August Taxation Bill released

The Bill introduces a new definition of “non-resident visitor", for natural persons who are not otherwise New Zealand tax resident (or transitional resident) and are:

•      Physically present in New Zealand for 275 or fewer days in an 18-month period; and

•      Not undertaking work for a New Zealand business or branch; and

•      Not marketing or selling goods or services in New Zealand on behalf of any New Zealand business or person; and

•      Not in New Zealand because the nature of their work requires them to be physically present; and

•      Lawfully present (i.e. have a valid NZ immigration visa) and not receiving family assistance entitlements; and

•      Tax resident in a jurisdiction that has a tax that is substantially similar to income tax in New Zealand (this is to ensure that there is no double non-taxation).   

A non-resident visitor will be excluded from being New Zealand tax resident under the 183-days count test, meaning they will be treated as non-resident as long as the definition is met.

A specific exemption from New Zealand income tax is proposed for any personal or professional service income derived by a non-resident visitor. Non-resident visitors will also be able to opt out from registering for New Zealand GST, if all supplies they make would be zero-rated (i.e. to non-residents).

A person who ceases to meet any of the non-resident visitor criteria will become tax resident (or transitional resident) prospectively. The exception is if the person ceases to be lawfully present in New Zealand, in which case non-resident visitor status will be lost retrospectively (and the 183-days count test and normal tax rules will apply instead).     

A number of related changes are proposed to exclude other non-residents, such as a non-resident visitor’s foreign employer, from having New Zealand tax obligations, simply because of the person’s presence in New Zealand. The Bill clarifies that the activities of a non-resident visitor will be disregarded when determining whether:

•      A foreign trust (of which the non-resident visitor is a settlor, trustee or a beneficiary) has income that is subject to tax in New Zealand.

•      A foreign entity has a New Zealand permanent establishment.

•      A foreign company is New Zealand tax resident, under the centre of management and director control tests, if the company is tax resident in a jurisdiction that has a tax that is substantially similar to income tax in NZ.

Importantly, the Bill proposes that “non-resident visitor” status would only be available for individuals who arrive in New Zealand on or after 1 April 2026 and were not present before that date.

Initial reaction

This is a welcome, albeit incremental change.

It is aimed at taking New Zealand tax out of the equation for those who may choose to spend some time in NZ, including as part of a “remote working” arrangement. It provides a longer time frame for physical presence in New Zealand, before the normal tax residence rules will apply. We welcome the prospective application of tax residence if a non-resident visitor chooses to legally remain beyond the 275-day limit, for example. It should also give greater certainty to foreign employers that presence of employees who meet the non-resident visitor criteria should not create New Zealand tax (employment or permanent establishment-related) risks for the business, which can be a significant barrier.

However, the proposal does not address the tax issues around remote working arrangements more generally (i.e. for those looking to work from New Zealand on a more permanent basis), including, importantly, the tax risks for foreign employers from prolonged presence. We understand that Inland Revenue is awaiting the outcome of work that has started at the OECD level on these wider issues, before considering any further New Zealand changes.  

Earlier this year, the Government indicated it would proceed with changes to the Foreign Investment Fund (“FIF”) rules to remove tax barriers for new migrants moving to New Zealand, and returning expatriate New Zealanders, who hold pre-migration foreign share portfolios.

The Bill includes an optional new Revenue Account Method (“RAM”) which would tax qualifying foreign shares on dividends and 70% of any realised gains. The RAM would be available as an alternative to other FIF methods, such as the Fair Dividend Rate or Cost Methods.

The key features of the RAM are:

•      To be a qualifying share, the share must have been acquired prior to a person becoming New Zealand tax resident and the share must not be: (a) a listed security, (b) have a redemption facility, or (c) a share in company that derives more than 80% of its value from shares that meet (a) or (b). In limited circumstances, the RAM can be applied to all foreign shares if the person would be taxable in a foreign jurisdiction on the disposal of those shares.

•      To be eligible to apply the RAM a person must become New Zealand tax resident (or be transitional resident) on or after 1 April 2024 and have been non-resident for at least 5 years prior. The family trust of a qualifying person (if they are the settlor) will also be eligible to apply the RAM.

Other detailed design features include:

•      The cost base for the RAM would need to be based on an independent valuation. Alternatively, a time-based apportionment can be applied to determine the portion of the realised gain that is taxable under the RAM.

•      Realised losses under the RAM would only be offset against gains on qualifying shares.

•      Deemed realisation events, such as if a qualifying share loses its eligibility (e.g. becomes a listed share). A person becoming non-resident would not trigger a deemed realisation for tax purposes under the RAM if the qualifying shares are not sold within 3 years of departing New Zealand.

Initial reaction

The RAM proposal in the Bill is largely as previously signalled. It will be welcomed by those who would be disadvantaged if they have tax annually under the Fair Dividend Rate in New Zealand but will also be taxed in another country (such as the United States) on the sale of the same shares. A key aim is to align taxation triggers to reduce double taxation.

The current scope of the RAM is limited to new migrants and returning Kiwis although we understand that further work is being undertaken on whether its application should be widened.

The Bill allows members of an unincorporated joint venture to individually account for GST (“flow through treatment”), rather than requiring the joint venture to be registered.  

Flow through treatment would apply by default to joint ventures where the members individually supply outputs from the venture rather than making joint supplies. Other joint ventures would need to elect for flow through treatment to apply.

The earliest effective date of a flow through election would be 1 April 2026. However, transitional rules are proposed to validate positions taken for GST periods prior to 1 April 2026.  In addition, transitional rules will allow unincorporated joint ventures that are separately registered currently to deregister and account for GST under flow through treatment.   

Under flow through treatment, if the total supplies by all members would exceed the $60,000 GST registration threshold, each member will be required to register for GST.

Initial reaction

We welcome the proposed changes as the flow through treatment option will resolve a number of uncertainties with the current GST laws for unincorporated joint ventures. 

The Bill includes a proposal to allow deferral of employee share scheme (“ESS”) tax liabilities where there may be valuation and/or liquidity issues at the taxing date. This is mainly aimed at ESSs operated by start-up companies.

•      The optional deferral regime would be available to unlisted companies that operate an ESS, for shares issued or transferred to employees on or after 1 April 2026.

•      The company and affected employees would need to agree which shares under the ESS are treated as “employee deferred shares” and these would need to be notified by the company to Inland Revenue.

•      The taxing date for ESS benefits relating to employee deferred shares would then be shifted to the earliest liquidity date (including listing, sale or cancellation of the shares, or payment of dividends).

•      The employer reporting obligations for ESS benefits would follow the taxing date. 

The Bill also contains remedial amendments to the ESS taxing rules to clarify:

•      The taxing date can arise before shares are held by (or for the benefit) of an employee. This can arise if there is clear entitlement to the benefit, but the shares have not been transferred to the employee.

•      The employer deduction for ESS benefits arises on the taxing date for the employee.

Budget 2025 included a 20% immediate “Investment Boost” tax deduction for the cost of new capital assets. Investment Boost was announced and enacted into law on Budget day, with no consultation. The Bill contains limited remedial fixes:

•      Clarifies that for the purposes of the Investment Boost deduction, trading stock includes land and that trading stock is held rather than used.

•      Confirms that where use is necessary as a condition of sale (e.g. for testing or trialing purposes), this does not exclude the first purchaser from claiming Investment Boost.

Initial reaction

While the remedial fixes are welcome, we await further clarity from Inland Revenue on a range of important practical issues, such as when an asset is first “available for use” and the extent to which capital improvements qualify (particularly in the context of buildings)  

The Bill:

•      Allows employers to treat gift cards provided to employees as subject to FBT rather than Pay-as-you-Earn (“PAYE”).

•      Provides different options for accounting for FBT on global insurance policies with a single premium. The options are to divide the total premium by the number of employees to determine the per employee benefit, or treat the premium as a pooled benefit.

Initial reaction

While labelled as remedial items, these appear to be policy changes and are welcome. Disappointingly, but unsurprisingly given some of the miscommunication around their impact, the FBT proposals consulted on earlier this year have not been included in the Bill. We hope that these can be progressed in future.

The Bill increases the thresholds below which a person holding financial arrangements (a “cash basis person”) does not have to apply the financial arrangement spreading rules, to return income on an accruals basis.  

The changes include increasing:

•      The “variable principal debt instrument” threshold (to determine whether the financial arrangement rules apply to these instruments) from $50,000 to $100,000.

•      The “income and expenditure” threshold (as calculated under the financial arrangement rules) from $100,000 to $200,000.

•      The “absolute value” threshold for all financial arrangements held (both assets and liabilities) from $1 million to $2 million.

•      The “deferral” calculation threshold (for the difference in tax between cash basis and accruals basis) from $40,000 to $100,000.

Initial reaction

These are very welcome changes given the wide scope and impact of the financial arrangement rules. As the Bill commentary notes, these thresholds were originally set in 1999. We believe that there is still room for further simplification of the financial arrangement rules, particularly for natural persons.

The Bill contains other miscellaneous remedial amendments. A couple of note are:  

•      Clarifying that short-selling of foreign shares will be subject to full revenue account tax treatment, for the share user, rather than the FIF rules. This is to align with the taxation treatment for short sales of New Zealand shares.

•      Clarifying that non-resident aircraft operators, shipping operators carrying international cargo, and Software-as-a-Service (“SaaS”) contracts (if the SaaS infrastructure and support personnel are not located in NZ) are generally not subject to Non-resident Contractors’ Tax (“NRCT”).