New Zealand: Taxes

Overview

An important consideration when you’re buying a home in New Zealand, even if you don’t plan to live there permanently, is taxation, which includes property tax, wealth tax, capital gains tax (CGT) and inheritance tax. You will also have to pay income tax if you live permanently Down Under or earn an income from a property there.

INCOME TAX

Generally speaking, income tax in New Zealand is below average for a developed country. During the ’90s most people saw their income tax reduced, but in the 21st century income taxes have increased. Most New Zealanders are resigned to paying taxes (tax evasion isn’t a national sport as it is in some countries) and in any case the country has a system of pay-as-you-earn (PAYE) that ensures that tax is deducted at source from employees’ salaries. The tax system in New Zealand isn’t particularly complicated. It’s designed so that most people can prepare and file their own tax returns, although if your tax situation is complicated you may need to seek help from an accountant.

The Inland Revenue Department (IRD) provides a comprehensive help service and publishes numerous factsheets and brochures for taxpayers. The following helplines are available:

• Income tax and general enquiries: freephone 0800-227 774 or 04-801 9973;

• Overdue tax and returns: freephone 0800-227 771;

• Student loans: freephone 0800-377 778;

• Family Assistance: freephone 0800-227 773;

• INFOexpress: freephone 0800-257 999;

• Forms and stationery: freephone 0800-101 035.

The IRD (PO Box 3754, Christchurch, PO Box 1535, Hamilton or PO Box 39-050 Wellington) also has a comprehensive website (www.ird.govt.nz) which includes downloadable factsheets and forms.

Liability

Your country of domicile determines whether you’re liable to pay New Zealand income tax. New Zealand residents are taxed on their worldwide income, while non-residents are subject to income tax only on income derived from New Zealand. To determine ‘domicile’ the tax authorities apply what’s known as the ‘permanent place of abode test’, although this is arbitrary and isn’t enshrined in New Zealand tax law. Usually anyone who’s present in New Zealand for more than 183 days in a 12-month period is considered resident there and liable to pay taxes. You don’t need to be a permanent resident to be liable, and the existence of financial and social ties (including bank accounts and club memberships) may be taken as evidence of domicile. You can usually be considered exempt from New Zealand taxes only if you aren’t present in New Zealand for 325 days in a 12-month period. However, if you maintain a home in the country, you cannot be considered non-resident, no matter how brief your stay. If you decide to leave New Zealand, you should inform your local IRD office. Note that the 325-day time limit doesn’t start until the IRD has confirmed that you’ve ceased to become a resident.

Income that’s subject to tax in New Zealand includes commissions, dividends, interest, profits or gains from a business, rents, royalties, salary and wages, and trust distributions.

Double-taxation Agreements

New Zealand has double taxation treaties with 29 countries: Australia, Belgium, Canada, China, Denmark, Fiji, Finland, France, Germany, India, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, the Netherlands, Norway, the Philippines, the Russian Federation, Singapore, South Africa, Sweden, Switzerland, Taiwan, Thailand, the UAE, the UK and the USA. Double taxation treaties are designed to ensure that income which has been taxed in one treaty country isn’t taxed again in another. A treaty establishes a tax credit or exemption on certain kinds of income, either in the taxpayer’s country of residence or in the country where the income is earned. Where applicable, a double taxation treaty prevails over local law.

Tax Code

Every taxpayer in New Zealand is required to complete a Tax Code Declaration (form IR330) when they start employment and if there are any changes in their employment circumstances, e.g. if working hours are reduced. You should be given the form by your employer, who returns the completed form to the IRD. The tax code for most employees is M. It’s important that you fill in the form correctly, as the amount of tax you pay is based on the information provided.

Tax Return & Tax Bill

When you start work in New Zealand, you should register with your local IRD office, who will issue you with an IRD or tax file number, which must be quoted on tax documents and enquiries. To apply for your IRD number you need to complete an IRD form and send a copy of your passport (freephone 0800-227 774, www. ird.govt.nz). IRD numbers are usually issued within five working days.

Recent changes in tax legislation have made tax calculations simpler and more accurate, and tax returns easier to complete. Until recently, everyone who earned an income in New Zealand had to file an income tax return annually with the Commissioner of the Inland Revenue Department. However, under new tax legislation tax returns have been eliminated for individuals who receive income from employment subject to PAYE or from interest and dividends subject to Resident Withholding Tax (RWT). All individuals who derive income that isn’t taxed at the time of payment or who are in business must file an annual return. The return, known as an IR3, is sent to you automatically each year. The New Zealand tax year runs from 1st April to 31st March of the following year, and returns must be filed by 7th July. The IRD then issues a tax assessment (i.e. a tax bill) showing the amount of income tax payable.

Payments for due tax can be made in a variety of ways, including by cheque, by electronic payment or direct debit from your bank, by cash or cheque at any branch of the Westpac Trust bank, or online through the internet banking facility at any major New Zealand bank.

Employees whose income tax is deducted at source by their employer under PAYE and who don’t have any other income, receive a Personal Tax Summary from the IRD based on information provided by employers and shouldn’t have any more income tax to pay. The Personal Tax Summary states your tax code and you should check with the IRD that you’re using the correct tax code (see above).

You will also receive a Personal Tax Summary if you receive family assistance payments from IRD; if you receive family assistance payments from Work and Income and earn over $20,000; if you have a student loan and qualify for an interest write-off; and if you have paid too little or too much tax. The Personal Tax Summary shows whether you’re entitled to a tax refund or have tax to pay. If you have tax to pay, you must pay it by the 7th February for people without a tax agent or by the 7th April for those with an agent and a time extension. If you’re entitled to a refund it will be paid when you’ve confirmed your Personal Tax Summary or within 30 days if the amount owing is less than $200. If you wish to claim certain rebates, such as a child or low income earner rebate (see Rebates below), or if you earn under $38,000 but your dividend income was taxed at 33 per cent, you should request a Personal Tax Summary.

Tax Rates

It has become common practice in recent years for the rate of income tax to be adjusted annually in the July budget. There are three tax rates in New Zealand, which are currently as follows:

Taxable Income: $0 - $38,000, Tax Rate: 19.5 %, Cumulative Tax: $7,410
Taxable Income: $38,001 - $60,000, Tax Rate: 33%, Cumulative Tax: $14,670
Taxable Income: over $60,000, Tax Rate: 39%

Under recent tax changes, if you receive a lump sum payment (e.g. bonuses, back pay or retirement payment) and your annual income is over $60,000, you can elect to pay the higher tax rate of 39 per cent on the lump sum and therefore avoid ‘squaring up’ your tax at the end of the year. If you receive a redundancy payment which together with the annual value of your income for the previous four weeks is less than $38,000, you will pay a flat rate of 21 per cent tax on the redundancy payment.

Rebates: Before you’re liable for income tax, you can deduct certain allowances (known as rebates) from your gross salary, which reduce your tax bill. Some income rebates, such as the low earner rebate, are built into the PAYE rates but others, such as the housekeeper, childcare and donations rebates, must be claimed from the IRD on separate forms. Key rebates include:

• child taxpayer rebate ($156), available for children under 15 or still at school;

• housekeeper rebate ($310), which generally includes childcare costs for working parents;

• donations rebate ($630), on charitable donations of $1,890 or more;

• low income earner rebate (4.5 per cent of net income up to $9500 and 1.5 per cent of income above $9,500);

• transitional tax allowance ($728, reduced by 20¢ per $1 of earnings over $6,240), which is available to full-time earners working at least 20 hours per week.

Tax rebates must be claimed by 30th September following the end of the relevant tax year. Expenses associated with employment (such as clothing or travel to work) cannot usually be claimed as a tax allowance in New Zealand. However, the self-employed can claim legitimate business expenses. Interest on a mortgage cannot be claimed as a tax allowance in New Zealand.

Resident Withholding Tax: Interest on bank and other savings accounts is paid after deduction of resident withholding tax (RWT) at a rate equivalent to the standard rate of income tax (19.5 per cent). If, however, you don’t provide your IRD or tax file number to a bank when opening an account, it’s taxed at the higher rate (39 per cent).

Businesses & Self-employment: Income tax for the self-employed and small businesses is broadly similar to wage and salary earners. You’re sent a tax return (form IR3) at the end of your financial year, which you must complete and return by the 7th day of the fourth month following the end of your financial year. If your financial year is the same as the tax year (April to March), your tax return must be filed by 7th July each year. You can apply to have a financial year that differs from the tax year. The self-employed are required to pay a proportion of their estimated tax on a monthly basis, which is based on their previous year’s liability. When your tax return is submitted, the IRD reconciles the tax due with the sum already paid and issues a tax assessment for any tax payable or a refund if you’ve over-paid. Company tax is levied at a flat rate of 33 per cent, whether a company is resident or non-resident.

OTHER TAXES

There are no local income taxes, wealth tax, capital gains tax or estate taxes (inheritance taxes) in New Zealand. However, income tax may be levied on income derived from any undertaking or scheme entered into or devised for the purpose of making a profit. For example, income from the sale of property and land if the principal purpose of purchasing it was to resell it or if your business is dealing in property. In addition, gains resulting from certain investments, such as debentures and some preference shares, options and leases, may be taxable irrespective of whether the nature of the gain is capital or income.

Goods & Services Tax

A goods and services tax (GST) is levied in New Zealand, which is essentially the same as the value added tax levied in European Union countries but isn’t a sales tax as in the USA. GST is the second largest component of tax revenue and is levied at a single rate of 12.5 per cent on most goods and services, although some are exempt (e.g. the letting of residential accommodation). When you import goods into New Zealand, GST (and in some cases also customs duty) is assessed on their value, unless they’re exempt or imported under a tax-free arrangement. Immigrants can import their personal possessions free of duty and tax, provided they’ve been owned and used prior to their arrival. This also applies to used cars, provided you meet the import criteria.

All businesses with a turnover of $40,000 or more within a 12-month period must register for GST with the Inland Revenue Department and must levy GST on goods and services supplied (unless they’re exempt). Similarly, businesses can reclaim GST paid on goods and services used in their business. A GST return must usually be filed every two months, although businesses with a turnover of less than $250,000 per year can choose to file a return every six months, and those with an annual turnover of over $24 million must file monthly. A penalty of 1 per cent of the tax due is levied if a return isn’t filed by the due date, plus a further 4 per cent if there’s still unpaid tax a week later. Thereafter, a further 1 per cent per month is added to any unpaid amount. For further information on GST contact the Inland Revenue on freephone 0800-377 776.

Property Taxes

Property taxes (rates) are levied by local authorities and are based on the rateable value (valuation) of properties. Bills are sent out at the beginning of the financial year and are payable by whoever occupies the property, whether it’s the owner or a tenant. If you occupy a property for just part of a year, then only a proportion of the tax is payable. The annual bill for an average family house is between $1,000 and $2,000. It isn’t uncommon for residents, either individually or collectively, to appeal against their property valuation in order to obtain a tax reduction.

Property taxes pay for local services such as street cleaning, lighting and subsidies paid to local public transport companies. They usually include rubbish collection (although an extra charge is levied in some areas), recycling collection and water, although in some areas such as Auckland, water is billed separately. Auckland residents have been protesting against water charges and rates for the last few years, because although water charges were recently excluded from their rates, they weren’t reduced! As a result, Auckland residents pay more or less the same as before in rates as well as expensive water charges (most households pay more than $800 per year).

Gift Tax

Gift tax (known as gift duty) is imposed at fixed rates on certain gifts, including property in New Zealand or elsewhere if the donor was domiciled in New Zealand at the time of the gift. Gifts that aren’t dutiable include those made to charities, gifts for the maintenance or education of your immediate family and gifts of up to $2,000 per year to an individual if they’re made as part of the donor’s normal expenditure, e.g. birthday and Christmas presents. The rates of gift duty range from 5 per cent on amounts above $27,000 to 25 per cent plus $5,850 on amounts in excess of $72,000.

Fringe Benefits Tax

FBT is payable by employers on the value of most fringe benefits paid to employees in New Zealand. The rate varies between 49 and 64 per cent (except as below). Examples of fringe benefits are:

• vehicles, which are subject to FBT at 24 per cent of their cost or market value, although there’s a proposal to reduce this to 20 per cent;

• subsidised or low-interest loans or mortgages, which are subject to FBT at rates revised quarterly (in the third quarter of 2005 the rate was 9.01 per cent);

• employer contributions to medical insurance, which are subject to FBT for the whole amount of the contribution.

For further information, see the Fringe benefit tax return guide (IR425).

It’s important to note that income such as interest, rents, dividends and royalties are taxable under income tax in New Zealand, rather than separately as is the case in some other countries.

© Survival Books Limited 2006

“Buying a Home in Australia & New Zealand” 1st Edition, Graeme Chesters.
Reproduced with the permission of Survival Books Limited.

Further information on this topic can be found in “Buying a Home in Australia & New Zealand” 1st edition, by Graeme Chesters.

For extensive information about buying a property in Australia & New Zealand, you can purchase this book at www.survivalbooks.net