INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 15): New Zealand
By Stephen Rutherford, Blackmore Virtue & Owens
There are two components which establish the New Zealand tax jurisdiction:
1. A New Zealand resident is liable for tax on all assessable income, whether derived from New Zealand or overseas, and
2. A non-resident is liable for New Zealand income tax only on income that is derived from New Zealand.
New Zealand has rules for the taxation of Controlled Foreign Companies (“CFC”) that may impute income in the hands of a New Zealand resident investor, even though the person has not actually derived the income. This occurs if the person has an ownership interest above the prescribed levels in a non-resident company earning passive income in the form of interest, certain dividends, royalties, and rent.
The CFC rules are supported by the thin capitalisation rules, which may prevent interest deductibility in New Zealand if the funding assists with the generation of active income that is not taxable under the CFC rules.
If the ownership interest in the non-resident company does not exceed the prescribed thresholds, the investment may be subject to taxation under the Foreign Investment Fund (“FIF”) rules.
New Zealand also has rules for investment in Portfolio Investment Entities (“PIE”). Tax rates for these vehicles depend on the investor’s residency and the resident’s income levels. The foreign investments of a PIE are always subject to taxation under the FIF rules.
The New Zealand government has entered into a number of treaties with governments of other countries for the purpose of avoiding double taxation. These treaties are referred to as Double Tax Agreements (“DTA”).
The regulation of foreign investment is liberal by international standards. However, the regime in relation to foreign investment in residential land was tightened in October 2018.
New Zealand’s inbound investment rules regulate investments in New Zealand significant assets; certain types of sensitive land (including residential land and farmland) fall under these regulations. These rules govern who needs to obtain consent, when consent is required, and the process for obtaining consent.
Foreign Tax and Financial Reporting Requirements for New Zealand
1. Main types of businesses and taxes in New Zealand
a. Sole traders who run their own businesses as individuals and are self-employed.
Personal income tax rates for 2019/20 range from 10.5% to 33%. In addition, a separate levy for accident compensation is payable by individuals who work for themselves, which is levied on profit.
b. A partnership is a way for two or more people to run a business together. A partner does not have to be an actual person. For example, a limited company counts as a “legal person” and can be a partner.
c. A limited partnership is a separate legal person, having a separate legal personality from its partners. This makes it more akin to a company. However, a limited partnership is also a flow-through entity for New Zealand income tax purposes (i.e., losses and gains are attributed to the partners directly).
As a result, limited partnerships are the preferred investment vehicle for some foreign venture-capital investors because they will allow investors to limit their exposure to liability, while at the same time providing a flowthrough tax mechanism in relation to gains and losses. This allows them to recognise those gains or losses in their home country.
d. A limited company is a company “limited by shares’’.
The current corporation tax rate is 28%. A full imputation regime applies to dividends. Income tax paid by a company which gives rise to imputation credits. The imputation credits may be attached to the dividends paid by the company. The shareholder’s income includes the imputation credits but with a credit allowed for those credits against the income tax otherwise payable. Nonresident shareholders will be subject to non-resident withholding tax on any dividends paid with the rate modified by any applicable double tax treaty.
A person’s Research and Development (“R&D”) tax credits for a tax year are calculated as 15% of their total eligible R&D expenditure, subject to a minimum threshold and expenditure cap.
Public limited companies pay the same tax rates as private limited companies. However, certain sectors such as banks can apply different rules.
2. Types of trusts
At the time any distribution is made, a trust is categorised (for tax purposes only) as either a complying trust, a foreign trust, or a noncomplying trust. This classification determines the tax treatment of any distribution, other than a distribution of beneficiary income, and the applicable tax rate.
Beneficiaries of foreign trusts and non-complying trusts may also be taxed on distributions of accumulated income and, in some cases, capital gains. These kinds of distributions are known as “taxable distributions”.
Trustees are taxed at the flat rate of 33% on trustee income. The same rate applies whether the trustee is a trustee of a complying trust, foreign trust, or non-complying trust. A beneficiary is liable to tax on beneficiary income at the beneficiary’s marginal tax rate. The same treatment applies whether the beneficiary is a beneficiary of a complying trust, foreign trust, or non-complying trust. Foreign beneficiaries may need to file a New Zealand tax return.
A unit trust is deemed to be a company for tax purposes. The unit holder is deemed to be a shareholder, the units are deemed to be shares and distributions are deemed to be dividends
3. Tax compliance requirements for owners of foreign assets such as bank accounts, insurance policies, shares, etc.
There have been changes for overseas owners of New Zealand real estate including holding entities and funds over the past few years. Changes involve rate of tax and withholding tax requirements on sale of real estate. Other changes are anti-money-laundering requirements for advisors and bankers. These include identification details for individual clients and sources of funds from overseas legal entities with details of their owners.
New Zealand has no Capital Gains Tax (“GCT”). The debate of whether to implement one was put to rest earlier this year.
4. Tax compliance requirements for estate and wealth planning matters
New Zealand has no estate taxes, inheritance taxes, or death duties, nor are there any gift duties.
5. Tax compliance requirements on sale of real estate
An objective bright-line land sale test for residential land requires income tax to be paid on gains from the disposal of certain residential property acquired and disposed of within five years (two years for land acquired before 29 March 2018), with the exception of the main family home. The purpose of the bright-line test is to supplement the purpose or intention test. The brightline test applies only where none of other land taxing rules apply. The bright-line test came into force on 01 October 2015. It only applies to a person’s disposal of land if the person acquired their estate or interest in the land on or after 01 October 2015. All non-residents and New Zealanders buying and selling any property other than their main home must provide a New Zealand IRD number as part of the usual land-transfer process with Land Information New Zealand.
In addition, all non-resident buyers and sellers must provide their tax identification number from their home country, along with current identification requirements such as a passport.
To ensure that our full anti-moneylaundering rules apply to nonresidents before they buy a property, non-residents must have a New Zealand bank account before they can get a New Zealand IRD number. A residential land withholding tax (“RLWT”) regime was introduced to ensure the collection of income tax from foreign investors who dispose of New Zealand residential property that is subject to a modified form of the bright-line test.
Collaboration with Other GGI Members
The firm has worked together with a number of GGI members in multiple jurisdictions. There is always the opportunity to mitigate tax and ensure that your client only pays the appropriate amount of New Zealand tax in accordance with New Zealand tax laws.
Appropriate structuring can always help and working with other GGI members to ensure that whatever structures are implemented provide the most tax effcient situation for both jurisdictions.
Future developments, Outlook / Summary
Although the capital gains tax debate has been put to bed, the New Zealand government is fully supportive of the OECD BEPs actions and has implemented measures in accordance with the OECD’s action points. However, the New Zealand government has noted that if they deem it appropriate, they will enact rules to protect the New Zealand tax base even if these rules conflict with the OECD’s recommendations.
Despite New Zealand being a small economy in a worldwide perspective it still has complex tax and compliance rules that can cost the unwary additional time and cost. To limit such cost and to ensure compliance with New Zealand regulations we are always willing to assist GGI members and their clients to further their business goals.
Stephen RutherfordGGI member firm
Blackmore Virtue & Owens
Advisory, Auditing & Accounting, Corporate Finance, Fiduciary & Estate Planning, Tax
Auckland, New Zealand
T: +64 9 5204 089
Blackmore Virtue & Owens (BVO) is an accounting practice located in Central Auckland which provides services to a range of New Zealand and overseas based clients.
Stephen Rutherford is the tax lead for BVO and provides taxation advice to BVO’s clients. He has been a New Zealand tax adviser for the past 30 years and is a Chartered Accountant, a member of STEP and a member of the International Fiscal Association (IFA).
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: boyloso - stock.adobe.com