New top personal tax rate
The New Zealand Government has legislated a new income tax rate of 39% on income over $180,000 that will come into force on 1 April 2021.
This change will also affect rates on fringe benefit tax (FBT), employer superannuation contribution tax (ESCT), retirement savings scheme contributions (RSCT), residential land withholding tax (RLWT) and resident withholding tax (RWT) (excluding dividends) and introduces new trustee annual return requirements.
This new rate could form part of New Zealand’s progressive tax system for years to come as the New Zealand Government navigates an economic recovery, commitments to public services and budgets to service the forecast growth in Government debt.
COVID-19 tax developments
The Government has introduced a number of short-term measures to assist taxpayers affected by the COVID-19 pandemic. These include:
- a wage subsidy for businesses which suffered a 30% decline in revenue;
- a temporary loss carry-back option;
- an increase in the low value asset write-off threshold to $5,000;
- an increase in the provisional tax threshold; and
- various administrative measures which extend deadlines and time frames for various provisions for affected taxpayers.
Commercial building depreciation has also been permanently restored.
The New Zealand Government’s subsequent annual budget for 2020, released during the COVID-19 pandemic, contained no new taxes or tax rate changes.
The government has also recently introduced the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill into Parliament. This will introduce:
- a deduction for feasibility and other black hole expenditure incurred in developing capital projects that are abandoned before completion, to ensure tax is not a barrier for businesses seeking to invest in new projects;
- more closely aligning the tax treatment of leases with IFRS 16; and
- new rules for the allocation of purchase price when buying and selling a business.
Finally, further tax changes are expected to be introduced to Parliament in late 2020 and added to the Bill. This is expected to introduce a significant relaxation to the rules that apply to carrying for ward a tax loss. The new rule will allow tax losses to be carried forward even if the current shareholder continuity requirements are not met, to the extent that the future income was derived by the “same or similar” business.
Base erosion and profit shifting (BEPS) update
On 27 June 2018, the government enacted the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018. The Act represents the accumulation of extensive work conducted by officials following the finalisation of the Organisation for Economic Co-operation and Development’s (OECD’s) BEPS framework in late 2015. Measures in the Act seek to prevent multinationals from achieving tax advantages by using:
- artificially high interest rates on loans from related parties to extract profits out of New Zealand;
- hybrid mismatch arrangements that exploit differences between countries’ tax rules to achieve an advantageous tax position;
- artificial arrangements to avoid having a permanent establishment (PE) for tax purposes in New Zealand; and
- related-party transactions to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore.
The Act also amends New Zealand's thin capitalisation regime. Many corporate taxpayers are now required to file a BEPS disclosure form for Inland Revenue to outline their activities in these areas (even in circumstances when the rules do not in fact apply to deny deductions / recognise income in New Zealand).
Multinational Enterprise Compliance Focus
Inland Revenue’s 2019 Multinational Enterprise Compliance Focus summarises New Zealand’s implementation of BEPS measures and highlights focus areas for future activity. Key messages include:
- a continued focus on a range of international tax issues, including transfer pricing and restricted transfer pricing, hybrids, and thin capitalisation;
- increasing exchange of information between governments, including sharing tax rulings, country-by-country reporting and other information;
- a clear desire to see taxpayers being proactive in seeking agreements in advance with Inland Revenue;
- an emphasis on pragmatic and proportionate solutions with a focus on reducing compliance costs for both the taxpayer and Inland Revenue; and
- a strong focus on Inland Revenue’s relationships with significant enterprises.
The Compliance Focus also provides:
- a list of risk factors that are likely to prompt further scrutiny from Inland Revenue;
- post-BEPS 'Top 10' recommended actions for taxpayers; and
- checklists for corporate tax governance and transfer pricing documentation.
Research and development (R&D) tax credit
On 7 May 2019, the Government enacted the Taxation (Research and Development Tax Credits) Act 2019. The Act introduces a 15% tax credit on eligible R&D expenditure and is intended to raise the amount of R&D undertaken in New Zealand to 2% of gross domestic product (GDP) by 2028.
Key features of the regime include:
- a 15% tax credit applied against income tax liability;
- expenditure parameters: 50,000 New Zealand dollars (NZD), capped at NZD 120 million;
- 10% of overall eligible R&D expenditure can be conducted overseas;
- limited cash refundability for certain loss-making entities;
- a new definition of R&D, with exclusions for specific activities and costs;
- eligible internal software expenditure, capped at NZD 25 million; and
- current Callaghan Innovation Growth Grant recipients and associated entities are ineligible to claim.
Businesses claiming R&D tax credits must keep records that demonstrate that the activities undertaken meet the definition of an R&D activity. The documentation will be relied upon during the claim approval and review processes to determine whether eligible R&D is being undertaken. These records should be kept contemporaneously.
The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill came into force on 23 March 2020. This Act extends the refundability of research and development tax credits, replacing the previous refundability rules with a single measure that caps the maximum amount of tax credits paid out based on labour-related taxes. The changes will take effect in the 2019/20 year, having been brought forward one year with separate COVID-related legislation.
Customs and excise duties
The Customs and Excise Act 2018 was enacted in March 2018 and represents a significant step towards replacing and modernising the current customs legislation. Some of the key substantive changes affecting importers, exporters, and manufacturers include:
- moves to streamline the GST at the border for business importers;
- a more flexible disputes regime;
- ability to declare a provisional value for imported goods in specified cases;
- ability to obtain rulings on more matters, including valuation; and
- more clarity on administrative penalties.
Double tax agreements (DTAs)
New Zealand is currently negotiating new and updating DTAs with a number of countries, including Fiji, Korea, Luxembourg, Norway, Portugal, Saudi Arabia and the United Kingdom.
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI)
The OECD’s MLI was signed by New Zealand on 7 June 2017. The MLI enables signatory countries to quickly update existing DTAs to include articles on PE avoidance, treaty abuse, dispute resolution, and hybrid mismatches. As of 1 July 2019, the MLI had the effect of updating New Zealand’s DTAs with Australia, France, Japan, Poland, Sweden, and the United Kingdom.
New DTA with China
On 1 April 2019, New Zealand and the People’s Republic of China signed a new DTA to replace the 1986 agreement. The new DTA contains a more modern set of provisions, similar to those introduced to a number of New Zealand’s other tax treaties under the MLI.
The key changes include the extension of the PE definition, the requirement of a dual resident company to obtain mutual agreement of the competent authorities as to the jurisdiction of its residence, and a reduction of the withholding rates on certain dividends.
The DTA generally came into force from 1 January 2020. In New Zealand, for provisions other than those relating to withholding taxes, the DTA came into force for income years beginning 1 April 2020.
Tax Working Group
On 21 February 2019, the Tax Working Group (the Group) released its final report (the Report) after undertaking further rounds of engagement and consultation following the release of an interim report in September 2018.
The Report included 99 tax reform recommendations to the government regarding the New Zealand tax system, including the recommendation of a capital gains tax.
On 17 April 2019, the government responded to the Group’s final recommendations, announcing it would not be adopting any of the recommendations relating to the extension of a capital gains tax. The government also announced it will not be introducing environmental taxes, such as water taxes or fertiliser tax.
In the absence of pursuing the introduction of a capital gains tax, the government announced it will consider other ways to improve fairness, including tightening the land speculation rules and land banking, which will involve the consideration of a vacant land tax.
The government has endorsed a number of the Group’s recommendations as high priority work programme items. These include reintroducing building depreciation for seismic strengthening, a review of loss-trading and loss continuity rules, and further measures to improve tax collection and encourage compliance.
A refreshed tax policy work programme reflecting these priorities was released in August 2019.