #1
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    Default Question about TAX from interest earned.

    Hello ^^

    Want to ask a tax related question about Term Deposit and stuff. Hope some people here can give me a heads up. Have emailed Inland Revenue and my bank about this, but would like to see comments and suggestions from you guys. As I often from their replies to be un-helpful.

    == Note all figures are hypothetical==

    Situation: 3 People (X ,Y & Z) open a term deposit account together. Interest earned will be split evenly among the 3 of them. How would the tax be deducted and reported to the IRD?

    Currently this is how I think it'll work, I need you guys to tell me whether or not this is correct

    Term deposit account is open under X's IRD number.

    Interest gained: $1000
    Tax is 10%: $100 (10% of $1000)
    Interest after tax: $900 ($1000 - $100)
    Split among 3 people: $300 each.

    Now do X deduct $33.33 from Y and Z? If so, should that deduction be reported to the IRD and what would this deduction be classified as?

    Now assuming the above is correct, which will result each person to walk away with $66.67. Now would each person pay tax on this earning, the $66.67?
    ====

    So is this how it work?


    Comments or suggestions will be great.



    Thank you ^^

  2. #2
    ~ >*()))><( andrew93's Avatar
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    Default Re: Question about TAX from interest earned.

    If this is going to be an ongoing thing then I recommend you form a partnership (which technically you already have) but you need to inform the IRD. The best way to do that is to download the form from the IRD website, fill it in and send it back. When you get the IRD number from the IRD, give this to the bank.

    The application form for an IRD number (for a non-individual) can be downloaded from here:
    http://www.ird.govt.nz/forms-guides/...ualirdapp.html

    The bank deduct will deduct RWT from the gross interest and the partnership completes a tax return at the end of the financial year. The entire contents of this return are the gross interest received, RWT deducted and the allocation both amounts to the 3 partners. Each person then includes partnership income (with the gross interest and RWT credits) on their personal tax return under the section titled 'partnership income'.

    There will be other ways of doing this but this is the method you should adopt. The other option is one taxpayer includes all of the interest and RWT on their personal return. To try and split the interest but have the RWT certificate in one name will eventually get messy.

    HTH, Andrew

    P.S. Per your example the taxable interest is actually $333.33 each with RWT of $33.33 each. There may be additional tax to pay if the individuals tax rate is higher than the rate at which RWT was deducted. Using your numers and a personal tax rate is 19.5% then the tax to pay is $333.33 x 0.195 less $33.33 = $31.67.
    Last edited by andrew93; 15-11-2007 at 03:30 PM.

  3. #3
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    Default Re: Question about TAX from interest earned.

    I see, thank you very much for your informative post. Things looks easier from your approach.

    More comments or suggestions are welcome.

  4. #4
    Smiling Down On Youse SurferJoe46's Avatar
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    Default Re: Question about TAX from interest earned.

    Person X, when they collect the tax from person Y and person Z, since they are NOT agents for the IRD, will then have to report such collection(s) as either capitol gains for him/herself or as taxable income at a newer, higher rate in a cost-devalued exceedance category, thereby raising the personal taxes for him/herself through the non-existent-but-implied interest gained upon such funds for the time that they are in control of that person.

    Person(s) Y through Z will then be monetarily injured parties and can seek redistribution of the lost income from the interest of the non-escrowed collection(s) depending upon just how the funds are held by X.

    That's what LLC's are for.

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  5. #5
    Senior Member george12's Avatar
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    Default Re: Question about TAX from interest earned.

    Here's how it would work (correct me, tax people, if I'm wrong):

    $1000 interest earned, $100 tax deducted by the bank.

    So each person has earned $333.33 in taxable income (even though they only got $300 cash from the split-up) and paid $33.33 in tax on it. This is reported as such on their individual tax return, eg:

    Income ..........
    Interest earned: $333.33
    Total taxable income: ...........

    -> Tax owing: (calculated at tax rate)

    Tax paid on wages: ...........
    Tax paid on interest: $33.33
    Total tax paid: ...........

    -> Difference between tax owing and paid is tax owing / tax refund

    Bottom line: You do not need to set up a partnership (though you could if you wanted to).
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  6. #6
    ~ >*()))><( andrew93's Avatar
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    Default Re: Question about TAX from interest earned.

    You have the maths correct George (is ther an echo in here?) but the issue is that the bank will issue an RWT certificate under one IRD number. 7 years down the track the IRD will look at the last 7 years tax returns and claim you didn't declare enough interest and you owe them back taxes plus cumulative penalties. Registering a partnership mitigates that risk.

    Andrew

  7. #7
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    Default Re: Question about TAX from interest earned.

    Don't get into an argument, which normally happens in such cases!.

    Split the capital three ways and go your separate ways, then you won't get into any strife later on down the track.

    My wife and I have several have several term deposits, in each of our names and together, she bitches because she doesn't get as much tax refund as I do, but I have more in deposits that receive imputation amounts by the banks.

    Lurking

  8. #8
    Senior Member george12's Avatar
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    Default Re: Question about TAX from interest earned.

    I assume they want to combine a couple of grand each to meet the minimum $5k or $10k deposit required.

    They won't earn as much interest if they try to each invest the smaller amount, say in a savings account.

    Although if they had $10,000 between them they'd only make about $20-30 each in interest more per year than if they just stuck their individual savings in a high interest bank account, which certainly makes forming a partnership not worth the hassle, unless they're in it for the long run...
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  9. #9
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    Default Re: Question about TAX from interest earned.

    Thanks a lot for everyone's help. Before I posted this question I really didnt know how this would work. Though with all your guys comments and suggestions it really helped a lot.

    One last little question, if I want more information about these things, would I goto the Inland Revenue, bank or an accountant? If it is the accountant, are there any recommendations and price for a consultant?


    Many thanks again

  10. #10
    Senior Member mmmork's Avatar
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    Default Re: Question about TAX from interest earned.

    The advice given seems very good. To your last question -

    Do the free stuff first: Talk to your bank. Visit the ird website. Then phone the IRD. Maybe I'm paranoid, but record that conversation (I'm not kidding).

    But if it's really complicated, go to a tax accountant. Sometimes there is no substitute for specialist knowledge, even if you have to pay lots for it. Will save you more in the long run, especially on issues like this. I don't have any recomendation sorry.

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