The income year generally consists of the 12-month period ending 31 March. When a taxpayer has a balance date other than 31 March they can elect, with the consent of the Commissioner of Inland Revenue (the Commissioner), to file returns to their annual balance date. In such cases income derived during the year ending with the annual balance date is treated as being derived during the year ending on the nearest 31 March.
Gross income includes business income, employment income, rents, interest, dividends, royalties, allowances, bonuses, some annuities and pensions, attributed income and services-related payments.
Allowable deductions include depreciation and expenditure incurred in deriving gross income or in carrying on a business for the purpose of deriving gross income subject to specific limitations (eg. limitations for capital and private expenditure).
Exempt income includes:
- alimony or maintenance received from a spouse or former spouse
- dividends received by New Zealand resident companies from foreign companies or from resident companies with 100% common ownership
- scholarships and bursaries except student allowances
- income earned by a non-resident in respect of personal services performed for, or on behalf of, a person who is not resident in New Zealand, in the course of a visit not exceeding 92 days, subject to certain provisos, including the imposition of tax in the recipient’s country of residence
- annuities paid under insurance policies offered or entered into in New Zealand by a life insurer or offered or entered into outside New Zealand by a New Zealand resident life insurer
- distributions from superannuation schemes registered under the Superannuation Schemes Act 1989
- distributions from a superannuation scheme that is registered under the KiwiSaver Act 2006
- money won on horse races and dog races.
Taxation of individuals BACK TO TOP
An individual is a New Zealand tax resident if he or she:
- has a permanent place of abode in New Zealand, even if they also have a permanent place of abode overseas; or
- is personally present in New Zealand for more than 183 days in total in any 12-month period; or
- is absent from New Zealand in the service of the New Zealand Government. A New Zealand resident will cease to be a tax resident only if he or she:
- is absent from New Zealand for more than 325 days in any 12-month period; and
- at no time during that period maintains a permanent place of abode in New Zealand.
- A permanent place of abode is determined with reference to the extent and strength of the attachments and relationships that the person has established and maintained in New Zealand.
- Non-resident individuals working in New Zealand are subject to the same marginal rates of tax as residents.
Each individual is assessed separately. The gross income of a taxpayer includes salary and wages, employment-related allowances, bonuses, other emoluments, expenditure by an employer on account of an employee, interest, dividends (including attached imputation credits and withholding tax), certain trust distributions, partnership income, shareholder salary, rents, services related payments and income from self-employment.
The gross income of an employee includes:
- all cash receipts in respect of the employment or service of the employee
- expenditure incurred by the employee but paid for by the employer. However, cash allowances which are intended merely to reimburse the employee for work-related expenditure incurred on behalf of the employer are generally not treated as part of the employee’s gross income
- the value of any benefit an employee receives from any board and lodging or the use of any house or quarters, or an allowance paid in lieu of board, lodging, housing or quarters, provided in respect of a position of employment;
- the value of the benefit gained by an employee from an employee share option or share purchase scheme;
- certain payments for loss of earnings payable under various accident insurance
- retiring allowances;
- directors’ fees;
- redundancy payments;
- restraint of trade and exit inducement payments.
Fringe benefit tax (FBT) is payable by employers on non-cash or in-kind benefits provided to employees.
Payments from superannuation funds
Payments from a New Zealand superannuation fund, whether in the form of an annuity, lump sum or pension, are not taxable in the hands of the recipient.
KiwiSaver is a voluntary savings scheme available to individuals who are either New Zealand citizens or permanent residents. The Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 raises the minimum employee and employer contribution rates from 2% to 3% of an employee’s gross salary or wages from 1 April 2013. A tax credit is available for a member’s contributions to KiwiSaver (capped at $521.43 per year). Employers must contribute to KiwiSaver for those of their employees who are KiwiSaver members. Employer contributions to KiwiSaver (or other qualifying registered superannuation schemes) were previously exempt from employer superannuation contribution tax (ESCT), capped at the 2% compulsory employer contribution. This exemption was removed from 1 April 2012. From 1 April 2012, the ESCT default deduction rate (a flat rate of 33%) is also removed and ESCT must be calculated at a rate equivalent to an employee’s marginal tax rate. Subject to certain narrow exceptions, KiwiSaver contributions are locked in until the later of the member becoming entitled to New Zealand Superannuation (currently at age 65) or for five years. Generally KiwiSaver schemes are ‘portfolio investment entities’ (PIEs) and can take advantage of the favorable tax rules for PIEs.
Investments in foreign companies or other foreign entities may be taxable even if the taxpayer does not receive any dividends or other income. In some circumstances attributed income can arise if the taxpayer has an investment in a controlled foreign company or a foreign investment fund.
Individuals who benefit from certain pensions or annuities provided by foreign entities may be exempt from the foreign investment fund rules but may be subject to tax on distributions on a receipts basis.
An individual’s interest in an Australian superannuation scheme is exempt from the foreign investment fund rules when the scheme is subject to preservation rules that lock in the benefit until the member reaches retirement age.
Individuals who maintain foreign currency bank accounts, loans and mortgages are liable to tax on exchange rate fluctuations.
The only deductions that employees may claim against employment income are professional fees for preparing their income tax returns and certain premiums for loss of earnings insurance. Individuals in business are entitled to a wide range of deductions.
Personal income tax rates
The basic rates of tax (before allowing for credits and excluding ACC earner premiums) that apply to individuals for the 2012/2013 and subsequent income years are:
|Taxable income $||Tax rate %||Cumulative tax $|
0 – 14,000
14,001 – 48,000
48,001 – 70,000
PAYE (Pay As You Earn)
Employers are required to withhold tax from employee remuneration paid and must account to the Commissioner for the amounts withheld. This procedure is known as ‘pay as you earn’ (PAYE). The tax withheld is offset against the employee’s income tax liability.
Withholding tax deductions are generally required from schedular payments. These include:
|Type of schedular payment||Withholding tax rate (%)|
|Honoraria (payments to members of Councils, boards,||33|
|committees, societies, clubs, etc)|
|Primary production contractors||15|
|Contractors in the television, video and film industries||20|
|(NZ residents only)|
|Non-resident contractors (including companies) where||15|
|payments exceed $15,000 in a 12 month period|
To apply the above rates the payer must receive a withholding declaration from the taxpayer. Where this is not received the above rates increase by 15 cents in every $1. The tax withheld is an interim tax credited against the taxpayer’s ultimate income tax liability.
Resident withholding tax (RWT)
Subject to certain exemptions, interest and dividend income is subject to RWT unless the recipient holds a valid certificate of exemption.
The RWT rates on interest income for individuals are 10.5%, 17.5%, 30% and 33%. The applicable rate of RWT on interest income depends on whether the recipient has supplied an IRD number to the payer and whether an election has been made to apply a certain rate to a particular source of interest income. The recipient can elect which of the four RWT rates applies if they have supplied their IRD number. If the recipient has supplied their IRD number but no election has been made, the default RWT rate is 33% on all new bank accounts opened after 31 March 2010 and 17.5% for all existing bank accounts. The non-declaration rate (ie. when the IRD number is not supplied) is 33%.
The withholding tax rate on dividend income is 33%. Following the reduction in the company tax rate from 33% to 30%, the imputation credit ratio changed to 30/70 when New Zealand resident companies pay dividends to shareholders. When a dividend is fully imputed at 30%, RWT is payable at 3%. With the reduction in the corporate tax rate to 28% with effect from the 2011/2012 income year, the imputation credit ratio changed to 28/72 when New Zealand resident companies pay dividends to shareholders. When a dividend is fully imputed at 28%, RWT is payable at 5%.
Dividend imputation credits New Zealand resident individual shareholders receiving dividends from New Zealand and certain Australian companies must:
- include net dividends and taxable bonus issues received (including bonus shares in lieu) in gross income;
- add imputation and resident withholding tax credits to income;
- calculate their total tax; and
- deduct imputation credits and resident withholding tax from tax payable.
Excess imputation credits that exceed a natural person shareholder’s tax liability are carried forward.
Dividend imputation credits
- New Zealand resident individual shareholders receiving dividends from New Zealand and certain Australian companies must:
- include net dividends and taxable bonus issues received (including bonus shares in lieu) in gross income;
- add imputation and resident withholding tax credits to income (refer Dividend imputation, page 17);
- calculate their total tax; and
- deduct imputation credits and resident withholding tax from tax payable. Excess imputation credits that exceed a natural person shareholder’s tax liability are carried forward.
Taxation of companies BACK TO TOP
A company is deemed to be resident in New Zealand if:
- it is incorporated in New Zealand; or
- it has its head office in New Zealand; or
- it has its centre of management in New Zealand; or
- directors exercise control of the company in New Zealand, whether or not the
- directors’ decision-making is confined to New Zealand.
For companies resident in a country with which New Zealand has a double tax Agreement, tie-breaker provisions often apply to relieve any potential double taxation.
Company tax rate
The company tax rate is 28% for the 2011/2012 and subsequent income years. All companies, whether resident or non-resident, are taxed at the same rate. This tax rate also applies to certain savings vehicles, including unit trusts, widely held superannuation funds, some group investment funds and life insurance shareholder income. The top tax rate for portfolio investment entities (PIEs) is also capped at the same rate as the corporate tax rate.
Generally, taxable income is determined after adjustments to accounting income for:
- trading stock;
- financial arrangements;
- legal and other expenses on capital account;
- entertainment expenses;
- leases; and
- provisions and reserves
Dividend income generally forms part of gross income. Dividend income derived from a New Zealand resident company by another New Zealand resident company is subject to tax in the hands of the recipient, except where paid between 100% commonly owned companies (prior to 29 August 2011 the companies also needed to share a common balance date).
The definition of dividend for tax purposes extends beyond company law concepts, catching virtually every benefit provided by a company to shareholders (or associates thereof). The definition excludes certain benefits provided to downstream associate companies or between sister companies in a wholly owned group of companies.
Interest incurred by most companies is deductible, subject to the thin capitalisation regime.
In calculating taxable income, losses from prior years may be carried forward and deducted when, in broad terms, at least 49% continuity of ultimate ownership has been maintained.
Special rules apply in calculating taxable income for businesses such as life insurance companies, group investment funds, non-resident insurers, ship-owners, mining, forestry and some film rental companies.
Grouping of losses
Companies are assessed for income tax separately from other companies included in the same group. To share losses between group companies, certain requirements must be satisfied:
- 49% continuity of ownership in the loss company; and
- 66% commonality of ownership in the group companies.
Continuity and commonality are measured based on the ultimate shareholders’ minimum voting and market value interests held at a particular time or over a particular period (a trace-through of intermediate shareholders is required).
Special rules apply to ensure that a subsidiary does not forfeit losses when the shares in that subsidiary are transferred to the shareholders of its parent company, providing there is no change in the underlying economic ownership because of the ‘spinout’.
Group companies may share losses by the profit company making a subvention payment to the loss company or by simple loss offset election. The payment or offset is deductible to the profit company and taxable to the loss company.
Losses cannot be transferred to natural person shareholders except historically in the case of loss attributing qualifying companies. Legislation enacted in December 2010 removed the ability for loss attributing qualifying companies to attribute losses to their shareholders with effect from the 2011/2012 income year. That legislation also introduced a new ‘look-through company’ vehicle, Look-through companies (LTC).
The dividend imputation system applies to all dividends paid by New Zealand resident companies. It allows tax paid by resident companies to flow through to shareholders in the form of credits attached to dividends paid and taxable bonus issues (including bonus shares in lieu).
Resident individual shareholders in receipt of dividends with imputation credits attached may offset these credits against their personal tax liability. Resident corporate shareholders in receipt of dividends with credits attached may offset credits against their tax liability except where the dividend is exempt from income tax.
Specific rules allow trans-Tasman groups of companies to attach both imputation credits (representing New Zealand tax paid) and franking credits (representing Australian tax paid) to dividends paid to shareholders. Under these rules, dividends paid by an Australian resident company with a New Zealand resident subsidiary can have imputation credits attached that the New Zealand resident shareholders can offset against their New Zealand tax liability. In the same manner, a New Zealand resident company with an Australian resident subsidiary can attach franking credits to dividends. Australian resident shareholders can offset the franking credits against their Australian tax liability.
Imputation credit account (ICA)
Generally, New Zealand resident companies must maintain an imputation credit account (ICA), a memorandum account which records tax paid and the allocation of credits to shareholders. A company must maintain an ICA on a 31 March year-end basis, irrespective of its balance date.
Credits arise in the ICA in a number of ways, including from:
- payments of income tax, including payments made into a tax pooling account
- imputation credits attached to dividends received
- tax on amounts attributed under the attributed personal services income rules. Debits arise in the ICA in a number of ways, including from:
- the allocation of credits to dividends
- refunds of income tax, including refunds from a tax pooling account
- penalties (allocation debit) when a company fails to meet the allocation requirements
- a breach of shareholder continuity requirements
- an adjustment to a company’s ICA for the tax effect of an amount attributed under the attributed personal services income rules.
Company refunds of income tax are limited to the credit balance in the ICA at the previous 31 March, or in certain circumstances, the credit balance in the ICA most recently filed with Inland Revenue. Inland Revenue will not refund the balance of any tax refund in excess of the ICA credit balance but the taxpayer can offset it against future tax obligations.
When an ICA has a debit balance at 31 March the company must pay income tax equal to the debit balance plus a 10% imputation penalty tax by the following 20 June. The income tax can be offset against future income tax obligations. The imputation penalty tax cannot be offset and does not give rise to a credit in the ICA.
A 100% commonly owned group of companies has the option of consolidating for tax purposes and being recognised as one entity. Consolidation allows the group to file a single consolidated tax return. Generally, relevant elections must be made prior to the start of the income year in which consolidation is sought.
Consolidation offers tax relief on intra-group transactions, including asset transfers, dividend and interest flows, and it simplifies tax filing and provisional tax calculations.
However, it requires:
- all companies within the consolidated group to be jointly and severally liable for the group’s income tax liabilities; and
- additional tax record keeping (eg. individual and group ICAs, loss carry forward records and property transfer records).
Companies are able to amalgamate under the Companies Act 1993. An amalgamation occurs when two or more companies amalgamate and continue as one company, which can be one of the amalgamating companies or a new company. For tax purposes, when the amalgamation is a ‘resident’s restricted amalgamation’ certain concessionary tax rules apply.
Prior to 1 April 2011, certain closely held companies could elect to become qualifying companies.
The qualifying company regime was closed for new entrants with effect from the 2011/2012 income year. Existing qualifying companies at 31 March 2011 have the option of continuing to be taxed as qualifying companies or to transition into ‘look through companies’, a partnership or a sole trader or to elect out of the qualifying company rules and into the tax rules that apply to companies. For tax purposes, qualifying companies are treated in a similar manner to partnerships. This allows for the:
- single taxation of revenue earnings by exempting distributions made to New Zealand resident shareholders to the extent that those distributions are not fully imputed.
- tax-free distribution of capital gains without requiring a winding-up.
- preservation of shareholders’ limited liability, except in relation to income tax.
Prior to 1 April 2011, a company could have elected to become a qualifying company if it met certain criteria. In addition, when the company’s shares all carried equal rights, shareholders could elect for it to be a loss attributing qualifying company (LAQC). Historically, shareholders in LAQCs have been able to deduct losses at their marginal tax rate with profits being taxed in the company at the company tax rate. The ability to attribute losses to shareholders was removed from 1 April 2011.
A ‘look-through company’ (LTC) is a flow-through vehicle with all income, expenditure, tax credits, gains and losses being allocated to the owners in proportion to their shareholding on an annual basis, subject to the application of a loss limitation rule. The deduction an owner can claim in an income year is limited to their investment in the LTC. The LTC regime was introduced from 1 April 2011. An LTC is treated as a company for company law purposes. As an LTC is a transparent entity for tax purposes, it is not liable to pay income tax. However, it is required to file returns which include income, expenditure and tax credits for the year and any income/loss distributions to its owners.
Other entities BACK TO TOP
Legislation enacted in 2008 codified the tax rules that apply to general partnerships and introduced new rules for limited partnerships. The limited partnership rules effectively replace the earlier special partnership regime. There are two types of partnership – general partnership and limited partnership.
A general partnership is a flow-through entity for New Zealand income tax purposes (ie. partners are attributed profits or losses directly). The partnership is required to file a tax return but this is for information purposes only. The individual partners include their share of the profit or loss of the partnership in their individual tax returns and the individual partners pay tax at their marginal tax rates.
A limited partnership is also a flow-through entity for New Zealand income tax purposes but has separate legal status from the individual partners in the partnership (in the same way as a company has a separate legal status from its shareholders).A limited partnership must have at least one general partner and one limited partner who is not the same person. Any ‘person’ can be a partner in a limited partnership including a natural person, a company, a partnership and another unincorporated body. General partners manage the business and are jointly and severally liable for all the debts and liabilities of the partnership. Limited partners are usually passive investors whose liability is limited to their capital contribution to the partnership. Limited partners can only participate in restricted decision making in respect of the business otherwise they risk losing their limited status. Loss limitation rules ensure that losses claimed by a limited partner reflect the level of that partner’s economic loss (ie. any tax loss claimed by a limited partner is limited to the amount that the limited partner has at risk in the partnership).There are anti-streaming provisions in the legislation for both general and limited partnerships to ensure that partners are allocated income, tax credits, rebates, gains, expenditure and losses in the same proportion as each partner’s share in the income of the partnership.
A joint venture is not treated as a separate entity for income tax purposes and is not required to file an income tax return. Instead participants in joint ventures include their individual share of the proceeds from the sale of the output or production in their own tax returns and claim a deduction for their individual share of the revenue expenditure.
However, a joint venture is treated as a separate entity for GST purposes and must file GST returns on its own account. A joint venture may elect into the partnership regime for income tax purposes.
There are three classes of trust:
A complying trust is one that has satisfied the New Zealand tax liabilities on its worldwide trustee income since settlement. New Zealand family trusts established by a New Zealand resident settlor with New Zealand resident trustees generally fall within this class.
Trustee income is subject to tax at 33%. With the exception of beneficiary income, all other distributions from a complying trust are received tax-free by the beneficiary.
Beneficiary income consists of income derived by a trustee that vests absolutely in the interest of a beneficiary during the same income year in which the trustee derived it, or within six months after the end of that income year. Tax agents who administer trusts can make beneficiary distributions up to the later of:
(i) 6 months after balance date; and
(ii) the earlier of the time in which the tax return is due or filed.
Beneficiary income is taxable in the hands of the beneficiary at their marginal tax rate, except when the ‘minor beneficiary’ rule applies.
A trust is a foreign trust if none of its settlors has been resident in New Zealand between the later of 17 December 1987 and the date of first settlement of the trust, and the date the trustees make a taxable distribution. This class includes offshore trusts with New Zealand resident beneficiaries.
A trust ceases to be a foreign trust if it makes any distribution after a settlor becomes a New Zealand resident, or if a New Zealand resident makes a settlement on the trust. Only New Zealand sourced trustee income is subject to tax. Beneficiaries are subject to tax at their respective marginal tax rates on all distributions received from the trust except:
- distributions of certain property settled on the trust;
- distributions of certain capital profits/gains;
- income derived by a trustee prior to 1 April 1988; and
- distributions after 1 April 2001 subject to the minor beneficiary rule.
New Zealand resident trustees of foreign trusts are subject to information disclosure and record keeping requirements. They are required to provide certain information to Inland Revenue and to keep financial records for the trusts in New Zealand. If a New Zealand resident trustee knowingly fails to disclose information or to keep or provide the requisite records to Inland Revenue the trustee will be subject to sanctions, including prosecution. In certain circumstances, the foreign trust will be subject to New Zealand tax on its worldwide income until the information is provided to Inland Revenue.
A non-complying trust is any trust that is neither a complying trust nor a foreign trust. This class generally covers a trust with New Zealand resident settlors, non-resident trustees and actual or potential New Zealand resident beneficiaries. It also includes a trust where the trustee income has been liable to full New Zealand tax but the trustees have not paid the tax.
Generally, trustee income comprises only New Zealand sourced income, except for years in which a settlor is resident in New Zealand, in which case worldwide income is taxable. Beneficiary income is taxed in the hands of the beneficiary at their marginal rate (subject to the minor beneficiary rule) while most other distributions are taxed at 45%.
The wide definition of a settlor includes a person who:
- makes a settlement of property to or for the benefit of a trust for less than market value; or
- makes property available, including a loan or guarantee, to a trust for less than market value; or
- provides services to or for the benefit of the trust for less than market value; or
- acquires or obtains the use of property of the trust for greater than market value. For trusts with New Zealand settlors, who are not permanently New Zealand resident, there is effectively a choice between being a complying or non-complying trust. Only New Zealand sourced income of a non-complying trust is subject to tax, except for years in which the settlor is resident in New Zealand. However, most distributions to New Zealand resident beneficiaries are subject to tax at 45%. If the trust elects to be a complying trust, the trustees are subject to tax on their worldwide income, with a credit for foreign tax paid. The rules for complying trusts then apply to distributions of such income.
Trust distributions to minor beneficiaries
In certain circumstances trust distributions to minor beneficiaries (ie. beneficiaries younger than 16) are subject to tax at the trustee tax rate of 33% rather than the beneficiary’s marginal tax rate. This is the ‘minor beneficiary’ rule. This income is subject to tax as trustee income and is not included in the minor beneficiary’s gross income. The minor beneficiary rule applies to distributions to minors when the income is derived from property settled on the trust by the minor’s relative or guardian, or their associates. The intent of the regime is to limit the tax benefits of using trusts to split income, on the basis that the income distributed to many minor beneficiaries is, in substance, ‘family income’ rather than income of the minor beneficiary.
Portfolio investment entities (PIEs)
A collective investment vehicle (eg. a managed fund) that meets the eligibility requirements and elects to become a portfolio investment entity (PIE) is subject to the PIE rules. A PIE is taxed on its investment income at the elected prescribed investor rates (PIRs) of its investors. The prescribed investor rates are 0%, 10.5%, 17.5% and a capped rate of 28%. Eligibility for any given rate depends on a number of factors including the investor’s PIE and non-PIE income earned in the previous two years. PIE tax deducted at a rate greater than 0% is a final tax for an individual who selects a rate to which they are entitled.
The rules align the tax treatment of investments made through PIEs with the tax treatment of direct investments made by individuals. PIEs are not taxable on capital gains and losses they make on New Zealand shares and certain Australian shares.
Charities and donee organisations
Income derived by an organisation that has a charitable purpose (and registers as a charity with the Department of Internal Affairs) is exempt from income tax.
Charitable organisations are eligible for various tax benefits, including exemptions:
- from income tax for non-business income.
- for business income derived by, or in support of, charities
Charities can also be eligible for donee status. Inland Revenue administers donee status. An individual can claim a tax credit equal to 1/3 of all donations made to organisations with donee status, up to the donor’s taxable income. Employers can choose to offer ‘payroll giving’, a regime which allows employees to make donations through their employer’s payroll system and receive the tax credit immediately as a reduction of PAYE paid. Companies and Maori authorities may deduct all donations to organisations with donee status, up to the donor’s net income (as calculated before the deduction for the donations are taken).
Deductions BACK TO TOP
Motor vehicle deductions
Self-employed taxpayers using a motor vehicle partially for business and partially for other purposes are required to maintain either:
- complete and accurate records of the reasons for and distance of journeys undertaken for business purposes; or
- a motor vehicle logbook for a three month test period every three years to establish a business mileage pattern. When no records or logbooks are maintained, the tax deduction is limited to the lesser of the percentage of actual business use or 25% of the total operating expenditure and depreciation. Taxpayers may deduct the actual motor vehicle expenses incurred, or use Inland Revenue’s prescribed mileage rate up to a maximum of 5,000 km of work related travel per year. The prescribed mileage rate is 77 cents per km from the beginning of the 2011/2012 income year. Inland Revenue reviews the mileage rate at least once a year and issues a revised rate where appropriate.
Trading stock may be valued at either cost or market selling value, if this is lower. Cost is determined by reference to generally accepted accounting principles. Market selling value must be demonstrated generally based on actual sales. Replacement price or discounted selling price may be used to approximate cost if these methods are used for financial reporting purposes. Shares which are trading stock must be valued at cost.
Businesses with $10,000 or less of business-related legal expenditure can claim a full deduction in the year the expenditure is incurred, regardless of whether the expenditure is capital or revenue in nature.
Generally 50% of entertainment expenditure is non-deductible for tax purposes.
The entertainment tax regime applies to specified types of entertainment, including corporate boxes, holiday accommodation and yachts and pleasure craft. The regime also applies to food or beverages which are:
- provided as part of the specific types of entertainment mentioned above
- provided or consumed off the taxpayer’s business premises
- provided or consumed on the taxpayer’s business premises, at a party or social function, or in an exclusive area of the premises reserved for employees of a certain level of seniority.
Exclusions from the entertainment regime include:
- food or beverages consumed while travelling on business, except where entertaining business contacts
- food or beverages consumed at a conference which lasts over four hours
- certain overtime meal allowances
- ‘light meals’ provided to employees while working
- entertainment at trade displays and other promotional activities
- entertainment enjoyed or consumed outside of New Zealand.
Depreciation rates diminishing value (DV) or straight line (SL) are determined by the Commissioner pursuant to a statutory formula which takes account of the expected economic life and residual value of assets. In special circumstances taxpayers may ask the Commissioner to prescribe a special depreciation rate.
The actual depreciation rate to be applied is dependent on the date of acquisition of the relevant asset by the taxpayer:
- assets acquired after 20 May 2010 – do not use the 20% loading for qualifying assets (except when the decision to obtain the asset was made on or before 20 May 2010).
Buildings with an estimated useful life of 50 years or more are subject to a depreciation rate of 0% from the start of the 2011/2012 income year.
Expenditure on assets costing up to $500 may be deducted at the time of acquisition rather than capitalised and depreciated, provided certain criteria are met.
The classes of depreciable property include certain land improvements and some types of intangible property. Computer software must be depreciated.
The disposal of an asset for an amount greater than its adjusted tax value results in depreciation recovery income which is taxable in the year of the disposal. Taxpayers are not able to offset depreciation recovered against the cost of replacement assets.
Specific rollover relief provisions have been introduced to provide relief from depreciation recovered for assets affected by the Canterbury earthquakes.
Tax administration and payment of tax BACK TO TOP
Generally the following persons and entities are liable to lodge an income tax return:
- individuals who derive income that is not taxed at the time of payment, unless that income is less than $200
- individuals who are in business or engaged in a profession
- all companies, societies, clubs and some public authorities
- all partnerships, trusts and superannuation funds
- absentees deriving income from New Zealand.
Returns are not required for individuals who receive only:
- income from employment that is subject to PAYE
- interest and dividends that are subject to RWT or do not have a New Zealand source.
At the end of the year, Inland Revenue prepares personal tax summaries for certain individuals based on information provided by employers. This group includes individuals with incorrect or special deduction rates, student loans or Working for Families tax credits. Other taxpayers may request a personal tax summary from Inland Revenue. Donations credits are claimed using a separate form unless the payroll giving system is used. The PAYE rates also build in some credits (ie. the independent earner tax credit) removing the need for taxpayers to make a separate claim.
Inland Revenue sends individuals who file IR3 returns and receive source deduction payments a summary of earnings containing income and tax deduction information from their employer. Taxpayers can use this to prepare the IR3.
Taxpayers who are linked to a chartered accountant or other tax agent receive an extension of time for the lodgment of their returns. For those taxpayers, the due date for lodgment of their return is 31 March of the following income year. Taxpayers linked to a tax agent also receive an extension of time for the payment of terminal tax.
Taxpayers who are not linked to a tax agent and have balance dates of 1 October to 31 March must lodge their returns by the following 7 July. Tax returns for all other balance dates (1 April to 30 September) are due on the 7th day of the fourth month after balance date. Late filing penalties apply if a return is not lodged by the due date.
Taxpayers have four years in which to claim a refund of overpaid tax. However, when there has been a clear mistake or simple oversight, or in the case of credits, the Commissioner may extend the period to eight years.
Provisional tax is a way of managing a taxpayer’s income tax liability by requiring compulsory installments throughout the year. Every taxpayer who is liable to pay residual income tax exceeding $2,500 for the 2012/2013 income year is a 2013/2014 provisional taxpayer. Residual income tax is the amount of income tax payable after deducting any tax credits available but before deducting any provisional tax paid. Provisional tax is generally payable in three equal installments.
When a taxpayer files a tax return, the provisional tax paid is credited against the tax assessed for that year. This results in either a refund or further tax to pay by way of terminal tax.
Taxpayers may reduce their exposure to use of money interest on provisional tax by using an Inland Revenue approved tax pooling intermediary. Tax pooling intermediaries facilitate the trading of under- and over-payments of provisional tax and typically save taxpayers 2% – 3% on the official rates.
Calculating provisional tax
Provisional taxpayers have three options available for calculating their provisional tax.
These options are:
- the standard uplift method
- the estimate method
- the GST ratio method.
Standard uplift method
The amount of provisional tax due under the standard uplift method is calculated based on the taxpayer’s residual income tax (RIT) in prior years.
The general rule is that provisional tax is payable at 105% of the residual income tax for the previous income year. However, if the tax return for the previous income year has not been filed due to an extension of time for filing, the provisional tax payable can be based on 110% of the residual income tax for the income year preceding the previous income year (ie. two years ago), but only for the first two installments. The final installment must be calculated based on 105% of the taxpayer’s residual income tax for the previous income year.
Late payment and shortfall penalties
An initial late payment penalty of 1% applies if the taxpayer does not pay tax by the due date. A further 4% late payment penalty applies if the tax is still not paid within 7 days of the due date. An incremental late payment penalty of 1% is then imposed monthly until payment is made. Inland Revenue is required to notify a taxpayer the first time their payment is late rather than imposing an immediate late payment penalty. If the taxpayer does not make payment by a certain date, Inland Revenue will impose a late payment penalty. Taxpayers are entitled to one notification every two years. After receiving a first warning, Inland Revenue will not send further notifications for two years and will impose an initial late payment penalty in the normal manner. Shortfall penalties, calculated as a percentage of the tax shortfall, may also apply.
The penalties imposed vary based on the nature of the action or position taken by the taxpayer and may be reduced for early disclosure or increased for obstructing Inland Revenue.
There is also a 50% discount on certain penalties when the taxpayer has a past record of good behavior and, in certain circumstances, a cap of $50,000 on shortfall penalties for not taking reasonable care or for taking an unacceptable tax position.
Use of money interest (UOMI)
Taxpayers are required to pay use of money interest (UOMI) when taxes are not paid by the due date for payment. There is a corresponding requirement for the Commissioner to pay interest to the taxpayer when the taxpayer has overpaid tax. UOMI applies to most tax obligations eg income tax, PAYE, FBT and GST.
All provisional taxpayers, other than individuals who were not liable to pay residual income tax exceeding $50,000 and who did not pay their provisional tax on the estimation basis, are subject to the UOMI regime. When residual income tax exceeds provisional tax paid, the taxpayer is liable to pay interest on the underpayment. Interest is payable regardless of culpability. When provisional tax paid exceeds residual income tax, the taxpayer is entitled to receive interest on the overpayment.
Other taxes BACK TO TOP
Capital gains tax
New Zealand does not have a capital gains tax as such. However, gains from the sale of real property (land and buildings) and personal property (including shares) where the property is acquired for the purpose of resale, or as part of a dealing operation, are subject to income tax at normal rates. Profits on the sale of real property may be taxable in other circumstances also.
Specific regimes such as the financial arrangements rules, foreign investment fund rules and the services-related payments rules also effectively blur the capital/revenue distinction.
Fringe benefit tax (FBT)
FBT is payable by employers on the value of fringe benefits provided to employees and shareholder/employees. The value of fringe benefits provided is not included in the gross income of employees.
The FBT quarters end with the last day of June, September, December and March. Within 20 days of the end of the first, second and third quarter, any employer who has provided a fringe benefit is required to file a return setting out the fringe benefits received or enjoyed by employees in the quarter and a calculation of the amount of FBT payable on those benefits. The due date for filing the fourth (March) quarter return is 31 May.
Employers with PAYE and employer superannuation contribution tax deductions not exceeding $500,000 per annum can pay FBT on an annual basis. An income year basis is also available for shareholder-employees.
Accident compensation insurance
All New Zealanders pay levies to fund a statutory scheme of accident insurance cover. These are paid by employers and self-employed people to cover work-related injuries and by earners to cover non-work injuries. Motor vehicle accident cover is funded by a component of motor vehicle registration fees and a percentage of fuel sales. This covers claims for all injuries resulting from motor vehicle accidents on New Zealand public roads.
The Government funds the costs of cover for injuries to people who are not in the paid workforce, unless the injury is related to a motor vehicle accident on a public road. The Accident Compensation Corporation (ACC) collects the employer levy, self employed levy, residual claims levy and earners’ account levy by issuing an invoice to the relevant party. Employers generally deduct earner premiums, together with PAYE, from an employee’s income and remit it to Inland Revenue (as agent for ACC).
The ACC is the sole provider of workplace accident insurance in New Zealand providing statutory minimum entitlements. The private sector can write accident insurance contracts only if they provide cover above the minimum entitlements.
All employers are required to pay employer levies to cover workplace accidents (minimum entitlement cover). The employer levy payable is determined according to the industry or risk classification of the employer and the level of earnings of employees. The levy may be adjusted up or down following an audit of the safety practices of the employer.
Residual claims levy
The residual claims levy is risk-rated on individual employers’ industrial classifications. The residual claims levy rate varies from year to year depending on the success of the ACC rehabilitation program in managing claim costs. The objective of this levy is to establish reserves over a 15 year period to fully fund the ‘tail’. The ACC collects residual claims levies from employers and self-employed directly.
The residual claims levy is a deductible expense to the employer or self-employed person in the income year it is due and payable. When a self-employed person’s terminal tax date has been extended to 7 April (because they are linked to a tax agent) the residual claims levy is deemed to be deductible in the previous income year, as if the levy were payable on 7 February.
All earners (employees and self-employed persons) are liable for an ‘Accident Compensation Earner Levy’. From 1 April 2012, the levy is payable at the rate of $1.70 per $100 of liable earnings, GST inclusive.
The earner levy on earning from self-employment is a deductible expense to the self-employed person in the income year it is due and payable.
Earner levies payable by employees are deducted via the PAYE system (ie. built into the PAYE deduction tables).
Earnings of the following nature are not liable for the earner levy:
- withholding payments
- retirement or redundancy payments
- student allowances
- various benefits
- pensions and tax-free allowances.
The maximum amount of liable earnings in the 2013 income year will increase to $113,768 for self-employed persons and $116,089 for other earners. Liable earnings include both earnings as an employee and other earnings derived as a result of personal exertion.
Goods and services tax (GST)
GST is a consumption tax which is imposed under the Goods and Services Tax Act 1985.GST is imposed on the supply of goods and services in New Zealand and on goods imported into New Zealand (in addition to any customs duty).
GST is levied at the rate of 15% (prior to 1 October 2010 it was 12.5%), although some supplies are taxed at zero percent and certain specified supplies are exempt from the tax. The tax is generally borne by the final consumer. Goods and services are taxed at each transaction stage, with a credit being given to registered persons for GST previously paid on goods or services.
Normally GST has no impact on business profits, except for additional administration and compliance costs and cash flow effects. However, there are instances where the tax falls on the business taxpayer as a final consumer eg GST on fringe benefits supplied to employees or GST on deemed supplies of non-deductible entertainment expenditure. GST is normally accounted for on an accrual (invoice) basis but where turnover in a given 12-month period is less than $2 million there is an option to account for GST on a cash basis.
Any person who, in a given 12-month period, makes total taxable supplies in excess of $60,000 in New Zealand in the course of all taxable activities is liable to be registered for GST. This is a turnover threshold – the level of profit/loss is irrelevant. Registered persons must generally file a GST return once every two months. However, a person may apply to file on a six-monthly basis if taxable supplies do not exceed $500,000 in a given 12-month period. Where turnover exceeds $24 million per annum, registered persons are required to submit GST returns on a monthly basis.
Certain supplies, known as exempt supplies, are specifically excluded from the imposition of GST.
- supply of financial services (other than those which are zero-rated)
- letting of residential accommodation
- supplies of fine metal (except for those which are zero-rated).
Being exempt means that no GST is payable on such supplies. However, GST on associated costs in relation to the exempt supply is not recoverable as ‘input tax’.
Certain supplies, known as zero-rated supplies, are taxed at the rate of zero percent. While no GST is payable on zero-rated supplies, in contrast to exempt supplies, GST on associated costs is recoverable as input tax. Zero-rated supplies include:
- exported goods
- services supplied to a New Zealand resident in connection with temporary imports
- goods situated overseas
- a taxable activity disposed of as a going concern
- certain ‘exported’ services including supplies in relation to exported goods where the services are supplied to a non-resident who is outside New Zealand at the time the services are performed
- business-to-business supplies of financial services
- certain transactions involving emissions units
- supplies that include land where the purchaser is GST-registered and acquires the goods with the intention of using them to make taxable supplies and is not intending to use the property supplied as their principal place of residence.
A ‘reverse charge’ mechanism requires the self-assessment of GST on the value of services imported by some registered persons. The reverse charge applies to imported services that are not used for making taxable supplies and that would have been subject to GST if they had been provided in New Zealand.
Customs duty is levied on some imported goods at rates generally ranging from 0% to 10%. Information on duty rates can be found on the Custom’s website www.customs.govt.co.nz
Excise duty is levied, in addition to GST, on alcoholic beverages (eg wines, beers, and spirits), tobacco products and certain fuels (eg compressed natural gas and gasoline).
Gift duty has been repealed in respect of gifts made on or after 1 October 2011.