Tax Advice

Overview of the New Zealand Tax System

Taxation in New Zealand is collected at the national level by Inland Revenue Department (IRD).

The main taxes are:

• Income tax, payable by individuals, companies, trusts, and other entities and groups;
• Goods and Services Tax (GST), currently levied at 15% on most goods and services in New Zealand;
• Fringe Benefit Tax (FBT) imposed on an employer in respect of benefits provided to employees and associates of employees; and
• ACC (Accident Compensation Corporation) levies (similar to workers’ insurance) and is levied on both employers and employees.

In addition there are:

• Customs duty imposed on some imports. This is administered by Customs and Excise.
• Various government charges; and
• Local property taxes (rates) are managed and collected by local authorities.

There is no:

• Social security tax;
• Land tax;
• Stamp duty;
• Estate duty; or
• Gift duty.

There is no specific capital gains tax in New Zealand, BUT income tax is levied on some gains of a capital including:

• Various land transactions. Land is defined as any interest in land and therefore has a wide application;
• Many foreign investments, other than most Australian listed equities; and
• Gains from financial arrangements (i.e. debt and debt instruments).

Income tax

Income tax is imposed on a wide range of income, including some items that may be regarded as capital gains.

Most payments to wage and salary earners are subject to PAYE (pay as you earn) source deduction payments.  Employers deduct tax based on the employee’s expected annual tax liability and pay this to IRD.  Employers may also be required to deduct student loan repayments and child support payments.

Sole traders, partners and shareholder-employees typically will pay tax through the provisional tax system of three instalments and a possible top-up.

Goods and Services Tax

Goods and Services Tax (GST) is a VAT-type consumption tax levied at 15% on the supply of most goods and services in New Zealand.

The threshold for compulsory registration is a turnover of NZD$60,000 is a 12-month period. If a supplier exceeds that threshold and does not register deemed registration occurs.

A non-resident without a liability for New Zealand income tax may still have a liability to register and account for GST.

Tax Administration

Most wage and salary earners have income tax deducted at source (PAYE).  Employers have specific obligations in respect of deducting and paying PAYE and other deductions at source.

Resident withholding tax (RWT) is deducted at source from most interest payments and dividends.

The combined effect of such source deductions is that many New Zealand residents do not have to file an annual tax return.

The standard fiscal balance date is 31 March.  The fiscal (tax) year runs from 1 April to 31 March of the following calendar year. IRD does grant industry recognised non-standard balance dates), such as 31 May or 30 June for farmers.  Application for the use of a non-standard balance date used by a foreign parent company is often granted, but approval is not automatic. Approval cannot be back-dated to an earlier tax year. Written application must be made for a non-standard balance date.

Tax Audits

The New Zealand tax system is based on voluntary compliance. Inland Revenue regularly undertakes a variety of audits, including:

• Risk Reviews – where Inland Revenue raises potential issues and discrepancies. This gives the taxpayer concerned an opportunity to review the returns and possibly make a voluntary disclosure of an error or errors; and
• Tax Audits – often a tax audit follows a taxpayer’s reply to a risk Review letter. A tax audit may be specific to a particular transaction, tax type and income year or return period. Sometimes a tax audit will cover multiple tax types and income years or return periods.

Inland Revenue has several specialist teams including:

• Property Compliance; these teams review and audit land transactions. Inland Revenue receives details of all land transactions in New Zealand.  The recent introduction of the Property Bright-line Test and the requirement for purchasers to have an IRD number, will provide even more information to these teams.
• Transfer Pricing; this team reviews payments from New Zealand businesses to foreign entities that are associated persons. This could include payment for head office costs and royalties for the use of intellectual property.
• Large Enterprises; these teams review the tax affairs of large businesses.
• Special Audit; this team reviews income from illegal activities such as bookmaking, drug dealing and criminal activity.

In addition, Inland Revenue periodically targets certain sectors or industries.  Recent examples include:

• The building industry;
• Restaurants and fast-food outlets; and
• The tourism industry – in particular looking at “back handers” paid by businesses to tour guides and drivers who bring tourists to a shop and failure to deduct tax at source.

Even if there is no or little tax to pay as a result of an audit, the experience is generally stressful for the taxpayer and sometimes the taxpayer’s accountant.  The use of an experienced specialist can reduce the stress and shorten the time taken to complete an audit.

Murray has dealt with many tax audits, both directly on behalf of taxpayers and for clients of other accountants.  Often the result has been reduced professional fees, taxes, penalties and interest.

Request for Revised Assessments

Income tax is assessed on an annual basis.  Goods and Services Tax (GST) is assessed on a periodic basis of one, two or six-months, depending on the registered person’s registration basis.

Sometimes errors are made when calculating income tax and GST returns or expenditure is incorrectly characterised as capital, and thus non-deductible, when in fact it is a revenue cost.

Where an error of this sort is detected within four months of an assessment, the taxpayer may issue a notice of proposed adjustment if the amount of tax is significant.  Often, however, such errors are not discovered until after four months and sometimes after many years.

Requests can be made to Inland Revenue to issue revised assessments in terms of section 113 of the Tax Administration Act and in some cases section 20(3) of the Goods and Services Tax Act.

While Inland Revenue agrees that incorrect assessments should be corrected, the decision to issue a reissued assessment is discretionary.

There is a time-bar on requests made after eight years of the end of the income year or GST return period in which the assessment was made.

Murray has assisted many clients in obtaining revised assessments for both income tax and GST.  Some of these requests have resulted in large amounts of refunded tax.

New Zealand’s International Tax Regimes

The New Zealand tax system includes specific regimes, the controlled foreign company (“CFC”) and foreign investment fund (“FIF”) regimes aimed at foreign investments that do not necessarily directly pay income to their New Zealand investors.

A CFC is a foreign company where a:

• Group of 5 or fewer New Zealand tax residents has total control interests of more than 50%;
• Single New Zealand tax resident has a control interest of 40% or more and no unassociated non-resident owns a greater control interest; or
• Group of 5 or fewer New Zealand tax residents can control the exercise of shareholder decision-making rights for the company.

There is an “active” exemption from the CFC regime for companies deriving trading rather than investment income that pay tax in the foreign company.  Distributions to the New Zealand shareholders, however, are taxed.

The definition of an FIF is very wide and includes:

• A foreign superannuation scheme;
• A foreign life insurance policy;
• Listed foreign equities, other than most Australian listed equities; and
• Shareholding in unlisted foreign companies that are not subject to the CFC regime.

The FIF regime applies:

• To individuals with FIF investments with a total cost of more than NZD$50,000; and
• To all other taxpayers.

Essentially a taxpayer must calculate attributable income from such investments. There are several options available, but the two most common methods are comparative value or the, so-called fair dividend rate (FDR) method.

New Zealand categorises trusts for tax purposes into three groups:

• Complying trusts (the most common type) – the trust is settled by a New Zealand tax resident, New Zealand tax is paid on all of the trust’s income and the trustees meet all of their filing and tax obligations;
• Foreign trusts – a trust with no New Zealand settlor (note settlor means any person who transfers value to the trust); and
• Non-complying trusts –a trust that is neither a complying nor a foreign trust.

Income derived by a complying trust is either distributed to beneficiaries and taxed at the beneficiaries’ own marginal tax rates or retained and taxed as trustee income at 33%.

A foreign trust is only subject to New Zealand tax on income that has a New Zealand source.

Most distributions to New Zealand tax resident beneficiaries from a non-complying trust are taxed at 45%

Penalties and Interest

The New Zealand tax system is based on voluntary compliance. The existence of penalties and interest on unpaid taxes and poor tax compliance, and civil penalties and possibly imprisonment for evasion, are designed to encourage voluntary compliance.

Land Transactions

Beware the claim that New Zealand has no capital gains tax (CGT). Despite the absence of a specific CGT, some capital gains are taxed as income.

There are specific provisions within the Income Tax Act relating to:

• Gains and losses from land transactions;
• Tests to “capture” transactions by associated persons; and
• Limited exemptions from gains.

Legislation came into force in 2015 that taxes any gain made from a sale of land acquired from 1 October 2015 that has been held for less than two years. There is an exemption for the main family residence, as well as other minor exclusions.

Inland Revenue (IRD) has designated teams reviewing land transactions. IRD numbers (tax-file numbers) must be disclosed when buying and selling land, including non-residents. This enables IRD to match data and take a view on whether a gain is taxable. Onus rests with the taxpayer and not IRD when it comes to land transactions.

One of the main specific taxing provisions provides that an intention or purpose, even a secondary intention or purpose, at the time of acquisition of land makes any future gain on sale taxable. There is an exemption for the family home, but that exemption does not apply where there is a regular pattern of transactions.

Further, there are

[1] Section CB 6A

[1] Section CB 6

Voluntary Disclosures to Inland Revenue

A voluntary disclosure is a disclosure of tax shortfalls (i.e. a past assessment is too low due to unreturned income, over-claimed expenses, timing errors, or an avoidance arrangement) of any tax type, but usually relates to income tax, GST and FBT.

Sometimes a voluntary disclosure is made because the person or business concerned wishes to “put things right”.  Sometimes a voluntary disclosure is prompted by a risk review letter or other correspondence from Inland Revenue.

Inland Revenue’s requirements are set out in Standard Practice Statement (SPS) 09/02 Voluntary Disclosures.

The SPS covers the necessary content of the disclosure and the concessions that will follow. The disclosure should set out a clear and comprehensive statement of the errors that are being disclosed and of the reasons for them. Enough information should be disclosed to enable Inland Revenue to make an assessment. Ideally, this means that an effort should be made to calculate the tax position as a result of the disclosure.

If a voluntary disclosure is made before the notification of an audit (a “pre-notification disclosure “) there will be a 75% reduction of the more severe shortfall penalties and potentially a 100% reduction for other shortfall penalties that would otherwise apply.

If a disclosure is made after notification of an audit, but before the audit has commenced (a “post-notification disclosure”), a 40% penalty reduction will still be granted.

Once the audit has commenced, however, there can be no reduction in shortfall penalties is possible.  But there may still be merit in making a voluntary disclosure at that stage.

To be effective, a voluntary disclosure must be a full disclosure for the relevant tax type and income year concerned.

Murray McClennan has assisted many clients to make voluntary disclosures and to negotiate settlements with Inland Revenue.

Tax Residency & Source

There are two separate tests of tax residency under New Zealand law:

• Physical presence or days count test. A person will become a tax resident if he or she spends more than 183 days in a 12-month period in New Zealand.  It is important to note that this does not necessarily mean a calendar year or a fiscal year, but in fact can be any 12 months; and
• Having a permanent place of abode in New Zealand, irrespective of whether the person has a permanent place of abode in another country.

The physical presence test is applied over any 365 day period and not necessarily a calendar year or a fiscal year (1 April to the following 31 March). Once the figure of 184 days is reached an individual is a tax resident from the first day.

A New Zealand tax resident must be physically absent from New Zealand for more than 325 days in a 365 day period and not have a permanent place of abode to break his or her tax residency.

The permanent place of abode test is the dominant test of tax residency and is often overlooked.

A permanent place of abode means having both i) a place of abode – i.e. a place to live – in New Zealand and ii) having a reasonable level of attachment to that place. In practice, the courts will look at a range of factors including:

• Where the taxpayer’s family live;
• Where the taxpayer takes his or her holidays;
• Whether personal effects are stored in New Zealand;
• Membership of clubs and professional associations; and
• Whether a job is kept open for someone working overseas.

Tax residency under domestic law can be modified by a Double Tax Agreement (DTA).  New Zealand had 39 DTAs as at March 2016.

Generally, a New Zealand tax resident is taxed in New Zealand on his or her worldwide income. If income is taxed overseas credit will be given for the foreign tax, but only up to the level of tax payable in New Zealand on that income. New migrants and returning New Zealanders who have been non-resident for 10 years or more are generally eligible for a 48 month exemption from foreign passive income – e.g. interest, dividends, rents and royalties.

A company is a tax resident of New Zealand under domestic law if:

• The company is incorporated in New Zealand; or
• Its head office is in New Zealand; or
• Its centre of management is in New Zealand; or
• Its directors, in their capacity as directors, exercise control of the company in New Zealand, even if the directors’ decision-making also occurs outside New Zealand.

In addition, a foreign business trading in New Zealand will be subject to New Zealand tax on the profits relating to a permanent establishment (in general terms a place of business such as a shop, factory, quarry or similar, but also includes a dependent agent who has authority to contract on behalf of the foreign business) in New Zealand.  Please note that the OECD is currently considering whether to widen the definition of permanent establishment.

Source

If income has a New Zealand source it is, almost always, taxed in New Zealand.  An example of this is net rental income derived by a non-resident in New Zealand.

A situation that often comes as a surprise, is that interest paid to a foreign lender has a New Zealand source if the loan is secured over New Zealand land.  Interest on such loans is subject to non-resident withholding tax at 10 or 15% or approved issuer levy (AIL) at 2%.  Not all loans are eligible for AIL.

Estate planning

While the ultimate goal of estate planning can be determined by the specific goals of the client, estate planning is the process of anticipating and arranging, during a person’s life, for the disposal of their estate.

Estate planning can be used to eliminate uncertainties over the administration of a probate and possibly to maximise the value of the estate by reducing taxes and other expenses.

Estate planning need not be overly complicated, but can be as complex as the client’s needs dictate.  For example, it can be prudent to have separate entities to i) hold long-term equity investments and ii) undertake share trading.

Often, but not necessarily always a trust, or on occasions two or more trusts, are established to hold assets  Simply holding business assets and investments in a company owned by individuals will not provide much, if any, asset protection and does not represent effective or prudent estate planning.

The process of effective estate planning begins with determining and understanding the client’s circumstances, plans and wishes. An estate plan is then developed and discussed with the client.  After any amendment the estate plan is implemented and continually reviewed.

See Trustee Services and Pre-migration Trusts