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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On January 26th the Governor of the Reserve Bank Alan Bollard announced that the Official Cash Rate (OCR) of New Zealand will be maintained at 2.5 percent.

Allan Bollard explained that since December, financial stability around the world has seen a slight improvement, but was still too fragile to justify raising the OCR. He added that given the moderate pace of the international market and the subdued domestic consumer demand levels, it remains prudent to maintain the OCR at the currently low level.

While detailing the national economic situation, the Governor noted that the New Zealand economy has seen some pick up over the last few months, and inflation has remained low, but an appreciation of the New Zealand dollar is undermining earnings from the export sector. He also indicated that although the OCR was not raised, consumers might still see an hike to retail interest rates, due to increasing costs of international funding and continued periods of economic uncertainty surrounding the Euro debt crisis.

The Reserve Bank’s decision did not come as a surprise to economists in New Zealand or overseas. Prior to the announcement, experts had come to a near unanimous decision that the OCR would not be changed, and is not likely to see any increase or decrease until late 2012 or even January 2013.

The OCR has remained unchanged through 7 rate reviews since it was lowered from 3 percent on March 10th 2011.

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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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On January 23rd Demographia, an international think-tank, released the latest edition of the annual “Demographia International Housing Affordability Ratings” report, containing an analysis of housing affordability around the world.

The study compared the median house prices in a given market area with the median household income levels in the same region. According to the published results, housing prices in New Zealand are severely unaffordable, and Auckland is the least affordable region, with the average house price being approximately 6.4 times higher than the average pre-tax salary. Christchurch and Tauranga were also seen as severely unaffordable areas, with property prices being 6.3 and 5.9 times higher than wages.

No areas of New Zealand were ranked as being affordable, with a median price multiple of 3.0 or less. Palmerston North was the most affordable area in the country, with a score of 4.1, followed by Napier and Hastings, and Hamilton, both with ratings of 4.8.

According to one of the authors of the report Hugh Pavletich, the high prices of housing in Christchurch are putting a serious hamper on the city’s recovery efforts following the repeated earthquakes in the city. He suggested that the local government and international experts need to investigate new means and urban planning methods in order to improve affordability in Christchurch, and aid its rebuilding.

Internationally, New Zealand ranks as one of the most unaffordable countries for housing, only being outranked by Australia and China, with scores of 5.6 and 12.6 respectively.

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On January 19th Statistics New Zealand released the latest national Consumer Price Index (CPI) for the December quarter of 2011.

The new information showed that during the last three month of the year the CPI fell by 0.3 percent. The drop was largely contributed to a 25 percent decrease in the price of vegetables over the 4th quarter of 2011. Also, telecommunications services saw a significant 3.6 percent decrease in prices in the last quarter of 2011, and the cost of purchasing new household contents and services fell by 1.5 percent. According to Statistics New Zealand, throughout the last quarter of 2011 retailers offered more discounts than during the rest of the year or the third quarter of 2010, leading to the overall lowering of consumer prices in the last three months of the year.

Statistics New Zealand explained that the decrease in produce prices was a seasonal variance, and the quarterly CPI would be 0.1 percent if the effect was removed.

The most significant price increase for the quarter was the cost of transport, which was up by 1.4 percent, mainly due to a 5.8 percent hike to the price of international air fares, a 1.8 percent jump for second hand cars, and 0.9 percent growth to the cost of petrol. According to Statistics New Zealand, the change in the price of airfares is a seasonal effect and was expected for the time period.

The annual inflation figure for the 2011 year now stands at 1.8 percent, and for the year up to the end of the September quarter, the inflation level stood at 4.6 percent. According to Statistics New Zealand, the 2011 annual CPI increase is the first to not include the upward effects of the GST rate increase that occurred in October 2010.

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According to the results of a survey recently conducted by Reuters, international economists are expecting the New Zealand OCR to be left at its current rate, due to the high levels of economic uncertainty around the world, and a lower than expected inflation rate in New Zealand.

Economist who participated in the survey indicated that New Zealand’s Consumer Price Index (CPI) only increased by 0.4 percent in the last three months of the year, and the annual inflation rate slowed to 2.6 percent from an a previously estimated level of 4.6 percent. Early indicators from the Reserve Bank suggest that inflation in the first quarter of 2012 is also expected to remain at approximately 0.4 percent. The Reserve Bank is expected to release the official inflation rate for the December quarter later this week.

Nick Tuffley, chief economist at ASB bank in New Zealand, said that if the currently expected inflation figures are correct, the Reserve Bank will be able to maintain the OCR at the current rate of 2.5 percent, as inflation is currently at an acceptable level. He added that the cash rate could even remain the same throughout all of 2012.

Dominick Stephens, chief economist at Westpac New Zealand, commented on the potential inflation levels in the near future, saying that food prices and the cost of telecommunications will fall in the first quarter of 2012. He also said that if the inflation figures remain as low as expected, the Reserve Bank will not raise the OCR in the near future.

Both economists suggested that the international economic condition at the moment were to uncertain, and the Reserve Bank could not make any large adjustments without more clarity.

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According to the Index for Economic Freedom for 2012, published by the Heritage Foundation and the Wall Street Journal on January 12th and examining economic conditions and market regulations in countries around the world, in 2011 New Zealand was ranked the 4th country in the world for its market freedom, regulatory efficiency, the role of government in the market, freedom from corruption and the effectiveness of the legal system.

New Zealand was given an index score of 82.1, from a possible maximum of 100. The average score across all countries ranked in the index was 59.5, and the average score for New Zealand closest neighbors in the Asia Pacific region was 57.5 points.

The authors of the report noted that New Zealand has one of the most competitive and efficient business environments in the world, with a particularly easy and effective set of regulations for establishing a new company, the national tax regulations, operating a new business, owning property, expanding commercial activity internationally, and for protecting intellectual rights.

On a macro scale, the report praised the long term economical, financial and political stability of New Zealand, but expressed a negative opinion on the high level of spending by the national government.

In the 2012 Index New Zealand’s score dropped by 0.2 percent, ranking the country behind Hong Kong at 89.9 points, Singapore at 87.5 points, and Australia at 83.1 points.

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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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On January 9th Statistics New Zealand released the country’s trade figures for November 2011, showing that both imports and exports were higher during the month of November 2011 compared to period last year, primarily due to rising prices of commodities.

In November the national trade balance was in deficit by NZD 308 million, with a total export value of NZD 3.9 billion and import value of NZD 4.2 billion.

The value of all imports into New Zealand in November rose by NZD 382 million, compared to imports during the same period in 2010. The rise of 10 percent was driven mainly by greater imports of crude oil and fertilizers.

Exports rose by NZD 251 million in November, which is equivalent to a 6.8 percent jump in the value of exports, compared to November 2010. The increase is primarily due to an hike in the volume of traded butter, cheese and milk powder.

According to Statistics New Zealand, the month of November typically sees a trade deficit, with an average deficit of 16 percent of exports over the previous five Novembers.

The trade balance for New Zealand for the year ended November 2011 was a surplus of over NZD 555 million.

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