Wikipedia

Taxation in New Zealand

Taxes in New Zealand are collected at a national level by the Inland Revenue Department (IRD) on behalf of the New Zealand Government. National taxes are levied on personal and business income, and on the supply of goods and services. Capital gains tax applies in limited situations, such as the sale of some rental properties within 10 years of purchase. Some "gains" such as profits on the sale of patent rights are deemed to be income – income tax does apply to property transactions in certain circumstances, particularly speculation. There are currently no land taxes, but local property taxes (rates) are managed and collected by local authorities. Some goods and services carry a specific tax, referred to as an excise or a duty, such as alcohol excise or gaming duty. These are collected by a range of government agencies such as the New Zealand Customs Service. There is no social security (payroll) tax.

New Zealand went through a major program of tax reform in the 1980s. The top marginal rate of income tax was reduced from 66% to 33% (changed to 39% in April 2000, 38% in April 2009, 33% on 1 October 2010 and back to 39% in April 2021) and corporate income tax rate from 48% to 28% (changed to 30% in 2008 and to 28% on 1 October 2010). Goods and services tax was introduced, initially at a rate of 10% (then 12.5% and now 15%, as of 1 October 2010). Land taxes were abolished in 1992.[1]

Tax reform continues in New Zealand. Issues include:

  • business taxes and the effect on productivity and competitiveness of NZ companies[2]
  • differences in the treatment of various types of investment income[3]
  • international tax rules[4]

Individual income tax

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New Zealand has jurisdiction to tax individuals on the basis of residence and source. Subject to relief under a double tax agreement, New Zealand residents are liable to pay income tax on their worldwide income, whereas non-residents are only liable to pay tax on income derived from a New Zealand source.

History

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Income tax was introduced in New Zealand by the Liberal Government in 1891.[5] The tax did not apply to individuals with income less than £300 per annum, which exempted most of the population, and the top rate was 5%.[6] Most government revenue came from customs, land, death and stamp duties.[5] The top rate rose to 6.67% by 1914. During World War I, revenue from income tax increased greatly, becoming the largest source of tax, in place of customs duties. But, still only 12,000 people of an adult population of 700,000 earned above the £300 threshold and were taxed. The top rate was 43.75% in 1921. Tax rates were lowered in the 1920s and in 1930 the top income tax rate was set to 29.25%, and the threshold lowered to £260 of annual income.[7] By 1939, and before World War II, the top rate was 42.9%. During the war, there were huge rises in the top rate, taking it to 90%. It dropped to 76.5 percent by the end of the 1940s. The working class still paid little or no income tax.[8] The top rate was 60% in 1982, until Robert Muldoon's National Government raised it to 66% that year.[9] The Fourth Labour Government, with David Lange as prime minister and Roger Douglas as finance minister, introduced a goods and services tax in 1986 and then reduced the top income tax rate from 66% to 48% in 1988 and then 33% in 1989.[10] The Fifth Labour Government raised it to 39%[11] in 2000. It was cut again by John Key's National government, and again a 39% rate was reintroduced by the Labour government in 2022.[12][13]

As of 2014, NZ$29.8 billion (41%) of the New Zealand Government's core revenue of $72.5 billion was from individuals' income taxes.[14]

Examples of taxable income

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  • salary and wages
  • business and self-employed income
  • income from investments (interest, dividends, certain property transactions,[15] etc.)
  • rental income
  • overseas income (including income from an overseas pension)

A bright-line test on property speculation was introduced on 1 October 2015, specifying profit from certain purchases and sales of property as income. The test does not apply to profit from the family home, death estate, or property sold as part of a relationship settlement. The main aim of the test is to tax profits from property speculation. At the initial implementation in 2015, profit on houses bought and sold within two years were subject to income tax.[16] The two-year threshold was extended to five years in 2018,[17] and ten years in 2021.[18]

Generally profits made from frequent stock trading will be deemed taxable income.[19]

Tax rates

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Income tax varies dependent on income levels in any specific tax year (personal tax years run from 1 April to 31 March).

2021–2024

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Income Tax rate Effective tax rate Max. tax of bracket Cumulative tax
$0 – $14,000 10.5% 10.5% $1,470 $1,470
$14,001 – $48,000 17.5% 10.5 - 15.5% $5,950 $7,420
$48,001 – $70,000 30% 15.5 - 20.0% $6,600 $14,020
$70,001 – $180,000 33% 20.0 - 28.0% $36,300 $50,320
$180,001 – 39% 28.0 - 39.0% $50,320 + 39%
No-notification rate 45% 45%

Income is taxed by the amount that falls within each tax bracket. For example, persons who earn $70,000 will pay only 30% on the amount that falls between $48,001 and $70,000 rather than paying on the full $70,000. Consequently, the corresponding income tax for that specific income will accumulate to $14,020 – which amounts to an overall effective tax rate of 20.02% of the entire amount.

Rates are for the tax year 1 April 2021 to 31 March 2022, and are based on tax code M (primary income without student loan) and excludes the ACC earners' levy. The earners' levy rate (including GST) for the period 1 April 2022 to 31 March 2023 is 1.46% ($1.46 per $100).[20][21]

Tax credits

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The amount of tax actually payable can be reduced by claiming tax credits, e.g. donations to approved organisations, independent earners tax credit, and foreign tax credits.[22]

Tax deducted at source

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In most cases employers deduct the relevant amount of income tax from salary and wages prior to these being paid to the individual. This system, known as pay-as-you-earn, or PAYE, was introduced in 1958, prior to which employees paid tax annually.

In addition, entities who intend to make payments of interest, royalties, dividends or Maori authority distributions to a person must withhold a specified amount of income tax prior to making the payment. Depending on the residence of the recipient, this form of withholding tax is known as either resident withholding tax (RWT)[23] or non-resident withholding tax (NRWT).[24] Some entities, such as banks and financial institutions, may hold an RWT exemption certificate, meaning persons who make certain payments to them (such as borrowers paying interest) may not withhold RWT.

Double taxation agreements

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Individuals who are tax resident in more than one country may be liable to pay tax more than once on the same income. New Zealand has double taxation agreements with various countries that set out which country will tax specific types of income.[25]

These countries have double tax agreements with New Zealand
Australia India Russian Federation
Austria Indonesia Samoa
Belgium Ireland Singapore
Canada Italy South Africa
Chile Japan Spain
China Korea Sweden
Czech Republic Malaysia Switzerland
Denmark Mexico Taiwan
Fiji Netherlands Thailand
Finland Norway Turkey
France Papua New Guinea United Arab Emirates
Germany Philippines United Kingdom
Hong Kong Poland United States of America
Viet Nam

Some agreements protect pension payments as well. The agreement with the United States, for example, prohibits New Zealand from taxing American social security or government pension payments, and the reverse is also true.[26]

ACC earner's levy

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All employees pay an earner's levy to cover the cost of non-work related injuries. It is collected by Inland Revenue on behalf of the Accident Compensation Corporation (ACC).

The earner's levy is payable on salary and wages plus any other income that is subject to PAYE, for example overtime, bonuses or holiday pay. The levy is 1.39% for the year from 1 April 2017 to 31 March 2018. It is payable on income up to $124,053.[27]

Capital gains tax

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New Zealand does not have a capital gains tax.

Profits made from frequent stock trading or from the purchase and sale of investment property within a certain period of time is deemed to be income (and subject to income tax).[18]

Profits made from trading cryptoassets are generally deemed to be income, although there may be exceptions (e.g., where cryptoassets are purchased for their staking rewards).[28][29]

Business taxes

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Business income tax

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Businesses in New Zealand pay income tax on their net profit earned in any specific tax year. For most businesses the tax year runs from 1 April to 31 March but businesses can apply to the Inland Revenue for this to be changed.

A provisional taxpayer is a person or a company that had a residual income tax of more than $5000 in the previous tax year. This means that taxpayers with residual income tax in the prior year of less than $5,000 do not need to pay provisional tax for the current year.[30]

There are four methods for paying provisional tax; standard method, estimated method, accounting information method and GST Ratio option.

  • The standard method is the most common method for provisional taxpayers. Under the standard method, provisional taxpayers make three provisional tax installments through the year based on the previous years tax liability, uplifted by 5 or 10%.[31]
  • The second most common method is the estimation method. Estimation allows the business owner to pay less or more tax depending on how they think their business is performing, and therefore what they expect their tax liability will be at year end. Underpayments are subject to a high use of money interest rate, while significantly less interest is paid on overpayments, so it is important that they estimate their profit accurately.[31]
  • A provisional tax payer can also pay provisional tax using the GST ratio option. This is based on their previous year's residual tax liability and what their GST Taxable supplies were for that year. The tax payer then applies this percentage to their current period GST return. Under this option, provisional tax is paid at the same time as GST.[32]

At the end of the year the business files a tax return (due on the following 7 July for businesses with a tax year ending 31 March) and any under or overpayment is then calculated. Tax pooling was introduced in 2003 to remove some of the worry associated with estimating provisional tax payments by allowing businesses to pool their payments together so the underpayments by some can be offset by the overpayments of others to reduce/enhance the interest they pay/receive.[33][34]

Companies pay income tax at 28% on profits.[35] Tax rates for individuals operating as a business (that is, individuals who are self-employed) are the same as for employees.[36] (See individual tax rates, above.)

Goods and Services Tax

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Main article: Goods and Services Tax (New Zealand)

Goods and services tax (GST) is an indirect tax introduced in New Zealand in 1986. This represented a major change in New Zealand taxation policy as until this point almost all revenue had been raised via direct taxes. GST makes up 24% of the New Zealand Government's core revenue as of 2013.[37]

Most products or services sold in New Zealand incur GST at a rate of 15%. The main exceptions are financial services (e.g. banking and life insurance) and the export of goods and services overseas.

All businesses are required to register for GST once their turnover exceeds (or is likely to exceed) $60,000 per annum.[38] Once registered, businesses charge GST on all goods and services they supply and can reclaim any GST they have been charged on goods and services they have purchased.

Fringe benefit tax

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Main article: Fringe benefits tax (New Zealand)

Employers are liable to pay fringe benefit tax (FBT) on benefits given to employees in addition to their salary or wages (e.g. motor vehicles or low interest loans).[39] There are several methods available for calculating FBT liability, including an option of paying a flat rate of 49.25% on all benefits provided.[40]

Excise duties

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Excise or duty is charged on a number of products, including alcohol products, tobacco products, and some fuels.[41]

Land taxes

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New Zealand makes a distinction between "land taxes" and "property taxes". The traditional concept of property tax may apply the same rate both to improvement values and to land values. A pure land tax exempts improvement values from taxation altogether and taxes only land values. A graded, dual-rate, or split-rate property tax applies a different rate to improvement values. The term "land tax valuation" is used to represent both its pure and partial forms.[42] Conceptually, a property tax is a proxy for income tax - rightly or wrongly presuming that a certain level of property holdings indicate a certain ability to pay taxes on a regular basis. In contrast, an LVT applies to the land itself – taking into account its scarcity, immovability and centrality to human activity.[43]

Although the Land Tax Abolition Act (1990) which took effect from 31 March 1992 abolished New Zealand's land tax, a land tax was the very first direct tax ever imposed on New Zealanders, by the Land Tax Act (1878). A property tax followed the next year (per the Property Tax Act 1879). When first enacted, this charged a rate of one penny in the pound (i.e. 1/240th or 0.4%), but a massive £500 exemption applied, exempting most people from tax liability.

The land tax initially provided a major proportion of government revenue. In 1895 it made up 76% of the total land and income tax revenue received by the government.[44] In 1960 land tax contributed 6% of direct tax revenues, and by 1967, in a report recommending the abolition of land taxes, a committee chaired by Auckland accountant Lewis Ross noted that a mere 0.5% of total government revenue now came from land taxes. The government did not act on the Ross recommendation to abolish land taxes.

By 1982 only 5% of total land value was taxed, and land taxes were also thought[by whom?] to be duplicative due to their similarity to local-authority property-rate levies, with property taxes (rates) making up 57% of local-government income by 2001.[45]

The Labour government elected in 1984 moved away from taxes on capital in all forms, and in 1990 Parliament passed the Land Tax Abolition Act (1990),[46] ending New Zealand's history of central government taxing land. Later LVT discussions produced no change.[47]

See also

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References

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  1. ^ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2841132 at page 573
  2. ^ "NZ Government discussion document on business taxes" (PDF). ird.govt.nz. Archived from the original (PDF) on 3 October 2006. Retrieved 5 April 2018.
  3. ^ "NZ Government discussion document on taxation of investment income". ird.govt.nz. Archived from the original on 9 September 2006. Retrieved 5 April 2018.
  4. ^ "NZ Government media release on forthcoming international tax review". ird.govt.nz. Archived from the original on 3 October 2006. Retrieved 5 April 2018.
  5. ^ a b Simpson, Tony (11 March 2010). "Customs and tariffs - Tariffs for revenue, 1840–1940". Te Ara – the Encyclopedia of New Zealand. Retrieved 19 July 2021.
  6. ^ Goldsmith, Paul (2 September 2016). "Customs and tariffs - Liberal Party taxes – 1890 to 1912". Te Ara – the Encyclopedia of New Zealand. Retrieved 19 July 2021.
  7. ^ Goldsmith, Paul (2 September 2016). "Customs and tariffs - War, depression and increased taxes – 1914 to 1935". Te Ara – the Encyclopedia of New Zealand. Retrieved 19 July 2021.
  8. ^ Goldsmith, Paul (2 September 2016). "Customs and tariffs - First Labour government taxes – 1935 to 1949". Te Ara – the Encyclopedia of New Zealand. Retrieved 19 July 2021.
  9. ^ Rankin, Keith (30 May 2008). "National's 2008 Tax Reform". Scoop. Retrieved 19 July 2021.
  10. ^ Calculating Average Marginal Tax Rates for New Zealand, 1907-2009 (PDF). New Zealand Association of Economists Annual Conference. 16 June 2011. p. 23. Retrieved 19 July 2021.
  11. ^ Goldsmith, Paul (2 September 2016). "Customs and tariffs - Labour government reforms – 1984 to 1990". Te Ara – the Encyclopedia of New Zealand. Retrieved 19 July 2021.
  12. ^ Calculating Average Marginal Tax Rates for New Zealand, 1907-2009 (PDF). New Zealand Association of Economists Annual Conference. 16 June 2011. p. 18. Retrieved 19 July 2021.
  13. ^ "Search results". www.google.com. [better source needed]
  14. ^ "2014 Budget: Key facts for taxpayers" (PDF). The Treasury, New Zealand Government. 15 May 2014. Retrieved 19 July 2021.
  15. ^ "Tax and your property transactions" (PDF). Inland Revenue Department. 11 December 2014.
  16. ^ "Govt to tighten tax on capital gains". Radio New Zealand. 17 May 2015. Retrieved 1 June 2015.
  17. ^ "Selling your house". New Zealand Government. Archived from the original on 13 September 2018. Retrieved 13 September 2018.
  18. ^ a b "The bright-line property rule". Inland Revenue. Retrieved 19 July 2021.
  19. ^ Marr, Emma; White, Kayla (2020). "Does your new share market habit come with a tax bill?". Deloitte. Retrieved 19 July 2021.
  20. ^ "Tax rates for individuals". IRD. 2021.
  21. ^ "ACC earners' levy rates". IRD. 2021.
  22. ^ Tax credits (Individual income tax). Ird.govt.nz (24 August 2009). Retrieved on 19 August 2011.
  23. ^ "Resident withholding tax".
  24. ^ "NRWT (Non-resident withholding tax)". Inland Revenue. Retrieved 5 April 2018.
  25. ^ http://www.ird.govt.nz/yoursituation-nonres/double-tax/ Double tax agreements from the IRD website
  26. ^ "(See Article 18, Pensions and Annuities)" (PDF). irs.gov. Retrieved 5 April 2018.
  27. ^ "Te tāke moni whiwhi mō ngā tāngata takitahi Income tax for individuals". Retrieved 19 April 2017.
  28. ^ "Taxing cryptoasset income".
  29. ^ BR Prd 23/04 - Everlasting Nominees Limited - Product Ruling (PDF) (Report). Inland Revenue. 8 November 2023. pp. 8–10.
  30. ^ "Provisional tax".
  31. ^ a b http://www.nztax.net/node/45.html Provisional Tax Breakdown
  32. ^ http://www.nztax.net/node/45.html GST Ratio Option
  33. ^ "Pool system designed to ease taxing interest rates". The New Zealand Herald. 12 June 2003. ISSN 1170-0777. Retrieved 7 February 2017.
  34. ^ "Tax policy news - 13 June 2003 - Tax pooling launched". taxpolicy.ird.govt.nz. Retrieved 7 February 2017.
  35. ^ http://www.ird.govt.nz/business-income-tax/paying-tax/tax-rates/bit-taxrates-companytax.html Taxing companies from the IRD website
  36. ^ http://www.ird.govt.nz/business-income-tax/paying-tax/tax-rates/bit-taxrates-soletradertax.html Taxing sole traders from the IRD website
  37. ^ "Financial Statements of the Government of New Zealand for the Year Ended 30 June 2013: Revenue". The Treasury. Archived from the original on 26 February 2014.
  38. ^ "Common questions about GST from the IRD website". ird.govt.nz. Archived from the original on 24 August 2006. Retrieved 5 April 2018.
  39. ^ "Fringe benefit tax". Inland Revenue. Retrieved 5 April 2018.
  40. ^ "Fringe benefit tax rates". Inland Revenue.
  41. ^ "Types of duties, fees & charges". New Zealand Customs Service. Archived from the original on 22 March 2012. Retrieved 21 March 2012.
  42. ^ Richard F Dye and Richard W England, "The Principles and Promises of Land Value Taxation" in Richard F Dye and Richard W England (eds), Land Value Taxation: Theory, Evidence, and Practice (Lincoln Institute of Land Policy, 2009) 3, 4 n 1.
  43. ^ https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2841132 p 575
  44. ^ Taxation in New Zealand: Report of the Taxation Review Committee (Government Printer, 1967) ("Ross Report") 410.
  45. ^ G Bush, "Local Government", in R Miller (ed), New Zealand Government and Politics (Oxford University Press, 2003) 161, 164 .
  46. ^ "Land Tax Abolition Act 1990". New Zealand Legislation. Retrieved 6 December 2019.
  47. ^ Victoria University of Wellington Tax Working Group, A Tax System for New Zealand’s Future: Report of the Victoria University of Wellington Tax Working Group (Centre for Accounting, Governance and Taxation Research, Victoria University of Wellington, 2010) ("Tax Working Group") and also, for example, International Monetary Fund, New Zealand: 2011 Article IV Consultation (International Monetary Fund, 2011) 14.
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