Taxation Information Relating to Investments

NOTE:  You should not select an investment on the basis of taxation alone.  Tax laws change frequently and what seemed to be a good deal this year may not be so attractive next year.

This information is given as a guide only.  If in doubt please seek professional advice.

New Zealand Personal Taxation Rates  
Definition of New Zealand Tax Resident
Capital Gains Tax
New Zealand Domiciled Unit Trusts 
New Zealand Group Investment Funds (GIF's) 
New Zealand Superannuation Trusts and Insurance Bonds 
Australian Domiciled Unit Trusts 
UK OEIC Funds (Open Ended Investment Companies) 
Foreign Investment Fund Regime (FIF Regime)
Overseas Resident Issues 
Student Loans
Salary Sacrifice (how to pay less tax)
Tax Deductibility of Financial Planning Fees
Tax Penalties
Why Form an LAQC?
Depreciation Rates (general)

We also recommend referring to our LYFORDS Bookstore for recommended books on taxation.

New Zealand Personal Taxation Rates 

Personal taxation rates that apply from 1st April 2009 are:
  Income between $0 and $14,000 is taxed at 12.5%
  Income between $14,001 and $48,000 is taxed at 21% 
  Income between $48,001 and $70,000 is taxed at 33%
  Income between $70,001 and over is taxed at 38%

To calculate what your PAYE tax is click here.

Company Tax rate

Effective 1st April the company tax rate is 30%.  It is still 33% for family trusts. 

The last date for being able to use imputation credits for the 2008 and prior tax years is 31 March 2010.  Failure to utilise these credits could result in an element of double taxation when the company's reserves are finally paid out.

Definition of New Zealand Tax Resident

You are a New Tax resident if:
     - you are in New Zealand for more than 203 days in any 12 month period, or
     - you have an "enduring relationship" with New Zealand.  The Income Tax Act 1994 says anyone who has a "permanent place of abode " in New Zealand is a New Zealand tax resident.  This definition can cover all ties with New Zealand social, physical, economic, financial and personal.
     - you are away from New Zealand in the service of the New Zealand Government.

The worldwide income of a New Zealand tax resident is subject to the tax laws of New Zealand.  You can be a tax resident in both New Zealand and another country.  New Zealand has double taxation agreements with a number of countries which will avoid you being tax twice on your world wide income.

Refer also to IRD publication "New Zealand tax residence", IR292.

Capital Gains Tax 

New Zealand does not have capital gains tax, unless:

• The taxation law is not clear and the IRD may deem you to be a trader  (this includes property) if you have traded assets as little as 4 or 5 times in a year.

• You are in the business of trading assets, such as a Fund Manager.

• You purchase assets with the prime intention of selling them to make a capital profit!!

Refer to Taxation changes effective 1st April 2007.

New Zealand Domiciled Unit Trusts 

Unit Trusts/Managed Funds in New Zealand are taxed at the same taxation rate as New Zealand companies, 33%. This applies to both dividends and interest (in the case of mortgage unit trusts) and capital growth of a fund.

Whether capital gains is taxed or not depends on whether the unit trust has a taxation ruling which deems it to be a 'passive' or 'active' fund. 

  Passive funds tend to be index type share funds and usually have an IRD ruling exempting them from taxation of capital gains. 

  Active funds are funds which actively trade and may include a range of asset classes such as shares, bonds, property, futures etc.  these funds pay tax on capital gains (including 'unrealised ') and are able to deduct any losses ( and 'unrealised losses '). 

  Imputation Credits
Dividend distributions from unit trusts are taxed at 33% for NZ residents, 15% for non residents.  The tax is referred to as "imputation tax" and if your tax rate is 19.5% then you can get credit for the tax paid by the fund manager at 33%.

If you pay too much tax via imputation tax you can only use imputation tax to offset other income and resident withholding tax.  You can carry imputation credits forward to a future tax year but if you are in credit the IRD will not refund the tax paid.

For overseas tax residents imputation credits paid in New Zealand will not be refundable but you should be able to offset against your total taxable income.

New Zealand Superannuation Trusts and Insurance Bonds  

Tax is paid by the fund manager/insurance company on all income, realised and unrealised capital gains received by the fund at 33%.  Returns received by the investor are tax paid and no further tax is due.

If your marginal tax rate is less than 33% you will be better off from a tax perspective investing in an equivalent unit trust.  Some fund managers offer the same fund in both insurance and unit trust structures.

If your income is above $60,000 this will put you in the 39% tax bracket.  These investments can be used to reduce your overall tax rate, refer to Salary Sacrifice. 

Australian Domiciled Unit Trusts 

Investors in Australian unit trusts have various amounts deducted from distributions (withholding tax) depending on the nature of the trusts underlying assets and the country of residence of the investor.

The fund will also pass through to Australian residents any franking credits (same as imputation credits) that the fund has received from investments in Australian company shares.  Please note these franking credits are not available to New Zealand investors to offset against personal income tax such as imputation credits available for New Zealand unit trust funds.

Australian based unit trusts distribute any realised capital gains to investors under the Australian capital gains tax rules, generally in the year the gains were realised.  What this means for a New Zealand investor is that the capital gains are passed to the investor as income which is taxable as income for New Zealand tax payers.

Any non-resident withholding tax deducted in Australia can be used as a credit  to offset tax payable in New Zealand. 

For unit trusts that invest in Australian shares, Australian franking credits can not be used by a New Zealand tax payer.

For those investors living outside Australia and New Zealand, Australian unit trusts may have some significant tax advantages over an equivalent New Zealand unit trust.

Foreign Investment Fund Regime (FIF)

The Government has announced removal of grey list countries effective 1st April 2007.  Australian and New Zealand shares and managed funds will be exempt capital gains tax based on residency and listing.

Where an investor has more than $50,000 of initial investment invested outside the Grey List countries then they are subject to tax on the capital gains in a financial year.  The Grey List countries are deemed to be countries that have similar taxation rules to New Zealand, they are Australia, Britain, Norway, Canada, United States, Germany, Japan.

Overseas Resident Issues   

You should seek professional advice.  The following is given as a guide only as the personal tax situation of the investor is dependent on the tax laws of their country of residence.
  Unit Trusts 
From a taxation view point passive/index tracking funds which are invested predominantly in New Zealand equities give taxation advantage from capital gains not being taxed and low distributions.  A similar advantage can be achieved through investing into UK OEIC funds registered in New Zealand.

Unit trusts invested predominantly in income producing assets eg. bonds, mortgages, property funds are not generally recommended for overseas investors.  Most or all of the return derives from income which is taxed at 33% and issue imputation credits which generally cannot be used by non-residents.

  Group Investment Funds (GIF 's) 
With these funds tax is deducted by the fund manager and issue withholding tax credits, or have Approved Issuer Levy Status refer to http://www.ird.govt.nz

Generally these funds are income orientated and are suitable for non-residents.  Residents of those countries that have a double taxation agreement with New Zealand may be able to use any withholding tax credits issued.

Those funds which have Approved Issuer Levy Status can deduct the levy at 2% in lieu of withholding tax.  This makes these funds tax effective for residents in low or zero tax jurisdictions.

  Superannuation Trusts and Insurance Bonds 
As these funds pay tax on both income and capital gains and do not issue any form of tax credit, we suggest that overseas residents avoid them altogether from a tax perspective.

Student Loans

Effective 1st April 2006 student loan borrowers personally present in New Zealand for 203 or more consecutive days will qualify for a full interest write-off.

Exemptions may be granted for the following:
     - post graduate study overseas
     - working for the New Zealand Government eg a member of the armed forces.
     - because of employment or occupation with a New Zealand company.  They must be resident for income tax purposes and have a permanent place of abode.
     - working or volunteering for a charitable organisation.
     - a partner of someone who would qualify for one of these exemptions.

Salary Sacrifice (how to pay less tax)

If you are saving regularly from your income and your tax rate is 39% then the Government allows you to save into approved superannuation funds so that your savings are only taxed at 33%.

For a more detailed explanation and examples click here.

Tax Deductibility of Financial Planning Fees

Click here to open the adobe acrobat file on Tax Deductibility of Financial Planning Fees.

Why Form an LAQC?

A Loss Attributing Qualifying Company is a useful investment tool for holding assets which may be in a loss making income scenario and have the loss off set your PAYE Tax, click here to learn more.

Tax Penalties

Reassessed tax may incur the following penalties:

The above penalties may be reduced for disclosure before an audit by 75% or during an audit by 40%. Above penalties may be increased by 25% for obstruction.

Late Payment
If you don't pay your taxes or duties on time, you will face standard penalties for late payment.
All initial late payment penalties imposed on and after 1 April 2002 are staggered in two phases.
An initial 1% late payment penalty will be charged on the day after the due date.
A further 4% penalty will be charged if there is still an amount of unpaid tax (including penalties) at the end of the 7th day from the due date.
Every month the amount owing remains unpaid a further 1% incremental penalty will be added.
Initial late payment penalties imposed prior to 1 April 2002 were applied on the day after the due date at the rate of 5%.
Late payment penalties may be remitted in limited circumstances.
These penalties apply to all taxes and duties, but not to student loan or child support payments.
 

Depreciation

Economic rates apply to the purchase of assets. An additional 20% loading applies to new assets (excluding buildings). There is an option to use either straight line or diminishing value for all assets. The following assets are examples only.

Low value assets ($500 or less excluding GST) can be written off.  ($200 or less excluding GST before 19/05/05)