Taxation

Tax FAQs

• An introduction to tax - Overview
• Get your taxes right! - Article
• Tax assistance package – summary of changes
• Talk to us, says Commissioner of Inland Revenue - Article
• Download your FREE copy of our tax FAQs
• or for more information please call 0800 CHAMBER (0800 242 6237)

Get your taxes right!

23 June 2009 - Inland Revenue has unveiled the areas it will focus on in the year ahead to make sure people get their taxes right, and claim correct social support payments.

The Commissioner of Inland Revenue, Robert Russell, has released “Helping You Get it Right: Inland Revenue’s compliance focus 2009-10’’

Tax assistance package – summary of changes

Information about these changes is available at www.ird.govt.nz.

Decrease to provisional tax (standard method) rate

The provisional tax rate for the standard method of calculating provisional tax has temporarily decreased by 5%. This applies to installments due after 1 April 2009 for the 2008/09 income year, and all installments for the 2009/10 income year.

For provisional tax payers using the standard method, we will recalculate and advise them or their tax agents of the reduced amount of provisional tax due for their remaining payments for the 2008/09 income year. We will also send individuals information on how to calculate payments for the 2009/10 income year.

Changes to provisional tax use of money interest (UOMI)

The threshold for being charged provisional tax UOMI, based residual income tax (RIT), has increased from $35,000 to $50,000 for individuals. If provisional tax payers have a provisional tax shortfall after using the standard method to calculate and pay provisional tax and their RIT is less that $50,000, they won’t be charged any UOMI from the provisional tax installment due date.

Please note, UOMI continues to be applied to any tax shortfalls after the terminal tax due date.

Increase to GST registration threshold

The threshold for compulsory GST registration that increased from $40,000 to $60,000. If annual turnover is under $60,000, customers will no longer need to be registered for GST.

Customers have certain responsibilities when they cancel their GST registration. Details about these can be found at www.ird.govt.nz/gst/.

Increase to six-monthly GST return threshold

If customers currently file and pay GST monthly or two-monthly and their annual taxable supplies are no more than $500,000, they’re eligible to change to filing and paying GST six-monthly.

To change to filing and paying GST six-monthly, customers need to apply in writing, by attaching a note with their next GST return or sending it to us separately.

Using the payments basis to account for GST

The threshold allowing use of the payments basis has increased from $1.3 million to $2 million. If a customer’s taxable supplies in the last twelve months are no more that $2 million, they can apply to use the payments basis to account for their GST.

Under the payments basis GST is accounted for in the period payment is received instead of the period when an invoice is issued, which can help with cash flow.

To change to using the payments basis, customers need to apply in writing by attaching a note with their next GST return or sending it to us separately.

Increase to FBT annual filing threshold

The threshold to file and pay FBT annually has increased from $100,000 to $500,000. If customers currently file and pay FBT quarterly and their gross PAYE including employer superannuation contribution tax (ESCT) is no more than $500,000, they can apply to do this annually instead.

To do this, customers need to complete a fringe benefit tax election form at www.ird.govt.nz/online-services or call us on 0800 377 772 to change to filing and paying your FBT annually.

Due dates for fringe benefit election forms

To change to filing and paying FBT annually using Fringe benefit tax annual return (IR 422), elections need to be received by 30 June in the income year that the election first applies. For example, if a customer wants to file their first annual return for the year ended 31 March 2010, we must receive their election by 30 June 2009.

Existing companies that have shareholder-employees, and file and pay FBT quarterly, can elect to file and pay FBT annually instead using our Fringe benefit tax income year return (IR 421). Elections need to be received by the last day of the first FBT quarter in the income year that the election applies. For example, if the company has a 30 June balance date, we must receive their election by 30 September 2009 in order for them to file an FBT return for the year ending 30 June 2010.

FBT for closely held businesses

Owner-employee’s of a “closely held business” can choose to file FBT returns annually, regardless of their annual PAYE and ESCT deductions provided that the fringe benefit relates to the use or availability of a motor vehicle for private use and the FBT liability is for no more than two vehicles.

FBT on minor fringe benefits

The value of minor unclassified fringe benefits (for example minor gifts such as chocolates and flowers) provided to employees without attracting FBT has increased to $300 per quarter per employee and $22,500 a year per employer. If a customer supplies certain minor benefits to their employees, they may no longer need to return FBT.

Decrease to interest rate for low-interest employment-related loans

The FBT prescribed interest rate for low-interest employment-related loans has decreased from 10.90% to 8.05%, and applies retrospectively from 1 January 2009. This means if a customer provides low interest, employment related loans to their employees they’ll pay less FBT for these.

Increase to PAYE twice monthly threshold

The threshold for paying PAYE twice each month based on annual PAYE and ESCT has increased from $100,000 to $500,000. However, the threshold requiring customers to file electronically using ir-File remains at $100,000.

If annual PAYE includes ESCT (employer superannuation contribution tax) is less that $500,000, customers only need to pay PAYE once a month.

We are writing to employers affected by this change and will update their details automatically in our system.

Both the PAYE income payment (IR 345) form and employer monthly schedule (IR 348) are due by the 20th of the month following the one in which PAYE was deducted.

Decrease in use of money interest (UOMI) rate

If customers underpay their tax, they’ll incur less UOMI. And, if they overpay tax, they’ll receive less UOMI.

Simplified rules for deducting legal expenditure

If customers incur business-related legal expenditure, they can immediately deduct up to $10,000 per year from their income tax in the year it was incurred without needing to distinguish whether it’s revenue or capital.

Information about these changes is available at www.ird.govt.nz.

Talk to us, says Commissioner of Inland Revenue

24 March 2009 - The Commissioner of Inland Revenue, Robert Russell, is urging customers finding it difficult to pay their taxes in the current economic climate to contact the department at the earliest opportunity.

“We understand that economic conditions are tough for many people and businesses at the moment. Many people may be OK now, but concerned that their finances will get worse in future and they will have trouble meeting their obligations,’’ he said.

“However, it’s vital that they get in touch with us and let us know that they are having problems, preferably before the date payments are due.  Missed tax payments attract penalties and interest.

“If people get in touch with us early, there are a number of things we can do to help them, depending on the individual situation.’’

Tax payment by instalment was one option, he said. “At the end of December, we had $902 million being paid under instalment arrangements.’’  Such arrangements can be renegotiated if people’s situations worsen.

“Even if customers do choose to talk to us after their due dates, better late than never.  A voluntary disclosure now is preferable to facing far greater tax problems at a later date, and will reduce further penalties, ’’ he said.

Customers who enter into instalment arrangements before the due date will pay a one-off penalty of one per cent of tax owed, and will pay use-of-money interest but they will avoid the penalties they could face if they just ignored their tax obligations.

Mr Russell said that it was important to comply with tax requirements. “Debt tends to rise and tax gets pushed down the list of priorities by people and businesses. Inland Revenue has a statutory obligation to collect the maximum revenue over time which is required to pay for health, schools, social services and a number of other areas.’’

He noted that customers with reduced income may find themselves eligible for Working for Families Tax Credits. Other people may be eligible for the Independent Earner Tax Credit which will be available from 1 April.

Options are also available in the case of Child Support and Student Loans repayments, and people unable to meet their KiwiSaver obligations can take a contributions holiday after being in the scheme for a year. Prior to that, they can apply for a financial hardship holiday.

Mr Russell said in the case of tax debt, the department only takes liquidation or bankruptcy proceedings as an absolute last resort.

“Such actions are only undertaken when all other efforts to recover the money owing has failed. Liquidation is always preceded by multiple attempts by Inland Revenue, often over several years, to negotiate with the taxpayer.’’

“The sooner people contact us,’’ Mr Russell said, “the sooner we can discuss the options available to assist them to meet their repayment obligations.’’

“We want to help people get their affairs in order to avoid worse problems down the track.’’

For more information, customers can go to or call 0800 227 771 for individual taxpayers, or 0800 377 771 for employers.

People can check their entitlements to Working for Families Tax Credit using the online calculator at www.ird.govt.nz

Information about the Independent Earner Tax Credit, coming into effect on 1 April, is available at www.ird.govt.nz/ietc

An introduction to tax

Overview

The Income Tax Act 2004 ("the Act") governs the law relating to income tax. The main purpose of the Act is to impose tax on accessible income, impose obligations in respect of tax and set out rules to calculate the tax and to satisfy the obligations imposed.

The Act taxes all accessible income from all sources for a particular income year ("annual gross income"). The aggregate of allowable deductions for that income year is then subtracted from the annual gross income.

The Inland Revenue Department ("the IRD") administers the income tax system. The IRD's powers and responsibilities are set out in the Tax Administration Act 1994 ("the TAA"). The TAA charges the IRD's chief executive, the Commissioner of Inland Revenue ("the Commissioner"), with the care, management and collection of the taxes that are covered by the Inland Revenue Acts.

Who is required to pay tax?

The Act imposes income tax on the taxable income of New Zealand tax residents and on income derived from New Zealand.

New Zealand tax residents are taxed on their world-wide income, while non-resident taxpayers are taxed only on income sourced in New Zealand.

Individuals

Under section OE 1(1) of the Act, an individual will always be a tax resident in New Zealand if they have a permanent place of abode ("PPA") in New Zealand, regardless of the amount of time that they spend in or out of New Zealand. The phrase "permanent place of abode" is not defined in the Act, but case law has developed a number of tests to determine an individual's PPA.

If an individual does not have a PPA in New Zealand, a person is deemed to be a New Zealand tax resident if he or she is present in New Zealand for 183 days in any 12-month period.

Companies

A company will be a New Zealand tax resident if any of the following tests in section OE 2(1) of the Act are met:

• Incorporated in New Zealand;
• Head office in New Zealand;
• Centre of management in New Zealand; or
• Control of the company by its directors is exercised in New Zealand, whether or not decision making by the directors is confined to New Zealand.

The primary test is if the company is incorporated in New Zealand, regardless of where the management or control of the company is carried out.

In addition, there is a distinction between branches and subsidiaries whereby branches are treated as non-residents and subsidiaries are treated as New Zealand tax residents.

Dual residency

It is possible for an individual or company to be resident in both New Zealand and another country under that country's domestic tax legislation. In such cases, ie. where a Double Tax Agreement ("DTA") exists, there will be a tie-breaker test in the DTA. The application of this tie-breaker test should result in a single country of residence for income tax purposes.

Transfer pricing

Where there are any cross-border arrangements between associated parties, eg. a New Zealand subsidiary and its Australian parent, all transactions must be conducted at arms length (ie. fair market value) and be supported by documentation that reflects this.

Source of income

It is important to determine the source of any income, as non-residents are only taxable on income sourced in New Zealand. The source rules are contained in section OE 4 of the Act.

What are the different tax types?

Listed below are the main tax types that apply to New Zealand resident taxpayers, as well as some of the taxes that apply to non-resident taxpayers.

Income tax

Income tax is imposed on taxable income under section BB 1 of the Act. Part C of the Act determines what receipts should be included in gross income.

A further influence in determining whether an amount constitutes "income" for tax purposes is the judicially developed rule that income:

• Is something that comes in;
• Is regular; and
• Is determined by its quality in the hands of the recipient.

Fringe benefit tax

Fringe benefit tax ("FBT") is a tax on certain "fringe benefits" or non-cash items previously received tax-free by employees from their employers. Employers are responsible for paying FBT. The cost of providing a fringe benefit and the FBT itself are both deductible to the employer.

To determine whether FBT applies, the following issues should be considered:

• Is there a benefit provided to an employee (including a deemed employee) by an employer?
• Is that benefit a "fringe benefit" as defined in the Act?
• What is the value of the fringe benefit?
• What is the taxable value of the fringe benefit?

Pay as you earn

The Pay As You Earn ("PAYE") rules require employers (or persons who engage independent contractors) to collect income tax from "source deduction payments" made to employees and to pay that tax to the IRD. Source deduction payments are "salaries, wages, extra emoluments and withholding payments". The PAYE deducted is on account of each employee's tax liability.

The PAYE system also requires employers to account for specified superannuation contribution withholding payments, ACC premiums, student loan repayments and child support.

Tax deductions from payments of salaries, wages or extra emoluments are made at the rates set out at Appendix A of schedule 19 to the Act. Tax deductions made from withholding payments are made at the rates set out in the schedule to the Income Tax (Withholding Payments) Regulations 1979.

The administrative and penalty requirements regarding PAYE are contained in the TAA.

Resident withholding tax

Resident withholding tax ("RWT") is a tax withheld on "resident withholding income", which, broadly speaking, includes interest and dividends. A person who makes a payment of resident withholding income must deduct RWT from the payment at source and pay that RWT to the IRD, ie. similar to the PAYE system.

Certificate of exemption

Certain persons can apply for a certificate of exemption ("COE") so that no RWT is deducted from resident withholding income, provided that they present the COE to the payer of that income. The holder of a COE is, however, not exempted from the obligation to make deductions when making payments of interest or dividends themselves.

Non-resident withholding tax

Non-resident withholding tax ("NRWT") is imposed on "non-resident withholding income" derived from New Zealand by a person who is not resident in New Zealand. Broadly speaking, non-resident withholding income includes dividends, interest and royalties.

In most cases, NRWT is the only New Zealand tax to which non-resident withholding income is subject to. The tax is deducted at source and accounted for by the 20th of the following month in accordance with section NG 11 of the Act.

Approved issuer levy

Persons borrowing from non-residents can apply for:

• Approved issuer status; and
• Registration of securities for money lent.

An approved issuer that pays interest on registered securities is not required to deduct NRWT on behalf of the non-resident lender, as the interest is exempt from NRWT where a 2% approved issuer levy has been paid by the due date. The approved issuer or some other party on behalf of the approved issuer may pay the levy.

Gift duty

Under the Estate and Gift Duties Act 1968, gift duty is imposed on dutiable gifts made within any 12-month period. A dutiable gift is a gift of property wherever situated, that is:

• The subject of a gift made by a donor domiciled in New Zealand or body corporate incorporated in New Zealand;
• Property situated in New Zealand where the donor is not domiciled in New Zealand; or
• A body corporate incorporated outside New Zealand.

The rate of duty varies according to the value of the gift. Actual liability for gift duty is determined according to the concepts of domicile and situation of property.

There are, however, a number of exemptions for certain kinds of gifts, including the exemption against gift duty for any gift valued at $27,000 or less made in any 12-month period.

Goods and services tax

Goods and services tax ("GST") is a consumption tax imposed under the Goods and Services Tax Act 1985 ("the GST Act"). It applies to the supply of goods and services in New Zealand and imported goods by registered persons, namely persons who carry on a taxable activity (ie. a business) and who make taxable supplies in excess of $40,000. A person can also register voluntarily if their taxable supplies do not exceed $40,000.

GST is levied at the rate of 12.5% on all taxable supplies made in New Zealand and at 0% on zero-rated supplies under sections 11 to 11B of the GST Act. An exempt supply, as defined in section 14 of the GST Act, is not subject to GST.

The amount of GST payable is calculated by deducting input tax (GST paid for supplies) from output tax (GST charged on supplies). These amounts must be recorded in a GST return for the relevant GST period (one-, two- or six-monthly filing basis) and filed by the due date (which depends on the filing basis).

What are the different tax rates?

Below are some of the main tax rates that apply to both New Zealand tax residents and income derived from New Zealand. The IRD's website provides further information and calculation tables for certain tax rates such as fringe benefit tax.

Individuals (PAYE and ACC)

The basic tax rates for individuals are as follows:

• 19.5% on taxable income of $38,000 or less;
• 33% on taxable income between $38,001 and $60,000; and
• 39% on taxable income exceeding $60,000.

ACC earners' account levies must be added to these rates where applicable. An employee may elect to have tax deducted from any extra emolument they receive at either 33% or 39%.

Companies

Both resident and non-resident companies are taxed at 33% on any taxable income derived from New Zealand.  From 1 April 2008 the corporate tax rate will be %30.

Trusts

Tax rates in relation to trusts depend on the tax status of the person deriving the income (ie. trustee versus beneficiary) and the nature of the trust from which any distribution is made. The tax rate for trustee income is currently 33% and for beneficiary income the tax rate is generally based on the beneficiaries individual tax rate.

Fringe benefit tax

Fringe benefit tax ("FBT") is imposed at 64% on the taxable value of fringe benefits granted in each quarter, unless the employer has elected to use the multi-rate FBT option for attributed fringe benefits.

Note that for an employee, the net benefit of a fringe benefit taxed at 64% is the same as that derived from a cash payment taxed at the top marginal tax rate of 39%.

Resident withholding tax

The various rates at which resident withholding tax ("RWT") is deducted from resident withholding income, such as dividends and interest, are set out in schedule 14 of the Act.

A 33% rate applies to dividends, whereas the rate that applies to interest depends on whether the payer has been supplied with the recipient's IRD number. Where no IRD number is supplied, the payer must deduct at 39%. Where an IRD number is supplied, the recipient can elect to have RWT deducted at 19.5%, 33% or 39%. A company (other than a trustee company) cannot elect to use the 19.5% rate.

As discussed in question 2, certain taxpayers can apply for a certificate of exemption so that no RWT is deducted from receipts of resident withholding income.

Non-resident withholding tax

The Act imposes a rate of 30% on dividends to the extent that they are not fully imputed (or 15% if the recipient resides in a country which has a Double Tax Agreement ("DTA") with New Zealand), 0% on interest paid by an approved issuer and fully imputed non-cash dividends, and 15% on interest that is not paid by an approved issuer and royalties (or 10% if the recipient resides in a country which has a DTA with New Zealand.)

Goods and services tax

GST on taxable supplies in New Zealand is charged at 12.5% and at 0% on zero-rated supplies. An exempt supply, as defined in the GST Act, is not subject to GST.

How are different trading entities treated?

Sole trader

New Zealand resident individuals are subject to income tax on their worldwide taxable income at the following rates:

• 19.5% on taxable income of $38,000 or less;
• 33% on taxable income between $38,001 and $60,000; and
• 39% on taxable income exceeding $60,000.

GST

Sole traders that carry on a taxable activity and make taxable supplies in excess of $40,000 must register for GST.

Partnership

A partnership is not a separate taxpaying legal entity. Thus, each partner must file a separate income tax return, recording their proportionate share of the gross income and allowable deductions of the partnership. Partnership income is therefore taxed at the marginal rate of each partner. However, a partnership income tax return must still be filed for information purposes.

Any cash distributions by a partnership to the partners are not taxable to the partners nor are they subject to RWT.

GST

Partnerships/joint ventures that carry on a taxable activity and make taxable supplies in excess of $40,000 must register for GST in the name of the partnership/joint venture. However, the partners remain jointly and severally liable for all GST payable by the partnership during the time that they are or were members.

Unincorporated joint venture

Each joint venture partner must include their proportionate share of the joint venture income (or loss) in their own income tax return. However, no return is required in respect of the joint venture itself.

Special partnership

The tax position for special partnerships is generally the same as that for partnerships, with the exception of the treatment of tax losses arising at the level of the special partnership. Tax losses cannot be passed through to the partners. Instead, they must be carried forward by the special partnership (subject to satisfying the 49% continuity of ownership rule).

Trust (excluding unit trust)

A trust is not a separate tax paying legal entity. Income is therefore taxed in the hands of either the beneficiaries or the trustees.

The beneficiaries are taxed on their "beneficiary income", being income vested in the beneficiaries, or distributed to the beneficiaries within six months of the end of the income year in which the income is derived by the trustees.

If income is not beneficiary income, it is "trustee income" and is taxable to the trustees at the trustee rate of 33%.

If the trust is in a tax loss position, the loss cannot be passed through to the beneficiaries. It can only be offset against any future income of the trust. The continuity of ownership rules do not apply at the level of the trust.

GST

A trust is an unincorporated body under the GST Act. GST registration will be in the name of the trust not the trustees. The trustees are, however, jointly and severally liable for any GST payable.

Unit trust

A unit trust is any trust in which two or more persons pool money in the trust and share in the income of their pooled investment. For income tax purposes, a unit trust is treated as if it were a company and the unitholders are treated as if they were shareholders.

Company

A company must file annual income tax returns and pay income tax in respect of the company's worldwide taxable income at the rate of 33%.

Tax losses cannot be passed through to a company's shareholders. However, where there is 66% commonality of ownership between companies, the tax losses of one company in a group can be offset against the income of another company in the group.

Tax losses that cannot be utilised by a company in the income year in which the tax losses were incurred may be carried forward and set off against future income years, provided that the 49% continuity of ownership rule is satisfied.

GST

A company can be required to be a registered person whether or not the company is incorporated in New Zealand.

Generally, the officers of a company are not personally liable for the company's GST obligations although there are some exceptions.

Qualifying company

Generally, companies with five or fewer shareholders may elect to become qualifying companies provided that the other criteria in the Act are also satisfied.

When a company enters the qualifying company regime, a qualifying company election tax equal to 33% of revenue reserves must be paid.

A qualifying company is treated in the same way as a company.

Loss attributing qualifying company

A loss attributing qualifying company ("LAQC") is a qualifying company that has one class of shares and whose directors and shareholders have elected that the company is an LAQC. The advantage of an LAQC is that tax losses can be passed through the company to the shareholders in proportion to their shareholdings. Passing through the tax losses for each income tax year is compulsory, ie. tax losses cannot be carried forward.

New Zealand business with non-resident owners

A non-resident could either invest directly into New Zealand (a subsidiary) or through a New Zealand company (a branch). The New Zealand tax costs of operating through a branch or a subsidiary have been aligned so that they are generally the same.

Subsidiary

A New Zealand incorporated subsidiary is a New Zealand resident for tax purposes. This means that all worldwide net income of the New Zealand subsidiary is taxed at 33%.

Branch

A New Zealand branch of a foreign company will be subject to New Zealand income tax at 33% on New Zealand sourced taxable income. Investment in a partnership operating in New Zealand also creates a New Zealand branch.

Do I need to file a return?

Companies and persons that carried on business for the whole of, or any part of, the previous income year must file an income tax return in the prescribed form, regardless of whether they incurred a profit or a loss. This obligation, however, does not apply to those who are not required to file returns under section 33A of the TAA or those whose income statement is deemed to be a signed return.

Generally, an income year runs from 1 April to the following 31 March, unless otherwise specified by the Act.

The Commissioner is required to give public notice in the Gazette, the local newspaper and via television advertising of the dates when returns should be filed, although failure to give such notice does not affect a taxpayer's liability to file by the due dates. The due dates are also shown on the return forms and information literature that is posted to most taxpayers. The Commissioner may extend the time within which a return must be furnished in exceptional circumstances.

The obligation to file is discharged only when an IRD officer receives the return. It is sufficient if the taxpayer can prove that a correctly addressed return was posted to the appropriate IRD officer. The Taxation Review Authority has ruled that a return is filed when it is received at the IRD's post office box.

When do I pay tax?

Most tax is payable by 31 March of the relevant income year, unless otherwise specified by the Act.

However, progress payments of tax can be paid to the IRD before the final assessment of an income tax liability for a particular year is made.

Provisional tax will affect most taxpayers that derive income other than from source deduction payments (salaries and wages), resident withholding income or non-resident withholding income.

Generally, the liability to pay provisional tax is based on the taxpayer's income tax liability from the previous year. Consequently, provisional tax is calculated for the whole of the current year, although it can be subject to adjustments as the year progresses.

Provisional tax is generally payable in three instalments. Each provisional taxpayer then furnishes a return at the end of the current year and is subject to an assessment of income tax. The provisional tax paid is credited against the tax assessed, which will either result in a refund of tax already paid or a further tax liability.

Our thanks to Hesketh Henry for updating this information.  For more information please email lawyers@heskethhenry.co.nz or visit www.heskethhenry.co.nz.