New Zealand - Individual - Income determination (2024)

Employment income

A tax resident is taxed on salary, wages, bonuses, allowances, and retirement gratuities received in cash, regardless of the source of that income. Non-residents are taxed only to the extent their employment income is earned in New Zealand (i.e. usually where services are performed in New Zealand), regardless of where payment is made and whether it is remitted to New Zealand. Allowances paid in cash that are no more than a reimbursem*nt of business-related expenses (with incidental person benefit) incurred within employment are generally not taxable. Certain relocation costs, overtime meal allowances, and accommodation benefits paid by employers to employees are exempt from income tax and FBT. The benefit arising from the use of an employer-provided motor vehicle, a low-interest loan, or discounted goods or services is not taxable to the employee, but the value of a benefit from the provision of shares or options, lodging, or housing by an employer is taxable to the employee. Other benefits provided to an employee in a non-monetary form are generally not taxable in the employee’s hands (see Fringe benefit tax in the Other taxes section).

Capital gains

New Zealand does not have a general capital gains tax. However, income tax legislation specifically includes various forms of gain that would otherwise be considered a capital gain within the definition of 'income’. Gross income includes gains on the sale of real estate in certain circ*mstances and on personal property where the taxpayer acquired the property for resale, where certain residential properties are bought and sold within ten years, where the taxpayer deals in such property, or where a profit-making purpose or scheme can be inferred from the actions of the taxpayer.

Gains on financial instruments are taxable when realised or when the instruments are deemed to have been disposed of. Above certain thresholds, such gains are taxable on an accrual (yield-to-maturity) basis, which may include unrealised gains.

Rental income

Rent derived from property is gross income. Deductions are allowed for most expenses incurred in deriving the rental income.

From 1 April 2019, deductions for expenditure incurred in relation to residential rental properties are limited to the extent of the residential income derived. Any excess expenditure is 'ring-fenced' and available to carry forward to offset against future residential rental income, but, generally, will not be available to offset against other income streams. From 1 October 2021, interest deductions are disallowed for residential properties (see the Significant developments sectionin the Corporate tax summary).

Controlled foreign companies (CFCs)

The CFC regime imposes New Zealand tax on the notional share of income attributable to residents (companies, trusts, and individuals) with interests in certain CFCs.

Central to the regime is the definition of a CFC. When five or fewer New Zealand residents directly or indirectly control more than 50% of a foreign company, or when a single New Zealand resident directly or indirectly controls 40% or more of a foreign company (unless a non-associated non-resident has equal or greater control), that company is a CFC. For interests of less than 10%, the investment may be taxed under the Foreign Investment Funds (FIFs) regime (see below).

For income years starting on or after 1 July 2009, a person with an income interest of 10% or more in a CFC does not have attributed CFC income or losses if:

• the Australian exemption applies, or
• the CFC passes an active business test.

If the exemptions do not apply, only the CFC’s passive (attributable) income is subject to tax on attribution (on an accrual basis).

Active business test

A CFC passes the active business test if it has passive (attributable) income that is less than 5% of its total income. For the purposes of the test, taxpayers measure passive and total income using either financial accounting (audited International Financial Reporting Standards [IFRS]or New Zealand Generally Accepted Accounting Principles [GAAP]accounts) or tax measures of income.

CFCs in the same country may be consolidated for calculating the 5% ratio, subject to certain conditions.

The active exemption test may also be available to investors with less than 10% interest income in a CFC if certain criteria are satisfied.

Australian exemption

A person with an income interest of 10% or more in a CFC does not have attributed CFC income or a loss if the CFC is a resident in, and subject to income tax in, Australia and meets certain other criteria.

Passive (attributable) income

Attributable, or passive, income is income that is highly mobile and not location-specific (i.e. income where there is a risk that it could easily be shifted out of the New Zealand tax base).

The broad categories of attributable income are as follows:

• Certain types of dividend that would be taxable if received by a New Zealand resident company.
• Certain interest.
• Certain royalties.
• Certain rents.
• Certain amounts for financial arrangements.
• Income from services performed in New Zealand.
• Income from offshore insurance business and life insurance policies.
• Personal services income.
• Income from the disposal of revenue account property.
• Certain income related to telecommunications services.

Taxpayers must disclose interests in CFCs in their annual tax returns. Failure to disclose CFC interests can result in the imposition of penalties.

Foreign Investment Funds (FIFs)

The FIF regime is an extension of the CFC regime, which subjects persons with interests in certain foreign entities (which are not CFCs) to New Zealand tax. It also applies when the investor does not have a sufficient interest in a foreign entity to be taxed under the FIF regime.

Common examples of investments classified as FIFs include foreign companies, unit trusts, certain foreign superannuation schemes, and certain life insurance policies issued by foreign entities.

The FIF rules can be split into the following two regimes:

• The portfolio FIF rules, which apply to interests of less than 10% in a FIF.
• The non-portfolio FIF rules, which apply to interests of 10% or more that are outside the CFC rules.

Portfolio FIF rules

The portfolio FIF rules apply to interests of less than 10% in foreign companies, foreign superannuation schemes, and foreign life insurance policies issued by non-resident life insurers (if the CFC rules do not apply). However, a New Zealand resident does not generally have FIF income when:

• the total cost of FIF interests held by the individual does not exceed NZD 50,000
• the income interest is less than 10% in certain Australian Securities Exchange (ASX) listed companies or certain Australian unit trusts, or
• the CFC rules apply.

There are also exemptions for interests in certain Australian superannuation schemes.

When an interest is exempt from the FIF rules, distributions are subject to tax on a receipts basis in accordance with normal principles.

The taxable income of a New Zealand resident with an interest in a FIF that does not qualify for one of the exemptions is calculated using one of the following methods:

• Fair dividend rate (FDR).
• Comparative value.
• Cost.
• Deemed rate of return.
• Attributable FIFincome method.

The nature of the interest held and the availability of information restrict the choice of method.

Taxpayers must disclose interests in certain FIFs in their annual tax returns. Failure to disclose can result in the imposition of penalties.

Non-portfolio FIF rules

The active income exemption (which applies for CFCs) also includes certain non-portfolio FIFs. If the FIF fails the active business test, passive income will be attributed to the New Zealand shareholders. There is also an exemption for shareholders with a 10% or greater interest in a FIF that is resident and subject to tax in Australia.

When investors do not have sufficient information to perform the calculations required under the active business test (or choose not to apply the active business test), they will be able to use one of the attribution methods for portfolio FIF investments (see above).

Foreign superannuation

Interests in foreign superannuation schemes (excluding certain Australian schemes) that were acquired during a period of non-residence are not taxable on an accruals basis under the FIF rules. Instead, the regime for taxing foreign superannuation schemes applies to cash withdrawals, amounts transferred into New Zealand or Australian superannuation schemes, and disposals of a superannuation interest to another person in certain circ*mstances. These rules do not apply to regular foreign pension or annuity payments. These remain fully taxable with the exception of Australian superannuation schemes where the tax treatment is determined by the New Zealand-Australia double tax agreement. The rules also do not apply to superannuation schemes that were acquired while the person was a tax resident of New Zealand. These remain in the FIF rules (with the exception of Australian superannuation schemes that are excluded from the FIF rules).

Taxpayers who have already treated their foreign superannuation schemes, and withdrawals in the first 48 months of a person becoming a resident, will generally not be taxable. There are no changes to the tax treatment of Australian superannuation schemes.

Any lump sum withdrawals or transfers to New Zealand/Australian schemes to which the new rules apply are now taxed under one of two new calculation methods.

Under the schedule default method, the tax liability on withdrawal/transfer amount is calculated by applying a fraction to the withdrawal/transfer amount. The fraction is based on how long a person has been present in New Zealand since the end of the 48-month exemption period at the time the withdrawal/transfer is made.

The formula method provides an alternative to the default method and is only available for defined contribution plans (provided taxpayers have sufficient information available). This method gives taxpayers the ability to use a method that attempts to tax actual investment gains derived between the end of the 48-month exemption period and the time of withdrawal/transfer.

Trans-Tasman retirement savings portability

Previously, Australians and New Zealanders working in Australia could not take their superannuation with them when they left Australia permanently.

The Australian government has completed legislative steps to allow individuals to transfer retirement savings between an Australian complying superannuation fund regulated by the Australian Prudential Regulation Authority and a New Zealand KiwiSaver scheme, and vice versa. The new arrangements took effect from 1 July 2013. Participation in this is voluntary for both members and superannuation funds and schemes and allows the transfer with minimal costs. The savings will generally be subject to the rules of the host country. Lump sum retirement savings transferred between the two countries will be exempt from New Zealand income tax. New Zealand KiwiSaver members will be able to retain any member tax credits if the transfer is to an Australian scheme.

Portfolio investment entities (PIEs)

A pooled collective investment vehicle (i.e. a managed fund or super fund) that qualifies as a PIE is able to elect into a set of tax rules (the PIE rules).

To be eligible to elect to become a PIE, the entity must be a New Zealand resident company (includes unit trusts), superannuation fund, or group investment fund that meets specific criteria in relation to investor size and investment type.

The key features of the PIE rules are:

• Taxable income is allocated to investors and tax paid by the PIE on behalf of the investors at their marginal tax rates, capped at 28%.
• A distribution from a PIE is ‘excluded income’ and therefore not taxable to the investor.
• Any gains/losses that the PIE makes on the sale of shares in New Zealand companies and certain Australian resident companies listed on an approved index of the Australian stock exchange are non-taxable/non-deductible.

The tax rates on PIEs have been aligned with the personal income tax (PIT) rate structure. The PIE tax rates are 10.5%, 17.5%, and 28%.

Supplementary dividend tax creditregime

Previously, the supplementary dividend tax credit (previously known as foreign investor tax credit [FITC]) regime ensured that foreign investors were not taxed at more than the New Zealand corporate tax rate by effectively rebating the New Zealand WHT to the extent that the dividend was fully imputed. As non-resident withholding tax (NRWT) rates have been reduced to nil on most fully imputed dividends, a supplementary dividend tax credit is generally no longer required.

The supplementary dividend tax credit regime applies only to fully imputed dividends paid to shareholders holding less than 10% of the shares in the company on NRWT rates of at least 15%.

Broadly:

• Only portfolio investors (i.e. those with less than 10% holdings) on NRWT rates of at least 15% qualify for relief under the supplementary dividend rules.
• A zero rate of NRWT applies to dividends paid to non-portfolio shareholders (i.e. shareholders with more than 10% holdings) and to any other dividends subject to lower tax rates, to the extent they are fully imputed.

The changes affect provisional tax calculations for taxpayers who take into account their anticipated supplementary dividend tax credits in calculating their provisional tax. Taxpayers should also consider the need to impute dividends where a tax treaty applies to reduce the NRWT rate.