New Zealand: Taxation

Doing Business in NZ
Last Updated: 3 August 2011
Article by Casey Plunket and Mark Reese

"Haere mai" is Māori for welcome and New Zealand is one of the most open economies in the world. But there are rules and regulations that will apply, and we are familiar with them.

This "Doing Business in NZ" publication is designed to provide the prospective investor with an introductory guide to the New Zealand legal framework as it applies to business. The information provided was accurate at the time of publication, and will be updated regularly. But it should not be relied upon as a basis for making business decisions as circumstances, business conditions, government policy and interpretation of the law may change.

We recommend that you seek advice specific to your needs before making any decisions and will be happy to assist.

New Zealand has a broad-based tax system consisting principally of:

  • income tax and fringe benefit tax
  • resident and non-resident withholding tax (RWT and NRWT)
  • goods and services tax (GST)
  • Accident Compensation levies
  • import tariffs and miscellaneous excise duties
  • a local authority rates on property, and
  • gift duty.

Tax advice provided by lawyers enjoys legal privilege.

Income tax

Residency and rates of tax

For individuals and companies defined as "resident" in New Zealand, income tax is imposed on all worldwide income. Non-resident individuals and companies, on the other hand, are taxed only on income derived from New Zealand, and their tax liability may be reduced by the provisions of an applicable double tax agreement.

Individuals are regarded as resident in New Zealand for income tax purposes if they have a permanent place of abode in New Zealand or are present in New Zealand for more than 183 days within a 12-month period.

A company is regarded as resident in New Zealand if:

  • it is incorporated in New Zealand
  • it has its head office in New Zealand, or
  • it has its centre of management in New Zealand or control in New Zealand.

Companies (both resident and non-resident) are taxed at 28%. Individuals (both resident and non-resident) are taxed incrementally at between 10.5% and 33%. As noted above, non-residents are taxed only on their New Zealand-sourced income.

For individuals, assessable income includes (among other items) salary and wages, bonuses, other employment benefits or remuneration, partnership income and investment income. For salary and wage earners, tax is deducted at source through the Pay As You Earn (PAYE) system. Non-cash benefits provided to employees are subject to fringe benefit tax which is payable by the employer.

For companies, net income generally corresponds with accounting profit or loss. However, adjustments are commonly required in relation to:

  • the timing of income and expenditure recognition
  • bad debts, and
  • various provisions and reserves.

New Zealand does not generally levy tax on capital gains. In certain circumstances, however, the proceeds from the sale of real or personal property (including shares) may be subject to income tax (for example, where the dominant purpose of the initial purchase was to resell the property at a profit).

Double tax agreements

New Zealand has entered into double tax agreements (or tax treaties) with certain countries to reduce the incidence of double taxation and to provide more certainty for taxpayers operating in foreign jurisdictions. Foreign tax credits are generally available to New Zealand residents for foreign income tax imposed on income derived from countries or territories outside New Zealand. The availability and quantum of the foreign tax credit is subject to certain limitations, but does not depend on New Zealand having entered into a double tax agreement with the particular country or territory concerned.

Treatment of tax losses

If a resident company or a New Zealand branch of a non-resident company incurs a tax loss, that loss can generally be carried forward (indefinitely) to offset future New Zealand net income and shared between group companies, provided a certain level of shareholder continuity (or in the case of group companies, common ownership) is maintained. Individuals and trusts can also carry forward tax losses, but these losses are effectively "trapped" and cannot be shared with other entities.

Taxation of dividends paid by resident companies to residents

Dividends paid by resident companies to residents are, in most instances, taxable to the recipient. However, dividends paid between New Zealand resident companies that are part of the same wholly-owned group are generally exempt (subject to certain other requirements).

To avoid the double payment of tax on the same income (i.e. by the company and the shareholder when the company's income is distributed as a dividend) imputation credits, and certain other types of credits (for example, foreign dividend payment credits), may be attached to dividends paid by resident companies (to both residents and non-residents). An imputation credit represents a portion of the tax paid by the company (for every $1 of tax paid, a company receives a $1 imputation credit which it can attach to dividends). Imputation credits received by resident shareholders (companies and individuals) are offset against any tax payable on their income, including dividends received.

Subject to certain exceptions, a dividend paid by a resident company to a resident is subject to a 33% withholding tax, although the withholding tax liability is reduced by any imputation credits attached to the dividend. In the event that the dividend is fully imputed (i.e. imputation credits are attached at the maximum rate) only a residual 3% withholding tax will be imposed on the dividend.

Portfolio Investments Entities (PIEs)

Certain investment entities can take advantage of New Zealand's PIE tax regime.

New Zealand resident companies (including unit trusts), superannuation funds and group investment funds can all elect to become PIEs, if they satisfy a number of requirements. Broadly speaking, to qualify as a PIE, they must be widely held (or owned by widely held vehicles) and cannot hold more than 20% of any company or unit trust they invest into (subject to some exceptions).

A PIE is exempt from tax on gains from the sale of shares in New Zealand resident companies, and in Australian companies that are listed on an approved Australian Securities Exchange index.

There are three different kinds of PIE — multi-rate portfolio investment entities (MRPIEs), portfolio listed companies, and portfolio defined benefit funds. MRPIEs are the most common vehicle as they benefit most from the PIE regime. The primary benefit of MRPIE5 is that investors — which through the MRPIE pay income tax on distributions or redemptions at their "portfolio investor rate" — can benefit from a lower tax rate than they would be subject to if they invested in a non-PIE entity, provided their taxable income is below a certain threshold, And because tax is paid by the MRPIE, not individual investors, no RWT or NRWT is deducted from distributions or redemptions.

Taxation of investments by New Zealand residents in non-resident entities

New Zealand has recently amended its rules for the taxation of foreign equity investment by NZ residents. Generally, income from 10% or greater stakes in NZ controlled foreign companies (CFCs) is not subject to NZ tax either as earned or when distributed, unless it is passive income. Income from FIFs is generally calculated either using a "fair dividend rate" or a comparative value method. The fair dividend rate method taxes the shareholder on deemed income of 5% of the value of the investment. The comparative value method taxes appreciation during the year plus distributions. There are significant exemptions from both regimes for investment in Australian companies.

Taxation of payments to non-residents

Payments of dividends, interest and royalties to individuals or companies not resident in New Zealand are generally subject to NRWT. The rate of NRWT imposed depends upon the type of payment and whether a double tax agreement is in place:

  Double tax agreement countries Other countries
Dividends 15% 15%*
Interest 10-15% 15%**
Royalties 10-15% 15%

* This rate generally applies if the dividends carry full imputation credits, foreign dividend payment credits or conduit tax relief credits. To the extent that they do not, the rate is generally 30%.

** Where interest is paid to a non-resident and a resident (jointly) the applicable rate of NRWT will be higher than 15%.

In the case of dividends, certain royalty payments, and interest paid to non-associated persons, NRWT is generally a final tax for New Zealand tax purposes.

Under the Foreign Investor Tax Credit (FITC) regime, when a resident company pays fully imputed dividends, the combined tax burden on the income derived by the New Zealand resident company and the payment of that income as a dividend to a non-resident shareholder is limited to a maximum of 30%. The FITC regime achieves this by providing a tax credit to the New Zealand resident company, which the resident company must use to fund an additional "supplementary dividend" to the non-resident (which is equal to the NRWT payable where the dividend is fully imputed). This ensures that the non-resident shareholder is in a no less beneficial position than a New Zealand resident shareholder receiving the same dividend.

In respect of interest payments made by an approved borrower to a non-associated non resident lender, the applicable NRWT rate can be reduced to 0%, provided certain conditions and registration formalities are satisfied. For example, a payment to the IRD of an "approved issuer levy" equal to 2% of the interest payment may be required.

Withholding payments are deducted at the rate of 15% from non-resident contractors for certain work or services performed in New Zealand (this rate increases to 30% for individuals and 20% for companies where the non-resident contractor does not provide a prescribed withholding declaration to the payer prior to the payment being made). An exemption certificate removing the need for the withholding deduction can be granted by the IRD in certain circumstances.

Transfer pricing and thin capitalisation

New Zealand's transfer pricing regime seeks to protect the New Zealand tax base by ensuring that cross-border transactions are priced (at least for tax purposes) on an arm's length basis. New Zealand also has thin capitalisation rules which, broadly speaking, disallow certain interest deductions for a foreign owned New Zealand group (depending on their debt to equity ratio) or for New Zealand residents with an income interest in a CFC or who control a resident company with such an interest.

Goods and Services Tax

GST is a consumption tax charged at 15% on the supply of most goods and services in New Zealand. GST-registered taxpayers must charge GST on the goods and services they supply and can obtain a credit for any GST they pay in the course of their business. In this way, the burden of GST is passed along a chain of registered suppliers until it reaches the final consumer.

Those making supplies in New Zealand are required to register for GST if they carry on a taxable activity (which is similar in concept to a business, but wider in scope) through which they will make taxable supplies of more than NZ$60,000 per year. A person carrying on a taxable activity (whether in New Zealand or outside New Zealand) can voluntarily register for GST even if they are under this threshold.

Certain supplies of goods and services can be either exempt from GST or zero-rated (e.g. the supply of financial services, services performed as an employee, some services supplied to non- residents and residential rental accommodation).

Accident Compensation Levies

New Zealand operates a no-fault accident compensation scheme whereby persons suffering from accidental injuries need not prove fault before receiving compensation. The scheme provides for some financial assistance for medical expenses, loss of earnings, and compensation for dependants in the case of death. All compensation is paid by the Accident Compensation Corporation (ACC), which is funded by:

  • levies paid by all employers, self-employed persons and private domestic workers for work- related accidents. The levy for the self-employed and private domestic workers is set by regulation, whereas the levy for employers is determined by the industry risk class applying to the employer, and may be adjusted up or down depending on the individual employer's safety management practices
  • levies paid by self-employed persons, private domestic workers and employees for non-work related accidents
  • a residual claims levy paid by employers, private domestic workers and the self-employed to cover claims outstanding prior to the introduction of the Accident Insurance Act 1998, and
  • funds set aside by Parliament to fund compensation for injuries to non-earners.

Another option is the ACC's accredited employer programme under which employers can elect to pay no levy, or a reduced levy, in return for funding all or a share of any compensation entitlements incurred at their workplace. To be accepted for the programme, the employer must satisfy a number of criteria, including a minimum level of safety expertise and financial solvency.

Import duties

Import licensing, once a common means of sheltering New Zealand producers, no longer exists in New Zealand, with tariffs now the principal form of protection.

Over recent years, there has been a steady reduction of tariff rates for goods imported into New Zealand. Tariff rates vary from item to item and depend upon the country of origin, with preferential rates being applied to Australia, Canada, "least-developed countries", "less-developed countries" and Pacific Forum countries. Items that are outside the scope of local manufacturing are generally duty free, or may qualify for a duty concession.

Where New Zealand is party to a free trade agreement (FTA), the FTA will address in detail the tariffs applicable between the two countries (for further information, refer to the Accessing world markets from New Zealand chapter).

GST is also charged on any goods which are imported into New Zealand. An input tax credit can be claimed for this GST (meaning no net cost arises) where the importer is GST-registered and is acquiring the imported goods for the purpose of making supplies which are subject to GST.

Rates

Rates are the main source of local government revenue. These are calculated as a percentage of the value of land and/or capital.

Other taxes

Currently, gift duty of between 5% and 25% is payable in respect of any dutiable gift of money or property, if the value of all gifts given exceeds NZ$27,000 in any 12 month period. Gift duty will be abolished as of 1 October 2011.

Stamp duty is no longer payable in New Zealand.

There is no estate duty and no death duties payable in New Zealand.

We make every effort to ensure the accuracy of the information provided but it should not be relied upon as a basis for making business decisions as circumstances, business conditions, government policy and interpretation of the law may change.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Authors
Casey Plunket
 
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