Who Is Liable For Income Taxes in New Zealand
Resident individuals are subject to income tax on worldwide income. Nonresident individuals pay tax on New Zealand-source income only.
Individuals are considered resident in New Zealand for tax purposes if they meet either of the following conditions:
- They have a permanent place of abode in New Zealand, regardless of whether they also have a permanent place of abode outside New Zealand.
- They are physically present in New Zealand for more than 183 days in any 12-month period.
Transitional Residents’ exemption. Resident individuals arriving for the first time in New Zealand after 1 April 2006, or who have been absent for at least 10 years before returning to New Zealand, are considered to be Transitional Residents and are eligible for an exemption on certain income arising from sources outside New Zealand for the first 48 months of their stay. However, Transitional Residents can elect to waive the exemption.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Gross income includes all salaries, wages, bonuses, retirement payments and other compensation. Employer-paid items, including hardship allowances, taxes, meals, permanent housing and tuition for dependent children, are generally included in gross income. Payments or reimbursements by employers of some relocation expenses may be excluded from gross income. Employer-provided accommodation for up to three months after arrival as a result of a work-related relocation is specifically exempt from income tax and fringe benefit tax.
Other employer-paid items, including automobiles, employees’ education expenses, medical insurance premiums, private or government pension plan contributions, life insurance premiums and imputed interest on below market rate loans, are generally excluded from employees’ gross income. However, employers are subject to either withholding tax or fringe benefit tax on pension contributions that are not Kiwi Saver contributions (see below) and to fringe benefit tax on the other items. Reimbursements for business expenses are not taxable to the employee.
The government has introduced a work-based savings initiative called Kiwi Saver. Most employers must make compulsory contributions to a Kiwi Saver fund or a complying superannuation fund for all eligible employees who have elected to participate.
To be eligible, employees must satisfy the following conditions:
- They must be New Zealand citizens or entitled to live permanently in New Zealand.
- They must normally live in New Zealand.
- They are under 65 years old.
Employers are subject to withholding tax on all Kiwi Saver contributions exceeding the compulsory employer contribution amount.
Income from personal services (salary and wages) rendered by a nonresident in New Zealand is generally not taxable if the non-resident is physically present in New Zealand for less than 92 days and if the income is taxable in the nonresident individual’s country of tax residence. This period is often extended to 183 days by double tax treaties. In general, these rules do not apply to nonresident entertainers or nonresident contractors, who are normally subject to withholding tax on all income unless they have obtained exemption or nil rate certificates. Nonresident contractors may be exempt from withholding tax without obtaining exemption certificates if either of the following applies:
- They are eligible for total relief from tax under a double tax treaty and they are physically present in New Zealand for 92 days or less in any 12-month period.
- The total amount of contract payments made for the contract activities is NZ$15,000 or less in any 12-month period.
Employment income also apply to self-employed persons. Self-employed persons are subject to tax on profits derived from any business activity, including the sales of goods, services and commissions.
A partnership must submit an income tax return setting forth the amount of profit or loss shared among the partners, but income tax is not assessed on the partnership. Each partner must file a separate tax return for all income, including his or her share of partnership income.
Nonresident entertainers are subject to withholding tax at a rate of 20%. This tax may be treated as a final tax. Nonresident contractors are generally subject to withholding tax at a rate of 15% for income from contract services. This tax is neither a minimum nor a final tax and is paid on account of any annual income tax liability.
Directors’ fees. Directors are generally taxed as self-employed persons. No special provisions apply other than a requirement to deduct withholding tax at a rate of 33%.
Attributed income from personal services. Personal services income earned through an interposed entity, including a company or trust, may be attributed to the individuals performing the services and taxed at the personal tax rates. This attribution may occur if the individual and interposed entity are associated persons and the services are supplied to a single or limited number of clients. Attribution will not apply if both the individual and interposed entity are nonresidents.
Investment income. Dividends received from a New Zealand resident company may have imputation credits attached. The imputation credit represents tax paid by the company on the underlying profit from which the dividends are paid that is passed on to the shareholder. A resident shareholder is assessed on the combined amount of the dividend plus the imputation credit, and receives a tax credit for the amount of the imputation credit. Non-residents do not receive a tax credit for the amount of the imputation credit. Other credits may arise with respect to the branch equivalent tax paid or foreign dividend withholding payments made by the company issuing the dividend.
Income earned on investments in certain unlisted portfolio investment entities (PIEs) may be allocated and taxed at the fund level at individual investor rates, with a maximum rate of 28% (from 1 October 2010; previously 30%) and no further tax on distribution. Listed PIE distributions may also be excluded from gross income.
Dividends (other than PIE distributions) and interest paid by New Zealand resident companies to New Zealand resident individuals are generally subject to an interim tax through a resident with-holding tax (RWT) deduction.
The RWT rate on dividends is 33%, reduced by any imputation credits attached to the dividends.
Certain types of interest are exempt from RWT, including interest payable on trade debts or interest received under a hire-purchase agreement. Other items that are exempt are payments made to entities or persons holding valid certificates of exemption. These may include banks, building societies, money lenders, and local or public authorities, and persons whose total gross income is expected to exceed NZ$2 million in the next accounting year. The rates of RWT on interest from 1 April 2010 to 30 September 2010 were elective rates of 12.5% (for individuals who expected their annual gross income would not exceed NZ$14,000 and for trustees of deceased estates), 21%, 33% or 38%, if the interest recipients supplied their tax identification numbers. Companies could elect an RWT rate of 33% or 38%, but interest payers could choose to deduct RWT at 30% instead of 33% on interest payments to companies. In all cases, the RWT rate on interest was 38% of gross interest if the recipient did not provide a tax identification number. Effective from 1 October 2010, the rates of RWT on interest are elective rates of 10.5% (instead of the 12.5% rate), 17.5%, 30% and 33% for individuals who supply their tax identification numbers, and 33% for companies (unless payers chose to deduct at the lower 30% rate). Effective from 1 April 2011, the RWT rate on interest paid to companies is reduced to 28% if the recipients supply their tax identification numbers. The default RWT rate if interest recipients did not supply their tax identification numbers was 33% for all recipients between 1 October 2010 and 31 March 2011. Effective from 1 April 2011, the default RWT rate is reduced to 30% for company recipients of interest but remains at 33% if other interest recipients do not supply their tax identification numbers. The recipients include the gross interest and dividends in their gross income and receive a credit for RWT.
Nonresidents are subject to withholding tax at a rate of 30% on dividends. This rate is reduced to 15% to the extent that cash dividends are fully imputed or fully credited under the dividend-withholding-payment regime or conduit tax relief system or to the extent that imputation credits are passed on through the payment of supplementary dividends under the foreign investor tax credit regime. The rate is reduced to 0% to the extent that non-cash dividends are fully imputed.
Effective from 1 February 2010, a 0% rate also applies to fully imputed cash dividends paid to nonresidents if the nonresidents have a direct voting interest of at least 10% or if a tax treaty would reduce the New Zealand tax rate below 15%.
Nonresidents are subject to withholding tax at a rate of 15% for interest and royalties. Certain tax treaties may reduce this rate. Nonresident withholding tax is a final tax on dividends, cultural royalties and interest paid to nonrelated persons. It is a minimum tax on non-cultural royalties and on interest paid to related persons. Nonresident withholding tax rates may be reduced under New Zealand’s double tax treaties.
As an alternative to nonresident withholding tax on interest, if the borrower and lender are not related persons and if the interest is paid by a person registered as an approved issuer with respect to a registered security, the interest is subject only to an approved issuer levy of 2% of the interest actually paid. The New Zealand government pays the 2% levy on interest paid on its loans from nonresidents that meet these criteria.
The foreign investor tax credit (FITC) provisions reduce the effective rate of New Zealand tax imposed on dividends received by a nonresident investor from a New Zealand company. To the extent that a New Zealand company is owned by nonresident investors and imputation credits are attached to dividends paid, the company may claim a partial refund or credit of its New Zealand company tax liability. The company then passes on the refund or credit to the nonresident investors through supplementary dividends. The effective rate of tax on fully imputed dividends received by nonresident investors with supplementary dividends under the FITC provisions is 30% (28% from the 2011–12 income year), which effectively equates the company tax rate on the company’s underlying profits and the extent of the credits passed to resident investors. However, the residents may need to pay further tax, depending on their individual marginal tax rates. Although the same result could be achieved for nonresident investors through a 0% rate of withholding on imputed dividends, the rather complicated FITC mechanism is intended to allow nonresident investors to claim a full tax credit in their home countries for New Zealand nonresident withholding tax.
Effective from 1 February 2010, the FITC provisions generally apply for dividends paid to nonresidents only if they hold less than 10% direct voting interests and if the New Zealand tax rate, after any tax treaty relief, is at least 15%.
Attributed income from controlled foreign investments. Under the controlled foreign company (CFC) regime, New Zealand residents may be taxed on income attributed to them that is derived by foreign entities in which they hold an interest if either of the following circumstances exists:
- Five or fewer New Zealand residents own over 50% of the foreign entity.
- New Zealand residents have de facto control of the company.
In general, an exemption from the CFC regime had previously been allowed for investments in companies and unit trusts in “grey list” countries (Australia, Canada, Germany, Japan, Norway, Spain, the United Kingdom and the United States). For taxpayers’ income years that begin on or after 1 July 2009 (for example, the year ending 31 March 2011 for taxpayers with the standard March balance date, or the year ending 31 December 2010 for taxpayers with December balance dates), the “grey list” exemption is abolished (apart from Australia) and an active income exemption is introduced, which may apply to companies and unit trusts in any foreign countries.
Under the foreign investment fund (FIF) regime, New Zealand residents may be taxed on income attributed to them that is derived by foreign entities in which they hold an interest not meeting the conditions for the applicability of the CFC regime.
The FIF regime may apply to interests in the following:
- Companies and unit trusts
- Foreign superannuation schemes
- Foreign life insurance policies that have an investment component
Several exceptions apply, including exemptions for the following:
- Shares held in certain Australian companies listed on the Australian Stock Exchange.
- Certain Australian unit trusts or superannuation schemes.
- Individuals holding FIF investments that cost less than NZ$50,000 in total.
- Certain interests in employment-related foreign superannuation schemes and qualifying foreign private annuities.
- An exemption period for foreign superannuation and life insurance interests held before the individual becomes a New Zealand resident. The exemption period is 48 months, beginning after the month in which the person first became a tax resident.
Effective from 1 April 2007, investors who own interests of less than 10% in foreign companies, unit trusts, superannuation funds and life insurance policies can calculate their FIF income under the fair dividend rate method (FDR). Under the FDR method investors are taxed on 5% of the market value of investments held at the beginning of the year. Dividends and capital gains are not separately taxed under this method.
Under legislation that is in the process of being enacted, an active income exemption and approach (similar in some respects to that applying for interests in CFCs) will be provided with respect to direct income interests of at least 10% in FIF companies and unit trusts for income years beginning on or after 1 July 2011.
Transitional Residents (see Transitional Residents’ exemption) are exempt from the attribution of CFC or FIF income.
Trust income. Trust income is taxed in New Zealand if it is sourced in New Zealand, if it is derived by a trustee or a beneficiary who is resident in New Zealand, or if a settlor of the trust (generally any person that provides some benefit to the trust) is a New Zealand resident. If the income is vested in, paid to or applied for the benefit of a beneficiary, the income is taxable to that beneficiary at the applicable marginal tax rate. Otherwise, trust income is taxable to the trustee or, if the trustee is not resident in New Zealand, then to any New Zealand-resident settlor at a rate of 33%. If the income of a trust has not been fully liable to New Zealand income tax, certain distributions to New Zealand beneficiaries may be taxable at a higher rate of 45%, even though legally they may be considered distributions of capital. Beneficiary income derived by Zealand-resident minors (younger than 16 years of age on the trust’s balance date) is generally taxable at a rate of 33%.
Taxation of employer-provided stock options. In New Zealand, any benefit conferred under an agreement to sell or issue shares to an employee is taxable to the employee as remuneration. The benefit is calculated as the difference between the fair market value of the shares on the day they are acquired and the amount paid for the shares.
Individuals resident in New Zealand who exercise share options are subject to tax on the difference between the strike price and the fair market value of the shares on the date of exercise. The liability arises in the income year in which the options are exercised.
If the employee is a Transitional Resident (see Transitional Residents’ exemption) at the time the options are exercised, the value of the benefit is apportioned based on the ratio of the time employed in New Zealand to the total employment period.
Capital gains and losses. New Zealand has no general capital gains tax, but profits from the sale of real and personal property may be subject to regular income tax in certain circumstances, including the following:
- The taxpayer’s business consists of dealing in that real or personal property.
- The taxpayer’s dominant purpose at the time of acquisition was to sell the property at a later date.
An accrual taxation system applies to New Zealand resident individuals who are parties to various types of financial arrangements, including debts and debt instruments. Under the accrual system, foreign-exchange variations related to the financial arrangements are included in calculations of income and expenditure.
A cash-basis system may be adopted by taxpayers deriving income and incurring expenditure of less than NZ$100,000 from financial arrangements in an income year and by taxpayers with financial arrangement assets and liabilities with a total absolute value of NZ$1 million or less. For the cash basis to apply, the cumulative difference between the actual income and expenditure and the notional income and expenditure on an accrual basis must be less than NZ$40,000.
The accrual taxation regime does not apply to nonresidents, unless the transaction involves a business they carry on in New Zealand, or to Transitional Residents if the other parties to an arrangement are nonresidents and if the arrangement is not for the purposes of a business carried on in New Zealand by any of the parties.
Deductions
Deductible expenses. No deductions are allowed against income from salary or wages, except for tax return preparation fees and premiums for loss of earnings insurance if the insurance proceeds would be taxable.
Personal deductions and allowances. Taxpayers with dependent children may be entitled to weekly amounts of family support and an independent family tax credit if gross income does not exceed specified amounts.
A 6% tax credit applies to certain redundancy payments (up to a maximum credit of NZ$3,600 on payments of at least NZ$60,000), made on or before 31 March 2011 (proposed to be further extended to 30 September 2011). An independent earner tax credit (IETC) may apply to taxpayers who have annual income between NZ$24,000 and NZ$48,000 and who do not directly or indirectly receive family support, income-tested benefits, New Zealand superannuation, certain pensions or other amounts. The IETC is a maximum of NZ$520 and abates at 13 cents per dollar earned over NZ$44,000.
Family support, rebates and special exemptions are generally not available to nonresidents.
Business deductions. Expenses necessary to produce gross income are deductible. However, only 50% of specified business entertainment expenses incurred by self-employed individuals is deductible.
Relief for losses. Business losses may be offset against a taxpayer’s other net income in the year when the loss is sustained. The balance of any loss may be carried forward and offset against future net income of the taxpayer.
B. Estate and gift taxes
Estate duty is not levied in New Zealand. Gift duty is currently imposed on every dutiable gift but legislation that will abolish gift duty for gifts made on or after 1 October 2011 is in the process of being enacted. Dutiable gifts consist of property in New Zealand and all property wherever located, if, at the time of the gift, the donor was domiciled in New Zealand.
C. Social security
New Zealand does not have a social security system requiring compulsory contributions from employees. However, under the Accident Compensation Act 2001 (previously called the Injury Prevention, Rehabilitation and Compensation Act 2001), levies are payable by employers, employees and self-employed people to fund the comprehensive no-fault accident compensation scheme, which covers all accidents at home and at work. The levies are payable on employment income of up to NZ$110,018 for the year ending 31 March 2011, and up to NZ$111,669 for the year ending 31 March 2012. For employers and self-employed persons, the rate of the levy depends on the relevant industry classification. For employees, the rate of the levy is 2.04%, effective from 1 October 2010.
New Zealand has entered into reciprocal social security agreements with Australia, Canada, Denmark, Greece, Guernsey, Ireland, Jersey, the Netherlands and the United Kingdom.
Double tax relief and tax treaties
If a New Zealand resident derives income from a foreign country, foreign income tax paid on that income is allowed as a credit against income tax payable in New Zealand. The credit is limited to the amount of tax payable in New Zealand on the same foreign-source income.
New Zealand has entered into comprehensive double tax treaties with the following countries.
Australia
India
Singapore
Austria
Indonesia
South Africa
Belgium
Ireland
Spain
Canada
Italy
Sweden
Chile Japan
Switzerland
China
Korea (South)
Taiwan
Czech Republic
Malaysia
Thailand
Denmark
Mexico
Turkey*
Fiji
Netherlands
United Arab Emirates
Finland
Norway
France
Philippines
United Kingdom
Germany
Poland
United States
Hong Kong*
Russian Federation
* This treaty is not yet in force.
To learn more about the history, culture, economy and other information about New Zealand
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