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Taxation

The main taxes are the income tax and Goods and Services Tax (GST), a value-added tax. Both are applied at low rates to broad bases. This is the result of the major tax reforms undertaken since the mid-1980s. The introduction of GST in 1986 marked a significant shift in the mix of taxation from direct to indirect tax.

Personal Income Tax

All income other than capital gains is taxed. The tax rates for individuals changed on 1 October 2008 and again on 1 April 2009.

As at 1 October 2008, the effective personal tax scale applying to people who earn wage and salary income was as follows: 15% on income up to $14,000 per annum; 21% on income between $14,000 and $40,000: 33% on income between $40,000 and $70,000 and 39% on income above $70,000.

The new rates of applicable from 1 April 2009 are as follows: 12.5% on income up to $14,000 per annum; 21% on income between $14,000 and $48,000; 33% on income between $48,000 and $70,000 and 38% on income above $70,000. In addition, a new tax credit was introduced for some independent earners who are not currently entitled to government assistance.

Withholding taxes apply to wages and salaries and to interest income and dividends. Fringe benefits are taxed separately.

Tax credits based on combined family income are available to families with children.

The tax treatment of pension funds and other savings is "TTE": contributions are made from Tax-paid income, fund earnings are Taxed, and withdrawals are Exempt. Changes introduced on 1 October 2007 in conjunction with the introduction of a work-based savings scheme reduced the tax on savings. These include:

  • investment income earned through a managed fund that qualifies as a Portfolio Investment Entity (PIE) is taxed at a maximum rate of 30%. PIEs are not taxed on realised gains from shares in New Zealand companies and some Australian listed companies; and
  • a tax exemption for employer contributions to registered employee superannuation schemes.

Indirect Taxes

GST applies at a uniform rate of 12.5%. Financial services and housing rentals are exempt. Additional indirect taxes are applied to alcohol and tobacco products, petroleum fuels and gaming. There are also cheque and gift duties.

Company Taxes

The company tax rate is 30%. Imputation credits are attached to dividends. Inter-corporate dividends (other than from wholly-owned subsidiaries) are taxed as income. Depreciation rates for new assets are based on the economic life of the asset plus a 20% loading. There is immediate deductibility against income of forestry and mineral mining development costs, petroleum exploration expenditure and most agricultural development costs.

International Taxation

The foreign-source income of New Zealand residents is subject to tax, with certain exceptions. An income tax exemption for the active foreign income of controlled foreign companies applies for all income years beginning on or after 1 July 2009. The exemption is similar to that operating in other OECD countries. Non-active (or passive) foreign income of controlled foreign companies is taxed on accrual according to the resident controller's interest. The government intends to extend the active income exemption to non-portfolio foreign investment funds and to branches of New Zealand companies operating offshore.

Investments in the shares of foreign companies (except for some Australian listed companies) of less than 10% are taxed under the Fair Dividend Rate method. The investor is attributed income equal to 5% of the investment's opening value. Dividend income is exempt. Where an individual can show the unrealised gain on their investments is less than 5%, the investor is taxed on this lower amount.

The tax treatment of the New Zealand income of non-residents encourages inward capital flows where this is feasible. Interest payments to non-residents are subject either to non-resident withholding tax (in most cases at a 10% rate where a double tax agreement applies and 15% otherwise) or to a 2% levy. In the case of New Zealand government debt, the issuer absorbs the levy. The government is considering whether to remove the 2% levy on certain bond issues.

Dividends paid to non-residents are also subject to withholding taxes. Currently, companies paying fully imputed dividends to non-resident investors can receive a credit of part of the company tax paid, which the company then pays to the investor.

The government is currently re-negotiating its network of double tax agreements, with a view to reducing non-resident withholding tax on dividends to zero for shareholdings in excess of 80% and 5% for shareholdings of 10% or more. Prior to the entry into force of any new double tax agreements, consequential changes to limit the availability of the tax credit referred to in the previous paragraph will occur. The net effect is that the maximum combined level of company tax and withholding tax will, in most cases, continue to be 30%. It is expected to take several years to fully roll out this new policy across New Zealand's network of double tax agreements.

The government has implemented transfer pricing and thin capitalisation regimes. It has recently abolished relief for New Zealand tax on offshore income derived by New Zealand companies on behalf of non-residents as these rules had led to tax avoidance. It is considering alternative methods of providing relief.

Taxation Reform

During 2009, the Victoria University of Wellington convened a Tax Working Group to address key medium-term tax policy challenges facing New Zealand. The Working Group presented its report to the government in January 2010.

In response, the Prime Minister announced, in broad terms, the tax changes that will be developed as part of the 2010 Budget. As part of a suite of changes that is intended to be fiscally neutral, the government is looking at reducing personal tax rates, increasing GST and changing tax rules on property investment. The government has also said New Zealand needs to maintain a competitive company tax rate. The details of the tax changes will be announced in the 20 May Budget.

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