On February 2nd the Inland Revenue Department (IRD) released the briefing for the incoming Revenue Minister of New Zealand, outlining the current state of the national tax system, which it deemed as strong and stable, saying “…New Zealand’s tax system is in a good place. The tax bases are broad, robust and provide reliable sources of revenue to fund Government pro grammes. The broad tax bases and the relatively low tax rates make the tax system among the most coherent in the OECD.”

It was suggested to the Revenue Minister that the government needs to evaluate the overall effectiveness of the current tax system, and decide whether it would be beneficial pursue an extensive overhaul. The IRD explained that the entire tax system needs to remain well planned in order to ensure that any future tax policy changes are effective and in line with the country’s broader economic outlook.

Also, some improvement will be required to the national welfare system in order to reduce the number of taxpayers in New Zealand who rely on benefit payments. The IRD suggested that welfare payments should be changed in order to provide more incentive for beneficiaries to seek employment.

The IRD advised that it will also continue to make greater use of electronic contact with taxpayers, as a means of reducing the number of front line staff and loweing overall running costs while maintaining adequate levels of service and customer contact.

According to the IRD, in order for the Department to continue to function effectively it will need to upgrade its aging IT system, which was originally designed and implemented over two decades ago and was not intended to handle modern features in the tax system, such as Kiwisaver payments and the student loan repayment system. The IT upgrade is expected to cost up to NZD 1.5 billion, and take up to ten years.

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Throughout 2011 New Zealand saw several significant changes to the tax system, including the introduction of the new types of entities, reducing corporate tax rates, closing of loopholes in tax regulation, modernisation of filing systems, and further alterations aimed at improving the overall efficiency and sustainability of the tax system. To summarise the recent tax changes, Abaconda Managment Group has released a new overview of the major tax changes that were carried out in New Zealand over the 2011 calendar year.

Use of Money Deductibility

On December 5, 2011 the New Zealand Inland Revenue Department (IRD) issued a statement clarifying the tax treatment of Use-of-Money Interest, confirming that the payment would now be regarded as an expense and will be deductible for tax purposes.

Use-of-Money is the interest is levied by the Inland Revenue Department when taxpayers underpay their tax obligations.

Gift Duties

On October 1, 2011 the government abolished gift duties in New Zealand, claiming  that the system of Gift Taxation is no longer effective or relevant. In recent years the cost to taxpayers of complying with rules of gift duty  was higher than the cumulative tax revenues raised by  this type of taxes.

Gift duties were levied on taxpayers who gave gifts valued in excess of NZD 27 000 per year.

GST Clarification

On August 5, 2011 a new Bill was introduced to New Zealand Parliament containing regulations aimed at eliminating the occurrence of “phoenix” fraud schemes.

The schemes involved a business entity making a claim for and receiving a Goods and Service Tax refund on a large purchase, while the corresponding party in the transaction winds down their own company before making any GST payments.

Business Tax Filing

On September 14, 2011 a new Bill was introduced to New Zealand Parliament containing several changes to the regulations governing the filing requirements for businesses. The new rules allowed businesses to file a greater number of their obligations online, with the aim of reducing compliance costs and processing times.

The expanded use of electronic filing has allowed the IRD to improve its infrastructures for information sharing and cross checking of data.

Deductions on Software Development

On June 22, 2011 the Minister of Revenue Peter Dunne announced the government’s decision to allow New Zealand businesses to claim tax deductions on failed software development projects. Prior to the change, the expenses incurred by when developing new software were not regarded as tax deductible if the project was ultimately scrapped prior to completion.

Excise Tax Threshold Increase

Starting from July 1, 2011 the thresholds for wine excise taxes were raised, greatly lowering the compliance requirements for the New Zealand smallest wine makers. Prior to the change, New Zealand wine makers with excise tax liabilities exceeding NZD 10 00 per year were liable to pay their tax obligation monthly. However, following the change, monthly payments are only required from producers with tax liabilities exceeding NZD 100 000 for the year.

Portfolio Investment Entities

On April 5, 2011 the Revenue Minister Peter Dunne announced the introduction of a Bill to implement new beneficial rules for foreign businesses investing  into a New Zealand Portfolio Investment Entity (PIE).

Under the new rules, foreign investors who derive incomes from a PIE will not face taxes in New Zealand, if the PIE’s incomes are raised overseas. The rules do not affect the tax treatment of New Zealanders investing in PIEs.

Property Depreciation

Starting from April 1, 2011 depreciation can no longer be claimed on buildings in New Zealand with estimated life spans of more than 50 years.

The change was instated with the intention of encouraging New Zealand investors to put money into sectors of the economy other than real estate.

Loss Attributing Qualifying Companies and Look-Through Companies

On April 1, 2011 the New Zealand government abolished Loss Attributing Qualifying Companies (LAQC) and introduced Look-Through Companies (LTC).

The LAQCs were commonly used by New Zealand property investors and landlords, as such entities allowed the company’s losses to be passed through to the individual owner, to offset their personal tax liability.

The LTC allow the profits and expenses of the New Zealand company to be passed on to the shareholders, in proportion to their respective shareholdings. The LTCs instantly have gained popularity with international investors, as the LTC regulations can offer a 0% tax advantage to companies with no New Zealand resident shareholders and no New Zealand raised profits.

Eligibility for Working for Families

On April 1, 2011 the New Zealand government tightened the eligibility criteria for taxpayers applying for Working for Families tax credits. Following the change, income testing for the Credits will also take into account earnings from family trusts. Additionally, applicants will no longer be able to deduct rental losses and investment losses for the purposes of the means test. The change is expected to save the government almost NZD 0.5 billion in payments over the next four years.

Corporate Tax Rate Cut

On April 1, 2011 the corporate income tax rate in New Zealand was cut by 2 percent, to a rate of 28 percent. The revised rate is also applicable to unit trusts, life insurance policy holders, and other savings vehicles.

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Last week the Tauranga District Court sentenced an Adrian Ace, an agricultural contractor, to twelve months in prison for evading his PAYE and GST tax obligations. Adrian plead guilty to 28 charges of failing to properly account for PAYE for the employees at his company Pride Contracting Limited. He had also pleaded guilty to three charges of evading GST. Cumulatively, the company owed approximately NZD 55 000 to the Inland Revenue Department.

According to the IRD’s investigations manager Jonathan Matthews, Adrian Ace was first contacted by the IRD regarding his company in August 2005, when a repayment plan was established to help him pay back over NZD 21 000 in due taxes. Only six payments were made, and soon after the defendant stopped filing GST returns. Between July 2006 and December 2007 the company also ceased to make PAYE payments.

During an interview with the IRD, Adrian Ace admitted that he had used his employees’ PAYE payments to cover his own personal expenses, including rent and petrol. He added that when his company was still operational he routinely used the company bank account to pay for his own recreational activities.

Jonathan Matthews explained that Adrian Ace claimed not to understand his full tax obligations, regarding his employees’ PAYE payments, and had disregarded the IRD’s letters concerning the mistakes.

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In the wake of the widespread flooding in the Nelson region of the South Island, the Inland Revenue Department is advising taxpayers that they may be eligible for special consideration on their tax obligations if they were heavily affected by the disaster.

According to the IRD, business owners who were struck by the flooding are eligible to re-estimate their provisional tax obligations, and early refunds may be arranged in case provisional taxes are found to have been overpaid. The Department is also willing to waive late filing penalties for business that are not able to submit their GST and PAYE returns on time.

Individuals who have an outstanding tax debt to the IRD may apply for payment installment plan, which the IRD will grant if the individual has undergone hardships during the flooding and is not able to meet their obligations.

Parents whose incomes were affected by the flooding may be eligible to reassess their Working for Families Tax Credit eligibility.

The IRD is advising anyone that who believes they may have trouble meeting their tax obligations following the flooding should contact the IRD to discuss their situation.

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As of January 1st the excise tax on cigarettes and tobacco has been increased, in a move that the government claims will lead to more people quitting smoking.

The excise taxes rose by 14.6 percent on all tobacco products. The tax can only be applied to new products purchased by merchants after January 1st. However, the Consumer institute has already received several complaints, alleging that retailers are marking up their old stocks.

The latest increase is the third hike in excise taxes since June 2010. According Quitline New Zealand the repeated tax increases have had a marked positive effect on the number of New Zealanders aiming to kick the habit, with a 93 percent increase in the number of New Zealanders seeking assistance with quitting over 2011.

Under the new rate, cigarettes face an excise duty of up to 63 percent.

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On December 21st Statistics New Zealand released its quarterly report on the country’s import and export levels, showing that the national current account deficit was larger than expected.

During the September quarter of 2011 the current account deficit in New Zealand reached NZD 2.7 billion, which exceeded the deficit recorded in the June 2011 quarter by NZD 0.7 billion. New Zealand’s total export of goods was valued at NZD 111.7 billion during the latest quarter.
The increased current account deficit was attributed to falling prices of New Zealand’s primary export commodities, especially meat, dairy and forestry products. The decreasing commodity prices caused a NZD 0.6 fall in export values.

Nearly NZD 0.4 billion of the deficit was attributed to increased levels of earnings seen by foreign investors for their business in New Zealand. According to Statistics New Zealand, a significant portion of the increased earnings was seen by profits made by foreign banks operating in New Zealand.

The Rugby World Cup was reported as having a significant positive impact on the current account deficit, contributing approximately NZD 0.2 billion to export of services during the September quarter.
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New Zealand’s tax laws and a lack of available capital are stifling growth in the biotechnology research sector.

On December 14th a new report was published by the Ministry of Science and Innovation, evaluating the current tax system and venture capital industry in relation to New Zealand’s biotechnology research sector. According to the report, the tax rules surrounding patent sales could be having a detrimental effect on the amount of high-tech research being carried out in New Zealand. The author’s of the report also found that there is a shortage of venture capital in the country.

Under current regulations, the sale of patents is taxed on its price, while the sale of other forms of intellectual property are treated as a capital gain. Peter Bradley, the chief executive of NZBIO and author of the report, says that the tax rules are a disincentive for young companies which are in the process of conducting research or applying for patents. He suggested that many new firms are likely to shift their research operations overseas in favor of overseas tax regulations.

According to the report, a lack of funding in New Zealand is still a significant detractor for research firms wishing to expand. There are currently adequate levels of start-up finance for new firms. However, there is virtually no capital available for mid level enterprises which are attempting to launch new products. The report called for the government to update the regulations for KiwiSaver funds, allowing them to invest in venture capital projects.
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The national airline carrier Air New Zealand is looking at cutting flights to London, following 6 months of losses and due to the upcoming increases to the tax rate for passengers departing the UK.

Air New Zealand is considering cut backs to its international long haul operations, with the company’s flagship flight to London already facing the prospect of being axed. The company says that the upcoming UK air passenger duty is also contributing to the potential decision.

Under recently instated rules, from April 2012 economy class passengers flying from the UK to New Zealand will face a departure levy of GBP 92, compared to the GBP 85 they are facing now. Commenting on the effect of the tax, Brent Thomas, director of House of Travel, said that a family flying from Europe could save over NZD 700 in taxes by flying back to New Zealand from a different country.

Air New Zealand reported a NZD 1 million per week loss on its long haul international operations in the first six month of the current fiscal year. The company has so far chosen not to release estimates of the impact that the new passenger duty will have on the company’s operations, but a Air NZ spokeswoman said that the levy was “naturally of concern”.

The increases to the rate of the UK Air Passenger Duty tax is also facing contention from New Zealand based tourism operators with the Tourism Industry Association of New Zealand calling the levy discriminatory and arbitrary.

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On December 12th the Inland Revenue Department won a tax avoidance case against the building supply company Alesco, sending the signal that certain structures involving the use of Optional Convertible Notes could be ruled as means of evading taxes. Alesco, which is a subsidiary of an Australian kitchen supply company, will now be required to pay the Inland revenue Department approximately NZD 8.6 million in unpaid taxes, shortfall penalties and use of money interest payments.

The legal proceedings against Alesco involved the company’s use of Optional Convertible Notes (OCN), which are a hybrid instrument which offer the option payments in cash or as equity at maturity. According to Alesco the OCNs bore an interest cost, which was claimed to be a deduction. However, the IRD argued that the OCNs were “an interest free advance with a valueless option attached, dressed up in the form of a valuable option and a discounted debt.”

The legal action against Alesco was seen as a test case for the Inland Revenue Department, as it prepares to follow similar action against 16 other Australian owned subsidiary companies which were allegedly misusing OCNs. According to IRD estimates, the legal proceedings could lead to the recovery of a cumulative NZD 300 million in unpaid taxes and associated penalties.

The court ruling is already being met with degree of skepticism from tax practitioners. Ernst & Young tax partner Jo Doolan commented on the result, saying that the court’s decision could lead to a degree of uncertainty in the minds of foreign companies financing their New Zealand subsidiaries. He added that that lowering tax evasion was a positive action, but it should not come at the cost of lowering New Zealand levels of incoming investment.

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On December 6th the Organization for Economic Cooperation and Development (OECD) released Divided We Stand: Why Inequality Keeps Rising, a report into income inequalities around the world.

According to the report, the richest 10 percent of New Zealanders earn approximately 10 times more than the poorest 10 percent. In the 1980s the ratio was approximately 6 to 1. New Zealand’s current inequality levels put the country on par with Australia, Japan, and Canada, and above the average for OECD nations.

The authors of the report examined several economic measures to gauge the extent of income inequalities in New Zealand, including the gini index on household net income, individual earnings, household market incomes, and wage dispersion.

New Zealand was deemed to have a household net income gini index of 0.32, with the OECD average household net income gini index is 0.31. The wage dispersion ratio between the bottom 10 percent of earners and the top 10 percent of earners was 2.92, significantly lower than the OECD average of 3.33.

The report suggested that the best means to address any shortcoming in income equalities was to address the issue of unemployment, invest more into national education and work training programs, and close outstanding loopholes which allow for high income earners to neglect their tax obligations.

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