Taxation in New Zealand
By Geoffrey Cone
Posted: 9th November 2016 08:48
New Zealand has two principal taxes: income tax (which includes domestic and non-resident withholding taxes), and goods and services tax (GST). Income tax is based on New Zealand residence or New Zealand sourced income. GST is based on the transfer of goods and services in New Zealand. There is no capital gains tax, wealth tax or inheritance tax in New Zealand,although care must be taken not to buy and sell property in such a way that a business activity is established, thereby making any gains taxable as a business or trading activity.
A New Zealand tax resident is taxed on both his domestic and foreign sourced income. A New Zealand tax resident individual is taxed on his New Zealand income at his marginal tax rate.
The basis for a person’s liability for New Zealand income tax is derivation of gross income. Income is defined in New Zealand’s source rules. A foreign sourced amount derived at the time a person was non-resident, is excluded from the definition of gross income.
The test for the residence of individuals for tax purposes is that he or she has either a permanent place of abode in New Zealand or is personally present in New Zealand for one or more periods exceeding 183 days in the aggregate of any 12-month period. In New Zealand each tax year starts on 1 April and ends on 31 March.
A New Zealand tax resident individual is taxable in New Zealand on his overseas investments in accordance with the Foreign Investment Fund and controlled foreign corporations rules. In the case of a New Zealand resident company, tax which may be paid by the company at the standard rate of 28% is then imputed to the dividend distributed to the individual; thus there is no double taxation of income applied to a dividend.
Credits for Tax Paid in another Jurisdiction
New Zealand now allows a New Zealand taxpayer to claim credits for tax paid in other jurisdictions even where there is no double tax agreement, provided the tax is of substantially the same nature as New Zealand income tax.
The rulesallow withholding tax paid on income paid to a New Zealand taxpayer to be credited against the New Zealand income tax. Where income is derived from a number of countries the taxpayer’s income will be segmented according to the country from which it is derived, and the credit will be applied to each segment of the income.
Disclosure of Taxpayer Information
New Zealand’s principal fiscal authority, the Inland Revenue Department and its officers are subject to a strict obligation, contained in the Tax Administration Act 1994, to preserve the confidentiality of information they collect and hold in the course of carrying out their functions under TAA and other tax legislation.
Natural persons who are not tax resident in New Zealand are liable only for tax in regard to income which has a New Zealand source. Such New Zealand source income is subject to non-resident withholding tax rates (such as dividends, royalties and interest). Reference must always be made to New Zealand’s source rules to determine what such income is. There are some unpredictable exclusions from the definition of New Zealand source income.
Unimputed dividends are taxed at the withholding tax rate of 30%. There are certain exemptions for interest paid by the approved issuer to a non-associated recipient company, imputed non-cash dividends and certain insurance transactions. All other non-resident withholding income is taxed at a withholding tax rate of 15%. These rates may be altered by a double taxation agreement.
There are special tax credit rules for a non-resident who holds shares in a New Zealand company and receives a foreign investment tax credit on the dividend paid under the FITC rules. In general terms, dividends paid by New Zealand resident companies to foreign shareholders do not result in a quantifiable charge, despite the fact that there may be a notional liability to tax.
Tax planning techniques involving trusts vary according to the source of funds for those trusts. If the trust fund is settled on the trustee by a non-resident settlor, the trust will be a foreign trust for tax purposes. If the settlor is a New Zealand resident, the trust will be classified either as complying or non-complying.
In relation to foreign trusts, the trustee may receive any foreign-sourced income free of tax. Similarly, non-resident beneficiaries will not be liable to pay tax on any distributions made to them from the foreign trust.
The trustee of a foreign trust may accumulate income for the whole of the perpetuity period of up to 80 years without making distributions.
If the beneficiary of a foreign trust is resident in New Zealand, a distribution may be taxed in that beneficiary's hands on receipt, depending on whether or not it is derived from the original corpus of property settled upon the trust, or from any augmentation of the capital of the trust, either as a result of capital gains, or the subsequent addition of property. The income accrued in relation to a discretionary trust will not be attributed to that beneficiary until distribution, while the income created under a fixed interest will be taxable as soon as it vests in that beneficiary, irrespective of whether or not it is distributed.
New Zealand limited partnerships (NZLPs) are considered to be tax-transparent, the income, losses, credits, etc., of the partnership are considered for tax purposes to flow through to the partners in proportion to their partnership interest. NZLPs offer complete confidentiality for the limited partners and do not impose any limit on the number of partners who may participate in the partnership.
OECD Common Reporting Standards (CRS)
These standards will be implemented in New Zealand on 1 July 2017. It is expected that, for the standards to be effective, New Zealand will have to amend its existing double tax agreements, or enter into new agreements with countries with which New Zealand has none.
Foreign Account Tax Compliance Act (FATCA)
The governments of New Zealand and the United Statesconcluded a Model 1 Intergovernmental Agreement (IGA)and the IGAwas formally brought into forceon 1 July 2014.
If a payment is made to a person, entity or beneficiary who is a “Specified US Person” then a FATCA report reporting that payment must be filed with the Inland Revenue Department.
The Inland Revenue Department must complete the filing of reports with the United States IRS by 30 September each year.
Foreign trust rules
Specific draft enabling legislation has been introduced into Parliament expanding the information to be disclosed to the Inland Revenue Department under the current laws in respect to foreign trusts. The foreign trust rules will run parallel to the CRS rules, and are designed to provide government authorities with information to enable investigations to be properly carried out in the event they become necessary. The information supplied will be kept confidential and will not be publicly available. New Zealand’s privacy and confidentiality legislation is extremely strong and the New Zealand government agencies have a proven record of data protection.
Geoffrey Cone is a principal of Cone Marshall, a New Zealand law firm, which specializes in international and domestic trust, wealth and tax planning. He has been in legal practice since 1981, and was a partner in two leading New Zealand law firms before establishing his own practice in 1999. He has appeared in New Zealand courts at all levels, and the Privy Council. His principal areas of practice were trust tax and insolvency litigation, before setting up his own firm to specialize in international wealth planning, with an emphasis on trusts. He advises many of the leading international trust companies, and is closely associated with many of the leading international private client law firms. He is a member of STEP and the LTRA, and a founding member of the New Zealand Trustee Companies Association. He has published a number of articles and is a contributor to The Worldwide Guide to Trusts, Trusts and Trustees, The Trident Guide to International Trusts, The Guide to International Financial Centres, and to The Rothschild Trust Review.
Geoffrey can be contacted on +64 (0)9 307 3950 or by email at email@example.com