NEW ZEALAND

5. Taxation

A. Tax System

I. General Concepts Of Tax Liability

1) Residency

Residents of New Zealand are liable to New Zealand tax on their worldwide income. Credit is allowed for any overseas tax paid (even in the absence of a tax treaty), limited to the New Zealand tax payable on that income. Non-residents are taxed only on income that has its source in New Zealand.

The primary test of residency is based on determination of an individual's 'permanent place of abode'. Where an individual does not have a permanent place of abode in New Zealand, then, subject to treaty relief, that individual may be classified as a New Zealand resident on the basis of personal presence in New Zealand. This is a so-called 'days in/days out' test.

An individual who is personally present in New Zealand for one or more periods exceeding 183 days in the aggregate in any 12-month period is deemed to be resident in New Zealand from the first day in the 12-month period on which personal presence began.

The converse of the personal presence test is that an individual who becomes personally absent from New Zealand for one or more periods exceeding 325 days in the aggregate in any 12-month period is deemed to be a non-resident from the first day in the 12-month period on which the personal absence began, unless the individual maintains a permanent place of abode in New Zealand.

The concept of permanent place of abode differs from the concept of domicile, as there is no requirement for a taxpayer to intend to live in that jurisdiction for the rest of that taxpayer's life.

In the event of dual tax residency (e.g. when an individual spends more than 183 days in New Zealand but continues to have a permanent place of abode in another jurisdiction) a tax treaty will generally invoke the 'tie breaker' provision to determine the dominant residency. In the absence of such a tax treaty, an individual may be taxable as a resident in two jurisdictions.

This double tax treaty tie-breaker provision may also apply to determine when a New Zealand resident individual ceases to be a New Zealand tax resident.

With effect from 1 April 2006, new migrants and returning expatriates (so called 'transitional residents') who have been absent for a continuous period of ten years or more are entitled to a 48-month tax exemption in respect of all offshore sourced income, even if that income is remitted into New Zealand.

A company will be resident in New Zealand if the company meets any one of the following four criteria:

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

2) Partnerships and joint ventures

Partnerships and joint ventures are not assessed as separate entities. Members of the partnership or joint venture are taxed on their respective shares of partnership income. Similarly, partnership or joint venture losses will pass through directly to the participants.

New Zealand has a limited partnership regime, which provides statutory limited liability for the limited partners. Any income earned by those limited partners is attributed to them directly, with the consequence that if the limited partner is not New Zealand resident, and the partnership earns non-New Zealand source income, there will be no liability to tax in New Zealand.

Losses suffered by limited partners can be set off against their other income, subject to certain limitations.

An entirely new statute, the Limited Partnerships Act 2008, has been enacted, which came into effect on 2 May 2008. The statute is intended to provide an internationally familiar style of limited partnership, with significant influence from UK and US limited partnerships models. Limited partnerships now have separate legal existence. The intention of the reform is to assist venture capital investment in New Zealand.

In addition, the New Zealand limited partnership may be a valuable structure in international tax planning.

Ii. Rates And Tax Incentives

New Zealand operates a resident withholding tax (RWT) regime in respect of interest or dividends derived by New Zealand resident individuals from New Zealand payers. New Zealand also operates a non-resident withholding tax (NRWT) regime that applies to payments of dividends, interests or royalties to non-residents. The non-treaty rate for dividends is 30 per cent, and the non-treaty rate for interest and royalties is 15 per cent. Under an applicable tax treaty, these rates are generally reduced.

NRWT in some cases may be a minimum tax rather than a final tax, unless an applicable tax treaty provides that the NRWT shall be a final tax. If the NRWT is a minimum tax, then the foreign person deriving the income will have an obligation to file a return in New Zealand and to pay any additional tax in respect of that income. This tax is based on net income, whereas NRWT is applied to gross income.

The applicable tax rate for companies is 30 per cent (reducing to 28 per cent on 1 April 2011), and for trusts the rate is 33 per cent. There is a progressive rate for individuals, which altered with effect from 1 October 2010:

Income Current Rate New Rate
NZD0 – NZD14,000 12.5% 10.5%
NZD14,001 – NZD48,000 21% 17.5%
NZD48,000 – NZD70,000 33% 30%
Over NZD70,000 38% 33%

The tax treatment of trusts is complicated by the fact that 'beneficiary income' is taxed at the beneficiary's marginal tax rate, whereas 'trustee income' is taxed at a flat rate of 33 per cent. The income tax treatment of trusts is explained in 5c below.

New Zealand operates a dividend imputation regime, which allows company tax to be passed through as a tax credit to New Zealand-resident shareholders, who pay tax on the gross amount of company income but get a credit for the company tax paid. Imputation credits are not available to non-residents, but New Zealand does operate a foreign-invested tax credit (FITC) regime, where dividends paid to a non-resident shareholder with full imputation credits attached will receive a supplementary dividend, which essentially funds the NRWT deducted at the time of payment from New Zealand to the non-resident shareholder.

Some changes were made to the FITC regime with effect from 1 February 2010. Non-portfolio (i.e. greater than 10 per cent) foreign shareholders will be subject to 0 per cent withholding on fully imputed dividends, rather than receiving a supplementary dividend.

Both mechanisms mean in economic substance that the dividend passes out of New Zealand without further deduction, but the 0 per cent approach means the foreign investor will not be able to claim a credit for NRWT in its home jurisdiction.

Unit trusts are taxed as though they were companies, with distributions to unit holders being treated as dividends. The imputation credit regime and the FITC regime will apply to such distributions. The new PIE regime, which came into effect on 1 October 2007, allows a more favourable tax treatment for unit trusts. Collective investment vehicles (e.g. unit trusts and superannuation funds) meeting certain criteria can elect to enter into the regime and become portfolio tax rate entities (PTREs), a type of PIE. Other entities, such as listed companies and investment-linked life funds, can also become PIEs.

PIEs are generally not taxed on any realised gains arising from the disposal of shares in New Zealand companies or Australian listed companies. Investment entities that elect to become PTREs cease to fall within the usual tax rules, and instead their tax liability is calculated by reference to the tax liabilities of their investors. Any income derived by the investment entity effectively 'flows through' to the underlying investors and, in the case of individual investors, is taxed in the PTRE's hands at their personal tax rates, capped at the corporate tax rate of 30 per cent.

It is highly likely that legislation will be enacted in 2011/2012 that will provide an extension of the PIE regime to foreign investors, to permit a tax exempt treatment for foreign investors in PIEs, which earn non-New Zealand sourced income.

The purpose of the regime is to align the tax treatment of individuals who invest through managed funds or other pooled investment vehicles more closely with individuals who make their own direct savings investments.

Charitable bodies are generally exempt from tax; however, the requirements to obtain exemption are reasonably stringent. The requirements for charitable bodies carrying on business activities are even more stringent.

Iii. Tax Evasion And Avoidance

New Zealand has, broadly speaking, a self-assessment system for income tax with a concomitant penalty regime designed to encourage voluntary compliance by taxpayers.

Where the taxpayer has adopted an 'abusive tax position', defined as an unacceptable tax position entered into with the dominant purpose of tax avoidance, the taxpayer will be subject to a 100 per cent penalty.

Tax evasion is subject to a flat 150 per cent penalty, as well as prosecution and the imposition of fines and/or prison sentences.

New Zealand tax law has a broad general anti-avoidance provision. In addition, there are many specific anti-avoidance provisions. The courts generally do not give a literal application to the general anti-avoidance provision and, for the time being, the courts recognise the form of transactions and give weight to this over and above the economic substance of the transactions. The general anti-avoidance provisions can be invoked in circumstances where there is a clear purpose or effect of tax avoidance, even if only one of a number of purposes of the transaction or structure is in question.

UK and Commonwealth jurisprudence on anti-avoidance principles has substantial weight in the New Zealand courts.

Iv. Taxable Periods And Filing Requirements

The New Zealand tax year runs from 1 April in each year.

B. International

I. Residents With Foreign Investments/transactions

New Zealand has a three-pronged international tax structure designed to discourage or limit the opportunities for New Zealand residents to shelter income offshore. The system comprises trust taxation (see c. below), controlled foreign companies (CFC), and foreign investment funds (FIF).

1) CFC

The broad effect of this regime is to capture within the New Zealand tax net any income derived by a foreign company that is controlled by five or fewer New Zealand residents. The income (and losses, if applicable) derived or suffered by such a company is attributed to any New Zealand resident taxpayer holding an 'income interest' of 10 per cent or more in the CFC. The tax is assessed as if the company were a foreign branch of a New Zealand company, but the assessment is against the shareholder. This branch equivalent income or branch equivalent loss is then attributed to the resident taxpayers in accordance with their respective income interests in the CFC. Losses are 'ring-fenced' by being restricted to deduction from gross income derived from the same country as the country of residence of the CFC generating the loss.

There was an exemption for companies resident in a 'grey list' country. The grey list previously comprised: Australia, Canada, Germany, Japan, Norway, Spain, the UK and the US. The grey list has been dramatically reduced to only Australian resident CFCs. However, the very good news is that this happened in tandem with the introduction of the 'active' business income CFC exemption, which was enacted in October 2009 and came into effect for most taxpayers on 1 April 2010.

2) FIF

A foreign investment fund (FIF) is any interest held in a foreign entity, with an exemption for: interests subject to the CFC regime; employer-sponsored superannuation arrangements; and interests whose cost does not exceed NZD50,000.

There were four methods for calculating foreign investment fund income or loss:

  • comparative value method (the default method), capturing movement in value over the income year
  • deemed rate of return method, involving application of a prescribed rate of return to the book value of the FIF interest
  • accounting profits method, which is the investor's proportionate share based upon shareholding of the net after-tax accounting profits of the FIF, and
  • branch equivalent method, which involves ascertaining the income of the FIF by the use of New Zealand tax rules.

The Income Tax Act 2004 was amended with effect from 1 April 2007 to provide new rules for taxing offshore portfolio investment in shares, and these changes have been carried forward into the Income Tax Act 2007. The new rules generally apply to an investment by a New Zealand resident in a foreign company (or unit trust) when the investor owns less than 10 per cent of the company.

The main changes are that the 'grey list' exemption in the foreign investment fund rules has been removed and a new fair dividend rate method – which broadly taxes 5 per cent of a portfolio's opening value each year – generally applies to interests of less than 10 per cent in foreign companies. If the total return on the share portfolio is less than 5 per cent then individuals and family trusts pay tax on the lower amount (they pay no tax if the shares make a loss).

Under the new rules, investments in Australian-resident companies listed on an approved index of the Australian Stock Exchange are taxed the same as New Zealand investments: they are taxable on dividends if the investment is held on capital account or on dividends and realised gains if held on revenue account.

There is a NZD50,000 cost threshold for investments in offshore companies outside Australia held by individuals, below which these investments continue to be taxable under general income tax rules (for example, on dividends only if held on capital account).

Two new income calculation methods under the foreign investment fund rules – the fair dividend rate and cost methods – have been introduced to apply generally to less than 10 per cent interests in foreign companies (including unit trusts).

Investors can use the other methods for calculating foreign investment fund income or loss – branch equivalent, accounting profits, comparative value and deemed rate of return – if they satisfy the conditions for using these methods.

3) Conduit tax regime

This regime was repealed in June 2009, effective for all income years commencing on or after 1 July 2009.

Ii. Expatriates And Non-residents

New Zealand treats expatriate New Zealanders as well as foreign non-residents in the same way: if an individual is not a tax resident of New Zealand, then the only liability for tax is in respect of New Zealand source income. If this income constitutes interest, royalties or dividends, then NRWT is the applicable tax. New Zealand also operates an 'approved issue levy regime', which applies to interest earned by non-residents and may reduce the effective withholding tax on interest from 15 per cent (or 10 per cent) to 2 per cent. The 2 per cent levy is not strictly an NRWT, however, and it will not be creditable in the recipient's home jurisdiction.

Iii. Tax Treaties

New Zealand has tax treaties with the following countries: Australia, Austria, Belgium, Canada, Chile, the People's Republic of China, Czech Republic, Denmark, Fiji, Finland, France, Germany, India, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Norway, Philippines, Poland, Russia, Samoa, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the UK and the US.

New Zealand has also signed tax information exchange agreements with: Anguilla, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Dominica, Gibraltar, Guernsey, Isle of Man, Jersey, Marshall Islands, Netherlands Antilles, St Kitts and Nevis, St Vincent and the Grenadines, Turks and Caicos Islands, and Vanuatu.

C. Taxation Of Trusts

I. Introduction

A new trust taxation regime was introduced in New Zealand on 1 April 1988 to counter tax deferral and avoidance benefits obtained by New Zealand residents who used trusts established in 'tax havens'.

A trust with New Zealand resident trustees, but settled by a non-resident settlor, is not subject to tax in New Zealand except on income that has its source in New Zealand. This is the case even if all the trustees of the trust are New Zealand tax residents, with the consequence that the trust itself would be regarded as a New Zealand tax resident. In this way, a New Zealand 'foreign' trust can operate as an 'offshore' trust.

This regime is sometimes known as 'the settlor trust regime', because the tax treatment of the trust turns in essence upon the tax residency of the settlor. 'Settlor' is defined broadly, and includes anyone who provides goods, services or money to a trust for less than full market value, or acquires goods, services or money from a trust for greater than market value. There are very extensive provisions designed to catch indirect settlements through nominees, and by other means. Consequently, to preserve a trust's foreign trust status (so that it operates as an offshore trust), it is crucial that no inadvertent settlements be made upon the trust by a New Zealand tax resident.

Ii. Types Of Trust And Tax Liability

New Zealand identifies three types of trusts for taxation purposes: complying trusts, foreign trusts, and non-complying trusts.

The tests that determine whether a particular trust constitutes a complying, foreign or non-complying trust are applied each time a distribution is made to a beneficiary.

1) Complying trusts

A complying trust is an ordinary, domestic New Zealand trust with New Zealand-resident trustees and a New Zealand-resident settlor.

At the time at which a distribution is made to a beneficiary, all trustee income derived by the trustee of that trust, from the year in which the original settlement was made to the year in which the distribution is made, has been liable to income tax in New Zealand, and all the trustees' income tax obligations have been met (i.e. filing returns, paying tax).

Except to the extent that distributions from a complying trust constitute current-year beneficiary income, distributions will not be assessable to beneficiaries. As New Zealand does not have a capital gains tax, capital gains can be passed through to beneficiaries tax-free. Similarly, accumulated income that has been taxed in the trustees' hands can be passed to the beneficiaries with no further tax liability.

2) Foreign trusts

A trust will constitute a foreign trust if, from the later of 17 December 1987 or the date on which a settlement was first made on the trust, until the date on which a distribution is made, no settlor of the trust has been a New Zealand tax resident. This is the case even if there are New Zealand resident trustees and/or beneficiaries.

3) Non-complying trusts

A trust will constitute a non-complying trust where, at the time a distribution is made, it is neither a complying trust nor a foreign trust. Generally this will include: a trust that would otherwise be a complying ('domestic') trust that has not satisfied all its obligations under the Act, or an 'offshore' trust on which a settlement has been made by a person who has been tax resident in New Zealand after the later of 17 December 1987 or the date on which a settlement was first made on the trust.

Iii. Distributions To Beneficiaries

The primary significance of the different types of trust is in relation to the taxation of distributions made by such trusts. As noted above in respect of a complying trust, beneficiary income (which means income paid or applied during, or within six months after the end of, the income year in which the income is derived) is taxed in the beneficiary's hands, but otherwise the beneficiary is not liable to tax on any amount received from the trust.

By contrast, when a distribution is made from a foreign trust to a New Zealand resident beneficiary, it will constitute a taxable distribution unless it represents a distribution of realised capital gains or the corpus of the trust. The tax exemption for capital gains does not apply to gains derived from transactions with associated persons.

The crucial thing in respect of a foreign trust is, however, that a non-resident beneficiary will not be subject to New Zealand tax in respect of any distributions unless the income has its source in New Zealand. Similarly, the trustees of a foreign trust will not be subject to tax in New Zealand except on income earned in New Zealand.

Distributions to beneficiaries of non-complying trusts are subject to full New Zealand tax and, in the case of distributions of accumulated income (falling outside the definition of beneficiary income) and capital gains, the tax rate is 45 per cent. By contrast, beneficiary income is taxed at the beneficiary's personal marginal tax rate. Taxable distributions from a foreign trust are also taxed at the beneficiary's marginal rate.

Non-complying trusts are deemed to be liable to New Zealand taxation on worldwide income, and the New Zealand resident settlor(s) is/are liable to pay New Zealand tax on all the trust's income, as agent(s) of the trustees.

D. Taxation Of Estates

New Zealand no longer has estate duty, as this was abolished in the early 1990s, but it still has a gift duty regime under Estate and Gift Duties Act 1968. Duty is imposed in respect of any gifts made by a New Zealand-domiciled individual, or in respect of gifts made by a non-domiciled individual comprising New Zealand-situated property. The annual gift duty exemption level is NZD27,000. Any gift in excess of this amount made within a 12-month period will be subject to duty at a sliding scale.

The applicable duty rates, calculated by reference to total gifts made by the donor, are as shown in the following chart.

Very little gift duty is paid in New Zealand, as individuals establishing trusts bypass the gift duty burden by either advancing funds to the trust or selling assets to the trust with a debt back. The debt will normally be interest-free and on demand, and the creditors will then progressively forgive the debt over time by way of deed of forgiveness of debt within their gift duty exemption limits.

No other specific taxes arise in the event of an individual's death. Nonetheless, the event of death may cause income tax liabilities to arise if, for specific tax purposes, death, and the subsequent passing of the estate to beneficiaries, constitutes a disposition of assets that might trigger a tax liability had that disposition been made by the deceased voluntarily while alive.

E. Other Taxes

New Zealand has GST as previously outlined, and the applicable rate is 15 per cent in respect of the supply of goods and services in New Zealand. Exported goods and services are generally zero-rated for GST. Financial services and certain other supplies (for example, the rental of residential properties) are GST exempt. Exported financial services are zero-rated for GST purposes.

Total gifts made by donor Gift duty rates
NZD27,000 – NZD36,000 5% on excess over NZD27,000
NZD36,000 – NZD54,000 NZD450 plus 10% of excess over NZD36,000
NZD54,000 – NZD72,000 NZD2,250 plus 20% of excess over NZD54,000
Exceeding NZD72,000 NZD5,850 plus 25% of excess over NZD72,000

New Zealand has no sales tax, stamp duty or wealth taxes. There is no broad-based capital gains tax, but in certain circumstances, gains of a capital nature may be categorised as income, for instance in respect of speculative transactions in property such as shares, certain real estate transactions, and gains made in respect of financial instruments.

New Zealand has no property taxes other than those levied by local authorities (rates). At the present time, there are no proposals to introduce any further taxes along the lines described above.

Because trusts are used as a mechanism for splitting of income among family members, rules were recently introduced, known as the 'minor beneficiary rules', which have the effect of applying a flat tax rate of 33 per cent in respect of beneficiary income distributions to individuals under the age of 16 years. Individuals over this age may receive beneficiary income at the lower marginal rate of 19.5 per cent.

Donations to charitable bodies entitle the donor to a tax rebate equal to one-third of the donation, with the only cap being that the rebate cannot exceed the donor's tax liability. Donations by companies receive the same effective treatment; but they are treated as a tax deduction. If a non-charitable trust allocates income to a charitable body as beneficiary income, that income will be entirely tax exempt, without limit.

Income attribution rules apply in respect of individuals who provide services via a company or trust where 80 per cent or more of the total services are provided to one party. In these circumstances, the income is attributed to the individual, who may be at the top marginal rate of 33 per cent. This measure is designed to prevent the allocation of beneficiary income via a trust to individuals at the lower marginal tax rate of 19.5 per cent.


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