The gravity of an individual’s or organization’s presence to New Zealand, whether conducting business remotely with New Zealand, by sending employees to New Zealand, or establishing an office, branch or subsidiary in New Zealand, will have varying New Zealand income tax consequences.
Consequences may arise under New Zealand income tax legislation, or the tax treaty or frequently, a combination of both.
The New Zealand tax year runs from 1 April to 31 March each year for most taxpayers. It is possible in some circumstances to apply for another tax year and this is commonly done to align the balance date of a New Zealand subsidiary company with its offshore parent, or due to the nature of a particular industry such as farming and retail.
New Zealand imposes an income tax on a source basis for non-residents and a worldwide basis for residents.
Resident taxpayers of New Zealand are taxable in New Zealand on worldwide income. Tax credits are available in New Zealand on foreign-sourced income subject to limitations under New Zealand income tax legislation. This includes capping the amount of tax credit at the amount of New Zealand income tax which would otherwise have been payable on the respective foreign-sourced income.
Non-resident taxpayers of New Zealand are taxable only on New Zealand-sourced income and are not taxable in New Zealand on foreign-sourced income.
The definition of the source is wide under New Zealand tax legislation, which prescribes specific categories of income that are deemed to have a source in New Zealand. For personal services performed in New Zealand, the source of the income is New Zealand regardless of the country from which the remuneration for those services originates. Income from a business that is wholly or partly carried on in New Zealand has a source in New Zealand. A catch-all provision exists whereby income derived directly or indirectly from a New Zealand source that is not specifically mentioned, is deemed to be sourced in New Zealand.
For income partly sourced from New Zealand, an apportionment is done to account for income attributable to the New Zealand source. The effect of the tax treaty may override New Zealand income tax legislation when doing business with New Zealand particularly with respect to a permanent establishment. A limited exemption from income tax on employees’ remuneration for employees who are sent to New Zealand on assignment exists for those assignments not exceeding 183 days in a 12 month period.
The most common type of vehicle through which business is conducted in New Zealand is the limited liability company. Companies are either resident or non-resident under New Zealand income tax legislation. A flat tax rate of 30%, reducing to 28% from the start of the 2011/2012 tax year (1 April 2011 for companies with standard balance dates) is applicable to both resident and non-resident companies.
In New Zealand, companies are regulated by the Companies Act, the powers of which are exercised through the Companies Office and the Registrar of Companies. This legislation applies to domestic and overseas companies and serves multiple purposes including the imposition of duties and obligations on directors.
Passive income derived from New Zealand
Passive income derived from New Zealand may be eligible for taxation at the reduced rates under the tax treaty. Passive income which can qualify includes income, royalties and dividends sourced from New Zealand.
Sending employees to New Zealand
Remuneration derived by a non-resident employee from personal services performed in New Zealand will be taxable unless the non-resident employee meets the criteria to claim the following exemption from New Zealand income tax, or a tax treaty exemption (also referred to as a treaty benefit) can be invoked.
Non-resident employees performing personal services in New Zealand are exempt from income tax where the employer is non-resident of New Zealand, the employee is in the country for less than 92 days during the New Zealand tax year and the employee pays income tax on the earnings in the home country. Certain categories of performing arts and professional sports person occupations are not eligible for the exemption.
For durations of more than 92 days, the employee may be able to gain an exemption from income tax under the tax treaty provided the criteria are met. This is possible if an employee stays in New Zealand for no longer than 183 consecutive or non-consecutive days in a 12 month period.
Specific rules apply to non-resident directors, self-employed contractors and professional sportspersons. Non-resident contractors’ withholding tax (NRCWT) is imposed on non-resident contractors’ income derived in New Zealand. This tax is collected by the payer and paid to the Inland Revenue Department.
Fringe benefit tax (FBT) is payable by the employer on non-cash benefits excluding accommodation provided to employees at the employee’s marginal income tax rate. The benefit is grossed up for fringe benefit tax and GST is also payable on the value of the benefit. Accommodation is taxable to the employee unless exempt under limited provisions, and is grossed up for income tax payable.
An Accident compensation regime is run by the government of New Zealand to fund health care, rehabilitation and compensation for personal injuries arising from an accident. Premiums are collected from employers, employees, self-employed persons and motorists.
Goods and Services Tax (GST)
Entities are required to register for GST which is chargeable on taxable supplies at the rate of 0% for zero-rated transactions and 12.5% increasing to 15% effective 1 October 2010 for all other taxable supplies. Zero-rated transactions include supplies made to non-residents in some cases and exports, upon meeting the criteria under the Goods and Services Tax Act to qualify for zero-rating.
Some types of income including residential rent and interest income are exempt for GST purposes. A reverse charge mechanism also operates requiring some New Zealand importers of offshore goods and services to pay GST on the value of imported goods and services to the Inland Revenue Department.
As is the global trend, transfer pricing is a key area of focus for the Inland Revenue Department. Any cross-border transfer of goods or services to a related entity must be made as an arm’s length transaction. An Advance Pricing Agreement may be obtained from the Inland Revenue Department.
International tax regime
Individuals and organizations that are resident in New Zealand are subject to the controlled foreign company (CFC) regime and the foreign investment fund (FIF) regime.
Under the recently revised CFC regime most income derived by a New Zealand resident from a CFC which derives active income is not required to be attributed to the New Zealand shareholder. The exemption does not apply in the case of CFC income derived from the performance of personal services through the CFC.
Trusts and charitable organizations
Trusts are classified into foreign trusts, complying trusts, non-complying trusts and charitable trusts, with specific rules for each type of trust. The most tax-friendly type of trust after the charitable trust is the complying trust. Other types of trusts have harsher tax implications for distributions of capital and corpus to beneficiaries. Elections can be made for a non-complying trust to be treated as a complying trust for New Zealand income tax purposes. Many specific rules exist related to the activities and conduct of trusts in New Zealand including residency rules and foreign-sourced income of the trust. There is currently no estate tax in New Zealand.
Family trusts are an extremely popular vehicle for asset protection in New Zealand and are heavily used for this purpose. In recent years, commercial trusts, and companies have been used as vehicles in which taxpayers have attempted to shelter income from the 39% top tax bracket with a surge of trading trusts being used in New Zealand during the first part of this decade. This has resulted in several high-profile lawsuits involving both companies and trusts, in which the Commissioner of Inland Revenue invoked the anti-avoidance provisions and frequently in these cases, the taxpayer has lost. Anti-avoidance provisions are still evolving with much uncertainty around this topic as lawsuits continue.
The incentive to use a trading trust has diminished particularly with the announcement of the 28% tax rate, which became effective on 1 April 2011. The 28% rate is lower than the trust tax rate of 30%.
Domestic charitable organizations are governed by the Charities Act, under which they are required to register in order to gain favourable tax status. Income derived by a charitable trust must be held solely for charitable purposes to achieve an exemption from income tax.