Chapman Tripp - Resource Library - Doing Business in New Zealand


Contents

	Introduction
	About Chapman Tripp
	Why do business in New Zealand?
	Overview
		Geography Climate People Government Legal system Currency Infrastructure Business conditions Holidays Living in New Zealand Cost of living
	Economy
		Major industries Markets Trade agreements Economic position Economic policies
	Starting up business
		Type of business Corporate structure options Branch or subsidiary? Government consents
	Immigration
		Entry requirements Temporary employment for foreign nationals New Zealand residence Immigration policy Returning residents' visa
	Buying and developing land and property
		Title Contracts for sale and purchase of land Resource Management Act and district plans The Building Act 1991 Barriers to buying land Maori land claims
	Taxation
		Overview Income tax Goods and Services Tax Import duties Rates Other taxes
	Finance
		Reserve Bank Financial institutions Financial markets Raising finance Repatriation of funds
	Regulations affecting business
		The Commerce Act The Fair Trading Act
	Intellectual property
	Labour and employment
		Employment Relations Act Working conditions

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Taxation

This chapter contains summary information relating to the tax environment in New Zealand. Specialist advice is required for any particular circumstances.

Overview

New Zealand has a broad base tax system.

The taxation of individuals (other than those who are self employed) is straightforward, with almost all income derived by such individuals being subject to the deduction of withholding tax at source.

Conversely, as a result of major tax reforms over the past 15 years, the taxation of companies and self-employed individuals is complex.

The New Zealand tax base incorporates the following main direct and indirect taxes:

	income tax and fringe benefit tax
	resident and non resident withholding tax
	goods and services tax
	Accident Compensation Levies
	import tariffs and miscellaneous excise duties
	local authority rates on property
	gift duty.

Income tax

Residency and rates of tax
For individuals and companies defined as resident in New Zealand, income tax is imposed on all world-wide income. Individuals or companies not resident in New Zealand are subject to tax only on income derived from New Zealand, although this 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 (regardless of whether they have a permanent place of abode elsewhere), or if they are personally present in New Zealand for more than 183 days within a 12-month period. Individuals will cease to be resident in New Zealand if they are personally absent from New Zealand for more than 325 days within a 12-month period and do not have a permanent place of abode in New Zealand.

A company is regarded as resident in New Zealand if:

	it is incorporated in New Zealand
	it has its head office in New Zealand
	it has its centre of management in New Zealand, or
	control of the company by its directors is exercised in New Zealand.

Rates of tax
The rates of tax are:

	Companies (resident and non-resident) 33% (reducing to 30% from 1 April 2008)
	Individuals (resident and non-resident)

	Income up to NZ$38,000_______19.5%
	income which is more than NZ$38,000 but not more than NZ$60,000__________________33%
	income in excess of NZ$60,000__39%

For individuals, taxable income includes (among other items) salary and wages, bonuses, other employment benefits or remuneration, partnership income and investment income. In certain limited situations, taxable income derived by a company, trust or other entity is “attributed” for tax purposes to the individual whose personal effort produced the taxable income (i.e. the attributed taxable income is taxed in the hands of the individual).

For salary and wage earners, tax is assessed on the whole of the taxable income, with limited rebates available in certain circumstances. Tax is deducted at source from wages and salaries through a system known as PAYE (i.e. Pay As You Earn). Non-cash benefits provided to employees are subject to fringe benefit tax which is payable by the employer.

In the case of companies, taxable income generally corresponds with accounting gross profit or loss. However, adjustments are commonly required in relation to:

	the timing of income and expenditure recognition
	depreciation
	bad debts
	legal expenses
	provisions and reserves.

Also New Zealand does not generally charge tax on capital gains. However, in certain defined circumstances the proceeds derived from the sale of real or personal property (including shares) are subject to income tax. For example, income tax will be imposed on proceeds derived from the sale of property which was purchased for the dominant purpose of resale or as part of a dealing operation.

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 to offset future New Zealand taxable income, provided a certain level of shareholder continuity is maintained. Generally, the required level of continuity is at least 49% common ownership from the time the tax loss is incurred to the time it is offset. Losses may be shared between group companies where there is at least 66% common ownership between the companies at all times from the time the loss is incurred to the time the loss is offset. Tax losses can be carried forward indefinitely provided these requirements are met.

Double tax agreements
Double tax agreements (or tax treaties) have been entered into to reduce the incidence of double taxation between certain countries and provide more certainty for taxpayers operating in foreign jurisdictions. The agreements seek to improve the prospect that only one country will tax the individual’s or company’s affairs or, where tax is levied in both countries, a credit will be available to recover tax paid twice.

Double tax agreements are in place between New Zealand and the following countries: Australia, Austria Belgium, Canada, Chile, China, Denmark, Fiji, Finland, France, Germany, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, Norway, the Philippines, the Republic of Korea, Poland, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, United Arab Emirates, the UK and the USA. New Zealand has signed a double tax agreements with the Czech Republic, however this agreement is not yet in force.

A unilateral foreign tax credit is 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, and does not depend on New Zealand having entered into a double tax agreement with the particular country or territory concerned.

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 wholly-owned resident companies are generally exempt.

To avoid the double payment of tax on the same income (i.e. by the company and the shareholder) imputation credits, and certain other credits described below, may be attached to dividends paid by resident companies. An imputation credit represents a portion of the tax paid by the company (for every $1.00 of tax paid, a company receives a $1.00 imputation credit which it can attach to dividends).

Imputation credits are attached at the election of the company paying the dividend and can be carried forward indefinitely, provided a shareholder continuity of at least 66% is maintained. There are no rules stipulating when dividends may or must be imputed, provided sufficient credits are available. Accordingly a company with taxable and non taxable income that wishes to distribute part of its income can elect to fully impute the entire distribution (provided it has sufficient credits) or not impute the dividend at all. There are however rules concerning the imputation of dividends paid in the same year, and rules prohibiting imputation credits from being streamed to shareholders who receive the most benefit from them.

Imputation credits received by resident shareholders (companies and individuals) are offset against any tax payable on their income, including dividends received.

Subject to specified exceptions, dividends paid by resident companies to residents are subject to a 33% withholding tax. 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) no withholding tax will be imposed on the dividend. However from 1 April 2008, fully imputed dividends will be subject to a 3% residual withholding tax as a consequence of the reduction in the corporate tax rate (and hence the maximum imputation ratio) to 30%. There is some transitional relief for profits earned prior to 1 April 2008 which are distributed after that date.

Portfolio Investments Entities (PIEs)
From 1 October 2007, a new PIE tax regime came into effect for investment entities. New Zealand resident companies (including unit trusts), superannuation funds and group investment fund can all elect to become a PIE. There are a number of requirements that entities must meet before they qualify as PIEs. Broadly speaking 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 has tax exemption for gains on sale of shares in New Zealand resident companies, and in Australian companies that are listed on an approved ASX index.

There are 3 different kinds of PIE – portfolio tax rate entities (PTREs), portfolio listed companies, and portfolio defined benefit funds. PTREs are the most common type of PIE and are entitled to the greatest benefits from the PIE regime.

A PTRE must allocate its net income for a period between its members based on their proportionate interest in the PTRE. The PTRE itself pays income tax on any net income which is allocated to a member at their “portfolio investor rate”. These rates are:

	19.5% where the member is a New Zealand resident natural person (but not a trustee) and, in either of the two previous tax years, earned less than or equal to $38,000 of taxable income (excluding income from PIEs) and $60,000 of taxable income (including net PIE income); or
	33% (reducing to 30% for the 2008/9 and following income years) for members that are either:

	not resident in New Zealand; or
	natural persons resident in New Zealand who do not qualify for the 19.5% rate; or
	trusts (other than unit trusts) that elect this rate.

0% for all other investors (such investors must return their allocated income in their own tax returns and pay the tax on it, regardless of whether they are receive any distributions).

If a PTRE makes a loss, then that loss must also be allocated to its members. The PTRE will then claim a rebate for any loss allocated to a member on a 19.5% or 30% portfolio investor rate, which it passes on to such members either in cash or by issuing additional units or shares. Members with a portfolio investor rate of 0% claim their allocated losses directly.

The result of the above is that a PTRE will pay tax on behalf of some members but not others. To maintain member equity, the PTRE must adjust either:

	the units or shares held by the investors (by redeeming units of 19.5% or 30% members or issuing additional units to 0% members); or
	the distribution paid to investors (by deducting the amount of tax paid on each investor’s behalf).

Investors in a PTRE are not subject to tax on any distributions or redemptions themselves, and no RWT or NRWT will be deducted from distributions or redemptions. This means that 19.5% and 30% investors do not have any personal New Zealand tax liability in respect of their net income from the PTRE (as any tax on that net income is payable by the PTRE itself).

Taxation of investments by residents in non-resident entities
New Zealand has a complex international tax system that is designed to tax on an attributed basis income derived by New Zealand tax residents from offshore equity investments (for example, shares or units in a unit trust). Broadly speaking, this is achieved through the attribution of the income of controlled foreign companies (“CFCs”) and foreign investment funds (“FIFs”) to New Zealand tax residents holding interests in those entities. Changes to these CFC and FIF rules have been proposed and will likely be enacted.

Controlled Foreign Companies Regime

Broadly speaking, a CFC is a non-resident company in which five or fewer New Zealand residents together with their associates have a combined holding of more than 50%. Ownership is determined by reference to "control interests" in the controlled foreign company. A company will also be a CFC where it is 40% or more owned by a single New Zealand resident and its associates and no non-associated foreign resident owns a greater or equal interest.

New Zealand residents are obliged to include in their New Zealand net income all "attributed foreign income," which is their proportionate attributed share of the net income of the CFC. However, where a resident holds shares in a CFC resident in Australia, Canada, Germany, Japan, Norway, Spain, the UK or the USA (known as the “grey list”), income is generally not required to be attributed under the international tax rules.

Credit is given for any underlying foreign income tax and foreign withholding tax paid by or on behalf of the CFC. The New Zealand resident's attributed CFC income may be set off also against attributed CFC losses. Both credits and losses are quarantined by jurisdiction, and may be carried forward subject to the passing of a continuity of ownership test.

There is an exemption from the CFC regime for New Zealand residents owning an income interest of less than 10% in a CFC. Such interests generally fall within the FIF regime described below.

Foreign Investment Fund Regime
The FIF regime imposes New Zealand tax on income from FIFs, which are foreign entities that are not CFCs or are CFCs in which the New Zealand resident investor holds an interest of less than 10%.

The FIF regime will apply to such offshore equity investments unless the New Zealand resident investor:

owns more than 10% of the entity in question (except where the investor is a portfolio investment entity, a superannuation scheme, a unit trust, a life insurer or a group investment fund); or

is a natural person (but not a trustee, other than for certain very limited purposes) and the total cost of all interests owned by the investor which would otherwise be subject to the FIF regime (which excludes, amongst other things, shares in Australian resident companies listed on the ASX All Ordinaries Index) is NZ$50,000 or less. For this purpose, the investor can elect to treat all interests, which it held on 1 January 2000, as having a cost equal to half the market value of those interests on 1 April 2007.

New Zealand resident investors subject to the FIF regime
Where the FIF regime applies, a number of possible methods can be used by an investor to calculate its income in respect of its FIF interests. However, some of the methods may only be used in certain circumstances. Therefore, an investor's choice of method is usually restricted. The two main methods are the fair dividend rate (FDR) method and the comparative value method.
The Fair Dividend Rate (FDR) Method
This is the main method for calculating FIF income and will usually produce the best result if the FIF interests have increased in value. Where the new FIF regime applies, New Zealand investors should, subject to the comments below, be deemed to derive assessable income in an income year equal to 5% of the market value of each FIF interest held by them at the beginning of the income year, plus an amount referred to as the ‘quick sale adjustment’ if the investor has bought and sold a particular FIF interest during the year.

To calculate any ‘quick sale adjustment’ the investor first needs to calculate their ‘peak holding adjustment’. To calculate its peak holding adjustment with respect its interest in a particular FIF, the investor must calculate the difference between the greatest number of interests held at any point during the income year in that FIF and the greater of:

	the number of interests held in the FIF at the beginning of the income year; and
	the number of interests held in the FIF at the end of the income year.

The investor must then multiply that difference by the average cost of the interests in the FIFs acquired during the year. The peak holding adjustment is 5% of this amount.

The ‘quick sale adjustment’ amount which then must be returned by the investor is the lesser of:

	the peak holding adjustment; and
	the profit (if any) made on the sale of the interests in the FIF acquired during the year, plus any distributions received on those interests.

For this purpose, the last FIF interest acquired is deemed to be the first sold.

Investors are subject to tax on this assessable income at their marginal rates.

Any dividends received by an investor and any redemptions or repurchases are ignored under the above 5% method (except when the redemption or repurchase occurs in the same year interests in that FIF are acquired and a quick sale adjustment must be made). A slightly more complex version of this method is used by managed funds.

If the investor is a natural person or a family trust and can show that the sum of:

	the total increase in the market value of all the investor’s interests which are subject to the FIF regime (including the FIF interests, but excluding certain debt-like FIF interests); plus
	any realised gains and distributions received from this pool of interests, is less than 5% of the total income on the pool under the 5% method, the investor can elect to only be subject to tax on this lesser amount. The investor cannot claim a deduction for any loss however.

The FDR method cannot be used for FIF interests which:

	exceed 10% of the FIF, except where the FIF is a foreign investment vehicle and the investor is a portfolio investment entity;
	are an in-substance debt arrangement; or
	offer a return guaranteed by another person.

These FIF interests are instead taxed under the comparative value method. Generally speaking, this method measures the fluctuation in value of New Zealand investors’ interests in the FIF over the relevant income year, including dividend receipts. Any increase in value attributed to investors using this method will be subject to income tax in New Zealand in that year. Any decrease in value attributed to investors under this method should be deductible. Effectively, this method will result in any surplus (including dividends) above the amount originally subscribed for a FIF interest being subject to tax, with a deduction available for any deficit.

It should be noted that the above passages describe the current taxation of investments in non-resident entities. The New Zealand Government is engaged in a review of options for changing the tax treatment of CFCs and certain proposed changes have been outlined in issue papers. The Government has indicated that a tax exemption will be introduced for the active income (income derived from active business, such as from manufacturing or from industrial activity) of New Zealand CFCs and certain FIFs. It also proposed that dividends from CFCs to the New Zealand parent will be exempt from domestic tax. The current exemption from the CFC regime for investments in entities resident in grey list jurisdictions will be repealed.

The Government also proposes that the rules on conduit taxation will be repealed. The Government will provide more detail through a second round of consultations and aims to introduce legislation in 2008, with application beginning from the 2009/2010 tax year (being 1 April 2009).

Dividends

Dividends, which a resident individual receives from a non-resident company, are subject to tax. Where income of the non-resident company has already been attributed to the resident individual (under the international tax rules) and subject to tax, a credit mechanism may operate to ensure that no further New Zealand tax is imposed on the dividend received. A further credit may be available, within certain limits, to the resident recipient for any foreign tax paid.

Dividends, which a resident company receive from foreign companies, are exempt from tax. However, the company receiving the dividend is required to deduct a dividend withholding payment (“DWP”) from the dividend at a maximum rate of 33% (reducing to 30% from 1 April 2008). The amount of DWP payable may be reduced by:

	any foreign withholding tax already paid in respect of the dividend;
	any underlying foreign tax credit (being a credit for qualifying foreign tax or New Zealand tax paid by the non-resident company) available;
	any imputation credit attached to the dividend;
	any credit which arises in circumstances where the income of the non-resident company has already been attributed to the resident individual (under the international tax rules) and subject to tax; and
	conduit tax relief (see below).

In the event that DWP is deducted by the resident company and paid to the New Zealand Inland Revenue Department (“IRD”), a dividend withholding payment credit will arise in the hands of the resident company. The resident company can attach dividend withholding payment credits to dividends, which may be used by its shareholders to reduce their tax in the same way as imputation credits and in some circumstances can be refunded.

Taxation on dividends received by resident companies from non-resident companies, or on income attributed to resident companies under the international tax rules, may also be reduced (through conduit tax relief) to the extent the resident company is owned by non-residents. There are rules in place limiting conduit tax relief when the New Zealand operations of a group are excessively debt geared.

The situation may be different in relation to New Zealand investors who make a direct investment in an Australian company where that Australian company derives New Zealand income or pays tax in New Zealand. Australian companies are able to maintain New Zealand imputation accounts and New Zealand companies are able to maintain Australian franking credit (the Australian equivalent of an imputation credit) accounts. The regime consists of a pro-rata mechanism whereby a company can allocate both New Zealand imputation credits and Australian franking credits to dividends. New Zealand resident shareholders will be able to benefit from imputation credits attached to dividends paid by Australian companies based on the proportion of their shareholding in the company that elects into the regime.

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:

	Double tax agreements other 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, dividend withholding 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.

Dividends paid to non-resident shareholders can have imputation credits and dividend withholding payment credits attached, in the same way as those types of credits can be attached to dividends paid to residents (although companies which elect to qualify for conduit tax relief may attach conduct tax relief credits rather than dividend withholding payment credits to dividends paid to non-resident shareholders).

Imputation credits can be used under the Foreign Investor Tax Credit (“FITC”) regime. Broadly, when a resident company pays fully imputed dividends, the FITC regime has the effect of limiting the combined tax burden on the taxable income derived by the resident company and distributed as dividends to a non-resident shareholder to a maximum of 33%.

The FITC regime achieves this by providing a tax credit to the resident company, which the resident company must use to fund an additional “supplementary dividend” to the non resident. The supplementary dividend is paid in cash at the same time as the main dividend. Where the dividend is fully imputed, the additional supplementary dividend is equal to the NRWT payable. The result of this is that the non resident shareholder receives the same net amount as if no NRWT (or supplementary dividend) had been payable, but may still be able to claim a foreign tax credit in its home jurisdiction.

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 zero percent, providing certain conditions and registration formalities are satisfied. These conditions include the requirement that the borrower or a person on the borrower’s behalf makes a payment to the IRD of an “approved issuer levy” equating to 2% of the interest payment. The approved issuer levy is not a withholding tax deducted from the interest payment.

Withholding payments are deducted at the rate of 15% from payments made to 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 to remove the need for the withholding deduction can be granted by the IRD if specified factors are satisfied. It is important that the non-resident contractor applies for the exemption certificate and provides a copy of it to the payer prior to any payment being made for work or services performed in New Zealand. It is not always necessary to apply for a certificate of exemption if the contractor is eligible for total tax relief under a double tax agreement and is to be present in New Zealand for 92 days or less in any 12-month period.
Transfer pricing and thin capitalisation
New Zealand’s transfer pricing regime seeks to ensure that almost all cross-border transactions are priced (at least for tax purposes) on an arm’s length basis where New Zealand tax leakage is in prospect. New Zealand also has thin capitalisation rules which, broadly speaking, operate to disallow deductibility for interest paid on debt to the extent that a foreign owned New Zealand group has a debt to equity ratio greater than 3:1.

Goods and Services Tax

Goods and Services Tax (“GST”) is a broad-based consumption tax chargeable on the supply of most goods and services in New Zealand at a rate of 12.5%. GST registered taxpayers supplying goods and services in the course of carrying on a taxable activity must charge GST, even if the recipient is not the final consumer. Generally GST registered taxpayers can obtain a credit for the GST charged on goods and services they acquire. In this way, the burden of GST is passed along a chain of GST registered suppliers until it reaches the final consumer.

Persons 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 with a combined value of more than NZ$40,000 per year. A person carrying on a taxable activity (whether inside New Zealand our outside New Zealand) can still voluntarily register for GST if they are under this threshold.

Subject to certain exceptions, the principal exemptions from GST are for financial services (e.g. the lending of money and transactions in shares), services performed as an employee 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. Anybody accidentally injured in New Zealand (including non-residents) is covered by the scheme, regardless of fault, circumstances, place, time, or injury. Moreover, the scheme abolishes any civil right, either at common law or under statute, to claim damages for unintentional injury.

The scheme provides for some financial assistance to be given to help with medical expenses, loss of earnings, and compensation for dependents in the case of death. All compensation is paid by the Accident Compensation Corporation (ACC).

The ACC is funded by the following sources:

	Levies paid by all employers, self-employed persons and private domestic workers for work-related accidents. The amount of the levy for the self-employed and private domestic workers is set by regulation. The amount of 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 nonwork-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.

Instead of paying a levy for its employee’s work-related accidents, an employer may elect to join the ACC’s accredited employer program. Under this program, an employer pays no levy, or a reduced levy, in return for providing all or some of its employee’s work-related statutory compensation entitlements. An employer wishing to join the program 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 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.

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 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 values.

Other taxes

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 exceeds NZ$27,000 in any 12 month period.

Stamp duty is no longer payable (except on the sale and lease of land, including buildings, for commercial use in respect of contracts completed prior to 20 May 1999).

There is no capital gains tax in New Zealand as such. However, in certain defined circumstances the proceeds derived from the sale of real or personal property (including shares) are subject to income tax. For example, income tax will be imposed on proceeds derived from the sale of property, which was purchased for the purpose of resale or as part of a dealing operation.

There are no estate or death duties payable in New Zealand.

Taxation section last updated February 2008