New Zealand has a broad-based tax system consisting principally of:
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, and
local authority rates on property.
Stamp duty, gift duty and death duties are not payable in New Zealand.
Tax advice provided by lawyers enjoys legal privilege, meaning that it does not have to be disclosed to the authorities in most circumstances.
Residency and rates of tax
For individuals and companies defined as “resident” in New Zealand, income tax is imposed on worldwide income, subject to some exceptions (BD 1). Non-resident individuals and companies, on the other hand, are taxed only on New Zealand sourced income, 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 a total of 183 days within any 12-month period. A non-resident who has come to New Zealand for the first time or, in certain cases, who returns to New Zealand and has not been resident in New Zealand for a continuous period of 10 years before becoming a New Zealand resident, can qualify for temporary transitional residence status. A transitional resident is exempt from New Zealand income tax on their foreign-sourced income other than service income for a period of four years after they meet the test for New Zealand tax residency.
A company is regarded as resident in New Zealand if it:
is incorporated in New Zealand
has its head office in New Zealand
has its "centre of management" in New Zealand, or
is controlled by its directors in New Zealand.
Companies (both resident and non-resident) are taxed at 28%. Individuals (both resident and non-resident) are taxed progressively 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 by the employer through the Pay As You Earn (PAYE) system. The amount of tax deducted will depend on the gross salary or wage paid to the employee. Non-cash benefits provided to employees are subject to fringe benefit tax which is payable by the employer.
For companies, net taxable income generally corresponds with accounting profit or loss. However, adjustments are commonly required in relation to:
New Zealand does not 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).
On 17 May 2015, the Prime Minister announced proposals to bolster the current NZ tax rules on property. The proposals include:
requiring income tax to be paid on the gains from the sale of a residential property (other than the seller’s main home), sold within two years of purchase; and
requiring the provision of a New Zealand IRD number for the purchase or sale of property other than the person’s main home. This will apply equally to New Zealand residents and non-residents. If the person is resident in another jurisdiction, they will also have to provide any tax identification number that has been issued to them by that country.
Specifically in relation to non-residents, the proposals include:
a possible withholding tax for non-residents selling residential property; and
as a prerequisite to applying for an IRD number, a non-resident will need to open a New Zealand bank account.
The changes (with the exception of the withholding proposal) are proposed to apply from 1 October 2015. The withholding tax is proposed to be introduced mid-way through 2016.
Double tax agreements
New Zealand has entered into double tax agreements (or tax treaties) with more than 30 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 cannot be shared with other entities.
Taxation of dividends paid by resident companies to residents
Dividends paid by resident companies to resident shareholders are, in most instances, taxable to the shareholder. 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 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 tax on 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. If the dividend is fully imputed (i.e. imputation credits are attached at the maximum rate) only a residual 5% withholding tax will be imposed on the dividend (i.e. the 33% tax liability is reduced by the 28% tax paid by the company to 5%).
Portfolio Investments Entities (PIEs)
Widely held investment entities which are tax resident in New Zealand can take advantage of New Zealand’s PIE tax regime. Broadly speaking, to qualify as a PIE, they must be widely held (or owned by widely held vehicles); an investor may not hold more than 20% of any investor class; and the PIE 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 certain approved indices of the Australian stock exchange.
PIEs are not taxed like companies. Instead their income is taxed only once – either to the PIE (if the investor is an individual or trustee (other than a trustee of a unit trust or charitable trust)) or to the investor (if the investor is a company or another PIE). For individuals, the PIE pays tax at more or less the investor’s marginal tax rate, with a cap of 28%.
Non-resident investors in certain PIEs bear no New Zealand tax on foreign-sourced income.
Taxation of overseas investments by New Zealand residents
The taxation of equity investments by New Zealand residents in non-New Zealand companies is governed by the New Zealand Controlled Foreign Company (CFC) and Foreign Investment Fund (FIF) regime.
Subject to certain exceptions, a New Zealand resident investor is taxed on foreign-sourced income derived by a non-resident entity that is either a CFC or a FIF, even though that income has not been received by the New Zealand resident investor.
In the case of a CFC, subject to a number of exceptions, the New Zealand investor will be taxed on its proportionate attributed share of all net passive income of the CFC. Net passive CFC income broadly comprises rent, royalties, certain income related to telecommunications services, income from offshore insurance businesses, life insurance policies, disposals of revenue account property, base company services income, certain dividends and interest, less related expenses. Attributed income does not include “active” income or passive income of the CFC if the passive income is less than 5% of its total income.
In the case of a FIF, the New Zealand resident shareholder will be taxed on income calculated by one of five calculation methods available to it. These methods are:
fair dividend rate method
comparative value method
deemed rate of return, and
attributable FIF income method.
Income from foreign investment funds (FIFs) is generally calculated either using the fair dividend rate method or the 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 the CFC and FIF 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 non-resident withholding tax (NRWT). The rate of NRWT imposed depends upon the type of payment and whether a double tax agreement is in place:
* A 0% rate of NRWT applies to fully imputed dividends paid to a non-resident shareholder holding a 10% or more direct voting interest in a New Zealand company or holding less than 10% but whose post-treaty rate is less than 15%. A 0% rate of NRWT also applies to a fully imputed non-cash dividend. To the extent the dividend is not fully imputed, NRWT will be required to be withheld at 30% (reduced to 15% for countries New Zealand has a double tax agreement with; ; and to lower rates under some treaties for substantial shareholdings).
** 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 interest paid to non-associated persons, dividends, and certain royalty payments, NRWT is generally a final tax for New Zealand tax purposes.
The Foreign Investor Tax Credit (FITC) regime alters the NRWT regime by effectively eliminating the monetary effect of NRWT on dividends paid by a New Zealand company to a non-resident shareholder who holds a direct voting interest in a New Zealand company of less than 10% and the post-treaty tax rate for the initial dividend is 15% or more.
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 New Zealand borrower (Approved Issuer) to a non-associated non-resident lender, the NRWT rate can be reduced to 0%, provided certain conditions and registration formalities are satisfied. Approved Issuers must generally pay a levy (Approved Issuer Levy or AIL) equivalent to 2% of the interest payment.
Interest paid on certain qualifying widely held bonds may be eligible for a 0% rate of NRWT without the payer of the interest having to pay AIL.
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 20% 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. This is not considered a minimum or final tax. It is credited against any final income tax liability the non-resident contractor may have in New Zealand, and is refundable to the extent of any excess.
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)
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 borne by 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 can voluntarily register for GST even if they are under this NZ$60,000 threshold.
Provided certain circumstances are met, non-residents who do not carry on a taxable activity in New Zealand may also voluntarily register for GST. Certain supplies of goods and services can be either exempt from GST or zero-rated (an example of an exempt supply is the supply of financial services. Examples of zero-rated supplies include certain “exported” services and supplies wholly or partly consisting of land).
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 Compensation Act 2001, 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 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.
For more information about ACC, please refer to the chapter on Labour and employment.
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.
Local government rates
Rates are the main source of local government revenue. These are calculated as a percentage of the value of land and/or capital improvements.