Tax bill introduced
A bill tabled in Parliament today introduces a number of major business tax reforms, including:
- Reform of New Zealand's international tax rules to help New Zealand-based companies compete more effectively overseas.
- Raising tax thresholds to reduce compliance costs for smaller businesses.
- Clarifying the law to ensure employer payments for relocation and overtime meal allowances are tax-free.
- Reform of the taxation of the life insurance business.
- Introduction of a voluntary payroll giving system for charitable donations.
- Updating the petroleum mining tax rules.
- Changes to strengthen the definitions of "associated persons" in income tax law.
For information on these and other matters in the bill see the two media statements, the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, and the commentary on the bill.
Business tax reforms focus of bill
Tax reform to help NZ companies compete overseas
Hon Dr Michael Cullen
Minister of Finance
Hon Peter Dunne
Minister of Revenue
Business tax reforms focus of bill
A bill tabled in Parliament today introduces a number of major business tax reforms.
"The focus of several of the reforms is on reducing tax costs for businesses," Finance Minister Michael Cullen and Revenue Minister Peter Dunne said today.
"High tax costs can arise from a range of factors, from tax rules that block sensible business transactions to others that create unnecessarily high compliance costs. The bill tackles these costs on a number of fronts.
"Other reforms introduced in the bill bring tax law up to date with today's commercial environment, ensure legislation is working as effectively as possible and protect the New Zealand revenue base,” the Ministers said.
Reform of international tax rules
"The central feature of the bill is the reform of our international tax rules, which represents a fundamental change in how we tax the offshore income of our controlled foreign companies. The present system of taxing that income as it is earned will be replaced by one that exempts the active offshore income of these companies.
"That reform will bring our tax rules into line with the practice in other countries and help New Zealand-based business to compete more effectively in foreign markets by freeing them from a tax cost that similar companies in other countries do not face.
Raising tax thresholds for small businesses
"The bill also reduces compliance costs for smaller businesses by raising several tax thresholds. For example, the PAYE once-a-month filing and payment threshold is being raised from $100,000 to $250,000. That will allow a greater number of small employers to file and pay their PAYE deductions once a month instead of twice a month, saving them time and money.
Employee relocation and overtime meal allowances
"The bill clarifies the law to ensure that employer payments for employee relocation and overtime meal allowances are exempt from income tax and fringe benefit tax if certain criteria are met. The changes remove long-standing uncertainty and simplify the law, which will save time and money for everyone involved.
Taxation of the life insurance business
"The bill introduces a major reform of the way the life insurance business is taxed, modernising rules that date back to 1990. As life insurance products and business practices have changed over the years, the tax rules have become out of date. For example, many term insurance profits are under-taxed today, with profitable business often leading to tax losses, while income from saving through life products is over-taxed.
"The bill brings in a coherent framework of changes that taxes risk business on actual profits, in a manner similar to the way other businesses are taxed. It also extends the tax benefits of the PIE rules to all savers in life products, ensuring savings through life insurance are taxed, as much as possible, in a manner that is consistent with the taxation of savings through other vehicles.
Charitable giving and volunteering
The bill introduces a voluntary payroll giving system whereby employees can have their charitable donations deducted from their pay by their employers.
Employees who donate in this way will receive the tax benefit of their donations each payday, without the need to present donation receipts. Payroll giving will operate through the PAYE system and will be available to people whose employers file their employer monthly schedules with Inland Revenue electronically.
"The introduction of payroll giving will undoubtedly be welcomed by the growing number of employers in New Zealand who see social responsibility and good corporate citizenship as an important part of their business.
"On a similar theme, the bill also clarifies the tax treatment of volunteer reimbursements and honoraria, to make it easier for volunteers and community organisations to comply with their tax obligations and to reduce the associated compliance costs," the Ministers said.
Petroleum mining in NZ
"The petroleum mining tax rules are being updated to remove possible disincentives to further investment in oil and gas exploration and development in New Zealand.
"The bill also introduces legislation to ensure that New Zealand receives its proper share of the benefits from our burgeoning petroleum mining industry, exports of crude oil now making a major contribution to our trade balance. The changes will allow expenditure on petroleum mining operations undertaken through a foreign branch to be offset only against petroleum mining income from outside New Zealand, to safeguard our taxing rights on our own petroleum resources.
Associated persons in income tax law
"The bill also introduces changes to strengthen the definitions of 'associated persons' in income tax law, which are there mainly in an anti-avoidance capacity, to counter transactions that are not conducted at arm's length. One of the main changes is to close gaps in the definition relating to land sales that allow land dealers, developers and builders to circumvent the rules by operating through connected persons,” the Ministers said.
Other measures in the bill include:
- Non-disclosure for tax advice: changes to allow the right for non-disclosure of documents to apply to discovery and similar processes that occur in litigation with Inland Revenue.
- Emissions trading: amendments to income tax and GST legislation to provide for the tax treatment of emissions units.
- Film grants: tax changes necessitated by the introduction of the New Zealand Screen Production Incentive Fund, as announced in Budget 2008.
- GST: changes to allow certain loyalty programme operators to defer imposing GST until loyalty points have been redeemed, and to allow exported second-hand goods to be zero-rated in certain circumstances.
- General insurance: amendments will allow general insurers to take a deduction for the annual movement in outstanding claims reserves under the new financial accounting standard.
- Fine-tuning of recent legislation: changes to ensure the new PIE rules, the offshore portfolio share investment rules, the R&D tax credit rules, the KiwiSaver rules and the provisional tax pooling rules work effectively and do what they were intended to do.
Full information on these and other matters in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill are available in the commentary on the bill, published at www.taxpolicy.ird.govt.nz.
Contacts:
Jason Knauf (for Hon Dr Cullen) 04 471 9869 / 021 226 9869 or Chris Ritchie 04 4719 412 / 021 270 9013
Rachel Baxter (for Hon Dunne) 04 470 6985 or 021 638 920
Hon Dr Michael Cullen
Minister of Finance
Hon Peter Dunne
Minister of Revenue
Tax reform to help NZ companies compete overseas
Comprehensive reform of our international tax rules, to help New Zealand-based companies compete more effectively overseas, is the main feature of a taxation bill introduced today.
"The proposed changes represent a fundamentally different approach to taxing New Zealand companies that have offshore operations," Finance Minister Michael Cullen and Revenue Minister Peter Dunne said.
"The cornerstone of the reform is the exemption from tax of the offshore active income of New Zealand's controlled foreign companies, regardless of where it is earned.
"That will bring our tax rules into line with the tax systems of comparable countries, particularly that of Australia, and remove a tax cost that similar companies in other countries do not face," the Ministers said.
At present, New Zealand taxes the active income – such as income from manufacturing – from its offshore subsidiaries, whereas other countries do not.
The change is designed to encourage businesses with international operations to remain in New Zealand and enable them to compete on an equal tax footing in foreign markets.
"Further important features of the proposed changes are an exemption from tax of most foreign dividends paid to companies and measures to protect the tax base as a result of adopting an active income exemption.
"The changes introduced today represent the first stage of the those to emerge from the government's review of our international tax rules and have been greatly influenced by extensive consultation with businesses and their advisors.
"Most aspects of the reforms were signalled in a series of consultative papers, although there has been further work to develop the detail in some areas.
Active income exemption
"Comprehensive attribution of income from controlled foreign companies (CFCs) to New Zealand owners will be replaced by attribution of passive income only. Passive income – such as interest – will continue to be attributable.
"There will be some exceptions to attribution of passive income, however, to reduce compliance costs. For example, there will generally be no attribution of passive income for CFCs in Australia, which is usually the first country of choice for our smaller businesses that want to expand overseas.
"There will also be an exception for CFCs that pass an 'active business' test: no attribution of passive income will be required for CFCs whose passive income is less than five percent of total income.
"Passive income will consist mainly of interest, rent, royalties and dividends. Certain services will also be classified as passive income, as will income from speculative derivative instruments and derivatives that hedge passive income.
Foreign dividend exemption
"Most dividends paid by a foreign company will be exempt from income tax when received by New Zealand companies, as was previously announced. Deductible dividends and dividends on fixed rate shares will be continue to be taxable as interest, and fixed rate shares issued by foreign companies will be treated as debt. That will prevent double New Zealand taxation, since a deduction will be allowed against the attributable income of the CFC.
"As part of the exemption for ordinary dividends, there will be a change to the qualifying company rules: a qualifying company may no longer hold an attributing interest in a controlled foreign company or non-portfolio foreign investment fund. That is to prevent foreign dividends being passed through to shareholders tax-free.
Revenue base protection measures
"Interest allocation rules will be extended to cover New Zealand residents that have outbound interests in a CFC. Several 'safe harbour' provisions will, however, minimise the impact of the rules and permit much of the cost of debt-funding for a foreign investment to be deducted against the New Zealand tax base.
"The present 'grey list' exemption from attribution of CFC income is being replaced with the active business test for CFCs in all countries, with one exception – Australian CFCs will generally continue to be exempt from the requirement to attribute any income to New Zealand residents.
"The existing conduit relief mechanism, which exempts from tax the foreign-sourced income of New Zealand companies owned by non-residents, is being removed. Even so, the active income exemption and the foreign dividend exemption provide the same results as conduit relief for active income.
Transitional measures
"Companies' foreign dividend payment accounts, branch equivalent tax accounts and conduit tax relief accounts will become unnecessary under the reform. It is the government's intention that existing FDP credit balances can be carried forward for five years and BETA debit balances and conduit tax credits can be carried forward for two years, with legislation repealing them to be introduced at a later date. BETA credit balances will be cancelled from the beginning of the 2009-10 income year.
"The aim in developing this comprehensive reform has been to devise flexible rules that are consistent with the realities of the business environment and that help New Zealand businesses to expand their operations but keep their head offices in New Zealand," the Ministers said.
Contacts:
Jason Knauf (for Hon Dr Cullen) 04 471 9869 / 021 226 9869 or Chris Ritchie 04 4719 412 / 021 270 9013
Rachel Baxter (for Hon Dunne) 04 470 6985 or 021 638 920