Quick Reference Guide

New Zealand taxation is imposed by the Income Tax Act 2007 (ITA). The basis for calculating tax is summarised in the following flowchart from the Core Provisions set out in Part B of the Act. This overview provides the context for details discussed in this quick reference guide.

Tax rates have come down in the past several years, but rates still vary for different taxpayers such as individuals, companies and trusts. There are also special rules that apply to certain taxpayers and not to others. While this is so, opportunities will exist to structure your affairs to benefit from the different rules and tax rates.

“Tax residence” and “source of income” are central to determining liability for taxation in New Zealand. Residence determines the jurisdiction and source relates to where income is earned or deemed to be earned.

Not every gain received by you or your business is taxable. The Income Tax Act only imposes tax on taxable income.

The questions of what expenditure is deductible and when, are of prime importance in determining your tax liability. For most expenditure, the question of deductibility is straight forward. However, there are exceptions. This chapter looks at what you may deduct and when.

Expenditure on capital assets cannot be deducted immediately. The value of the asset depreciates over time and the cost is spread over its useful life. Costs are there- by matched against any income that the asset generates and the tax deduction occurs each year on a more gradual basis until the asset is fully depreciated.

Entertainment expenditure must be for business purposes to be deductible and special rules exist to clarify what may be claimed for tax. The rules are slightly different for GST. There is a working party looking at simplifying the regime but in the meantime, the current rules apply.

Trading stock purchases are a regular and significant revenue expense for many businesses. However unlike many other revenue expenses, a tax deduction for trading stock is only allowed at the time the stock is sold.

This chapter distinguishes between taxable and non-taxable property transactions.

The Financial Arrangements or Accrual Rules are a detailed set of rules relating to the tax treatment of debts and debt instruments and transactions including debt related aspects.

Your business structure can have a huge impact on taxation and the legal framework under which your business operates. Here, we compare the different business structures available to you. These are discussed in greater depth in following chapters.

Companies are a popular structure for doing business because they allow a degree of protection and flexibility. Companies offer business people the advantages of limited liability and may provide a beneficial structure for tax purposes.

A partnership is formed by a contract between parties, to carry on business or commercial activities in common, with a view to making a profit.

A trust is a legal promise by a trustee or trustees to hold and administer property, sold or gifted by a settlor, for the benefit of identified beneficiaries.

Primary production in New Zealand forms a major part of our GDP. Not surprisingly there are specific tax provisions relating to this form of enterprise. Agricultural production is unique since it is the only form of production involving “natural increase”. As a result, special accounting and tax rules are required.

A number of events in the forest life cycle give rise to taxable forestry income. Clearly, this includes the net proceeds of sales, including felled timber and thinnings etc. In addition, sales or transfers of forestry or cutting rights are also taxable. The forestry regime also contains special rules for deduction of forestry expenditure.

Being a small country, much of our investment is off shore. Although this accounts for a relatively small portion of New Zealand’s tax revenue, overseas investment is governed by quite a complex regime and affects a large percentage of the population either directly or indirectly.

Provisional tax is a means of paying tax on income, that is not fully taxed at source via PAYE or other withholding payments.

In this chapter, we consider withholding tax obligations in respect of interest, dividends and royalties paid. We also look at Non- Resident Contractors Tax. Chapter 26 “Employment Responsibilities” discusses withholding tax obligations when you pay New Zealand resident contractors, including commission agents, builders etc.

Fringe benefit tax (FBT) was introduced to tax non-cash benefits provided to employees or associates of employees. These rules also apply to non-cash benefits provided to shareholder employees and their associates.

The application of GST to the majority of New Zealand business transactions is straightforward. GST can however give rise to difficult issues, especially in the area of “non standard” transactions. This would include the sale and purchase of real estate, financial services based transactions, GST on fringe benefits provided and GST adjustments for entertainment tax.