New Zealand has a broad-based tax system consisting principally of:
- income tax
- 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. Non-resident individuals and companies, on the other hand, are taxed only on income derived from New Zealand, 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 183 days within a 12-month period.
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 incrementally 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 through the Pay As You Earn (PAYE) system. Non-cash benefits provided to employees are subject to fringe benefit tax which is payable by the employer.
For companies, net income generally corresponds with accounting profit or loss. However, adjustments are commonly required in relation to:
- the timing of income and expenditure recognition
- bad debts, and
- various provisions and reserves.
New Zealand does not generally 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).
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 are effectively “trapped” and cannot be shared with other entities.
Taxation of dividends paid by resident companies to residents
Dividends paid by resident companies to residents 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.
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) and 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 an approved Australian Securities Exchange index.
PIEs are not taxed like companies. Instead their income is taxed only once – either to the PIE (if the investor is an individual) or to the investor (if the investor is a company or another PIE). For individuals, the PIE pays tax at a rate no higher than 28%.
Non-resident investors in certain PIEs bear no New Zealand tax on income from outside New Zealand.
Taxation of overseas investments by New Zealand residents
New Zealand has recently amended its rules for the taxation of equity investment by New Zealand residents in non-New Zealand companies.
Generally, income from 10% or greater stakes in New Zealand-controlled foreign companies (CFCs) is not subject to New Zealand tax either as earned or when distributed, unless it is passive income. Income from foreign investment funds (FIFs) is generally calculated either using a “fair dividend rate method” or a 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:
Click here to view the table.
* 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%. 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).
** 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 for the right to reduce the NRWT rate to 0%.
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.
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 passed along a chain of registered suppliers until it reaches 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 threshold.
Certain supplies of goods and services can be either exempt from GST or zero-rated (e.g. the supply of financial services, services performed as an employee, some services supplied to non-residents 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.
Rates are the main source of local government revenue. These are calculated as a percentage of the value of land and/or capital improvements.