Budget 2026 Tax changes

Changes:

• Foreign Investment Fund (FIF) tax changes are expected to cost $84.6 million over the forecast period and include:
• For unlisted shares, making the new revenue account method available to all New Zealand taxpayers, ensuring tax is paid only on realised gains and actual dividends.
• Lifting the FIF de minimis threshold from $50,000 to $100,000, reducing the number of smaller investors who are required to apply the complex FIF rules.
• Expanding the availability of the attributable FIF income method.
• Changes to ensure the 10-year FIF exemption continues to apply for corporate migration.

Reflections:

• This reform is good news and builds on earlier reforms which saw the realisation-based Revenue Account Method added to the available calculation methods. 
• This change should help to encourage further investment in New Zealand and from a fairness perspective equalises the rules applicable to New Zealand investors and migrants.
• The doubling of the de minimis threshold is also excellent news, as it has been some time since the threshold was set, and the nature of New Zealanders’ investment choices has changed. With more young Kiwis in particular investing in shares as opposed to property, this change will go some way towards equalising the tax effect from our tax settings.  

Changes would:

• Remove the impact of certain foreign exchange movements for some individual investors.
• Exclude common low-risk foreign currency arrangements from the rules, this would limit the tax on the arrangements such as foreign mortgages on private homes and personal bank accounts.
• Relieve certain migrants from double taxation, presumably focused predominantly on taxpayers subject to taxation on a citizenship basis such as those from the United States of America.

Reflections:

• Changes to lower the compliance impacts of the financial arrangements rules applicable to migrants are welcome news. The New Zealand financial arrangements rules can come as a shock to migrants not expecting taxation on unrealised gains.
• Removing foreign exchange movements from the tax base in certain situations is a sensible rebalancing of the financial arrangements tax base. Equally, removing low-risk investments from the rules, such as some foreign mortgages, will be welcome news to taxpayers currently having to apply this complex regime simply because they retain their former overseas home. 
• Unfortunately, these changes appear to be targeted predominantly at migrants unlike the earlier discussed foreign investment fund changes. We hope the Government will, in the future, make further changes to make the financial arrangements rules less onerous for New Zealanders as well. 

Changes would:

• Introduce in-year payments so businesses can get the tax credit sooner,
• Reduce the cap on non-administrative internal software development spend from $25 million to $3 million per annum.
• Provide additional flexibility for RDTI return deadlines by giving the Commissioner of Inland Revenue the discretion to accept and amend late RDTI filings.
• Expand the range of R&D expenditure mining businesses can claim
• RDTI changes are expected to net savings of $84.6 million over the forecast period.

Reflections:

• This change is one of the ‘surprises’ from this year’s Budget package. Impacted businesses will likely be disappointed with the tightening, which may send the wrong signal on adoption of software to improve productivity.  It is of course important for the regime to remain sustainable over the longer term, so it does need to carefully balance the trade-offs between encouraging R&D activities and ensuring system integrity. However in the long run this change may cost New Zealand far more than the forecast fiscal savings would suggest.
• The introduction of the in-year tax credit process should help support cashflow for impacted businesses and the compliance flexibility will overall reduce compliance cost.

Changes:

• Simplifies fringe benefit tax (FBT) rules for private motor vehicle use by removing the requirement for detailed logbooks and implementing a category approach for determining the application of fringe benefit taxes to privately used employer provided motor vehicles, at a cost of $0.6 million. 

Reflections:

• Modernising FBT has been a policy project on the radar for some time. It is great to finally see some progress in this space.
• Removing the need to maintain accurate log-books should ease compliance costs for employers across New Zealand, and is a welcome modernisation of the FBT settings.
• The introduction of a category approach to FBT on motor vehicles is likely to have a mixed response, with some employers having more tax to pay and others less. Despite that, the change can be expected to simplify compliance which is great news for anyone required to file FBT returns.
• We remain hopeful that the remainder of the earlier consulted on FBT reforms will be progressed in time. 

The Budget introduces changes to exempt the dry leasing of aircraft parts from the NRCT regime, effective from 1 April 2026. Additional changes will modernise the NRCT settings including changes to:

• Increase the monetary exemption threshold from $15,000 to $75,000
• Implement a single -payer view of the monetary and day-count thresholds
• Exclude certain low-risk non-resident contractors including branches and limited partnerships from the NRCT regime if they are otherwise compliant.
• Introduce a bespoke NRCT tax code. 

Reflections:

• The leasing change will be welcome news for Air New Zealand, which had previously faced additional costs due the current settings.
• In practice, the imposition of NRCT can present an additional cost on businesses who require foreign personnel or equipment to deliver on their New Zealand projects, including key infrastructure. The lift in the exemption threshold from $15,000 to $75,000 should go some way to rebalancing the cost of compliance with the additional revenue at stake. However, we would still like to see a more wholesale rethink of the NRCT rules, testing if the withholding tax is even needed in the modern context where compliance, even for non-resident taxpayers, is much more easily managed.
• The modernisation changes will be welcome for taxpayers contending with NRCT compliance including the seemingly benign change to introduce an NRCT tax code, which though minor should improve the ease of compliance. 

Key changes include:

Not-for-profits:

• Increasing the amount of net income a not-for-profit organisation can earn without paying tax from $1,000 to $10,000.
• Ensuring that membership subscriptions and levies received by not-for-profits remain non-taxable.
• Allowing not-for-profits to treat honoraria as salary or wages, simplifying compliance. 

Charities changes:

• Limit to the amount of income that trusts can allocate to tax exempt beneficiaries.
• Removal of tax exemption for non-resident charities.

Donations tax credits:

• Capping eligible donations at $100,000 per year for natural person claimants.
• In-year refunds for donations tax credits allowing donors to receive their donation tax credit refunds earlier.
• Allowing donors to gift their donation tax credit to a charity. 

Reflections:

• The changes announced are not unexpected. Earlier Inland Revenue consultations signalled the changes, and the charitable sector was well prepared to expect reform.
• However, the charitable sector will not be able to fully understand the implications until the details of the proposals are released. In particular, the proposed limits on trusts allocating income to tax exempt entities and the removal of non-resident charities could have wide-ranging impact for the charitable sector. Watch this space for more information once legislative changes are proposed.
• The donation cap of $100,000 is a surprise and the full impact on charitable giving remains to be seen. However, as compared to the alternative of complex rules to improve overall system integrity, the relatively simple to explain brightline cap appears more favourable.
• However as with many things tax related the devil will be in the detail and much will depend on how the new rules impact on compliance requirements given the broad variation in relative sophistication of charitable operations across the sector.
• Not-for-profits in particular will be pleased to see the Government committing to ensure that subscriptions and levies received remain tax free, this change will ensure your local sports clubs and community groups do not have to contend with additional tax compliance.

The changes will take effect at various times between 2027 and 2028 – detail to come when the legislation is introduced. 

• Shareholder loans outstanding at liquidation – a small technical fix will ensure that Inland Revenue can more effectively collect outstanding taxes from companies undergoing liquidation. The change will mean that six months after a company has been liquidated, or otherwise removed from the Companies Register, any outstanding loans it previously made to its shareholders will be taxed as income to the borrower. Taxing these outstanding loans to shareholders is expected to bring in an additional revenue of $146 million.
• Inland Revenue compliance funding - Budget 2026 also invests a further $15 million per annum for Inland Revenue debt compliance activities. Expected to bring in net revenue of $120 million.

Reflections:

• The shareholder loan change makes sense and is unlikely to cause much of a stir.
• The additional compliance investment for debt collection builds on earlier funding and will help to maintain the momentum on Inland Revenue’s debt recovery efforts. 

• The Budget introduces a prudential levy for banks, non-bank deposit takers, insurers, and other financial market participants to help cover the costs of services provided by the Reserve Bank. The prudential levy is estimated to recover around $209 million over the next four years. The levy will be paid to the Reserve Bank, with the revenue returned to the Government through an increased dividend.
• Foreign owned banking groups - The Government is also updating thin capitalisation settings for foreign-owned New Zealand banking groups to align with prudential capital requirements. The change is expected to net additional $45.2 million of revenue.
• In response to questions from media the Minister of Finance noted that further changes to the taxation of banks may be coming, but what the changes may entail remains to be seen.