Tax System in New Zealand in Asia
Tax System in New Zealand
While it is no tax haven, New Zealand has comparatively simple tax laws with a focus on minimising loopholes. Income taxes are high. The tax is 19.5% on income up to NZ$38,000 (US$19,000)?. Within the OECD, a grouping of thirty developed economies, New Zealanders are just above average in the amount of tax they pay. This is measured as the ‘tax burden’: the percentage of the total tax take to GDP (the total value of services and products a country produces in a year). New Zealand’s tax burden has been 30% or above since 1980. Between 1995 and 2005 New Zealand’s tax burden rose 1%.
The Inland Revenue Department (IRD) is the government department that collects taxes in New Zealand. In Māori the name of the Inland Revenue is Te Tari Taake. The Inland Revenue Department chooses to spell Taake with its long vowel marked with two ‘aa’s rather than one ‘ā’ with a macron, to distinguish it from the English word ‘take’.
Taxes in NZ
Prior to 2000, New Zealand had a top personal tax rate, corporate tax rate, and trustee tax rate of 33%. On 1 April 2000, the top personal marginal tax rate increased to 39%. This created a six percentage point gap between the top personal tax rate and the tax rate for trustee income and for company income. In the case of company income, that differential increased to nine percentage points when the corporate income tax rate reduced to 30%, effective from the 2008/09 income year.
3.2 One consequence of this is the capacity for people to reduce the marginal tax rate at which income is taxed by directing income to a company or a trust rather than to an individual. In the case of a trust, this income can then be directed to the trust’s beneficiaries, who are taxed at their marginal rate, which is not necessarily the top personal income tax rate. Alternatively, it can be retained as trustee income. In the case of a company, dividends can be deferred.
3.3 Carrying on a small business (including one that derives most of its income from the efforts of the owner) through a company is very common in the case of family-run businesses in New Zealand. And it is likewise common for individuals to hold their wealth (including businesses they operate) through a family trust. Inland Revenue has highlighted this phenomenon in the last two briefings to the incoming Minister.47 They expressed their view that:48
47 Inland Revenue Briefing for the Incoming Minister of Revenue – 2008 (2008) and Inland Revenue Briefing for the Incoming Minister of Revenue – 2005 (2005).
48 Inland Revenue Briefing for the Incoming Minister of Revenue – 2008 (2008) at 40.
… there are considerable differences between the tax treatments of sheltered forms of income. For example, an individual can set up a company which derives business income. If the individual earns income through the company, this will be taxed at the company rate of 30 percent so long as it is retained in the company. It will be subject to a wash-up tax on distribution and taxed at the individual’s marginal rate so long as shares are held directly. If the individual is on a 39 percent rate and all income is distributed, income would end up being fully taxed at the 39 percent rate. For this person there may be little tax sheltering benefit from using the company if most of the profits are distributed soon after they are earned by the company to finance personal consumption.
However, there are more tax-efficient options. If, instead, a trust is interposed between the individual and the company so the shares in the company are held by the trust in which the individual is a beneficiary, the company’s profits will once more be taxed at 30 percent so long as they are retained in the company and not distributed. On distribution to the trust, however, these can be taxed as trustee income at a final tax rate of 33 percent. In this case, if all income were distributed to the trust, the company’s income would end up being taxed at a 33 percent tax rate. Trusts are increasingly being used in this way not only to avoid the top marginal tax rate but also to avoid the higher effective marginal tax rates brought about by other social policy measures.
3.4 The widespread use of trusts in accordance with Inland Revenue’s concerns is demonstrated by the graph below, which demonstrates a significant increase in the amount of trustee income, for which the tax rate from 1 April 2000 was lower than the top personal income tax rate. 2248668 v12 20
3.5 Inland Revenue similarly warned that “with varying marginal tax rates and a company or trustee tax rate below the top personal marginal tax rate there will be incentives to split and shelter income.”49 Inland Revenue presented the data shown in the graph below, which indicated the effect the differential tax rates were having on personal income. The graph shows that from as early as 2001 (one year after the increase in personal tax rates) there was a significant spike in income earned in the income bands at the level at which the new 39% tax rate began to apply ($60,000 at the time). Thus it was clear that the tax rate structure was driving the level of income paid to and declared by a significant number of individual taxpayers.
It is hard to argue that arrangements involving the use of a company and a family trust were highly unusual or contrived. As indicated earlier, the Policy Advice Division of Inland Revenue has often advocated rate alignment of the top personal income tax rate, the corporate income tax rate, and the trustee tax rate in order to combat such arrangements. In the briefing to the incoming Minister of Revenue, Inland Revenue warned that companies and trusts were being used to shelter income:52
The use of a trust owning a trading company has become much more common recently, in which case the 33% company tax is often effectively a final tax, even though the beneficiaries of the trust may be taxed at a rate of 39%. Other assets are also frequently placed in a trust.53 If the assets are income-earning (for example, as business premises can be) a 33% maximum tax rate is often achieved. Less commonly, but prevalent in some parts of rural New Zealand, trading trusts are being used for active business and achieve the same effect.
3.10 They issued the same warning in their next briefing to the incoming Minister:54
Policy pressures also arise because individuals are able to shelter personal income from higher effective marginal rates using companies, trusts, portfolio investment entities (PIEs) and other savings vehicles. This can erode confidence in the fairness of the tax system and undermine voluntary compliance.
“Improving the Operation of New Zealand´s Tax Avoidance Laws”
New Zealand’s tax system
New Zealand has a relatively simple tax system when compared to other countries. There are very few tax incentives and other loopholes that complicate the tax systems in other countries – incentives, which are meant to encourage desirable behaviours, can also create opportunities for tax avoidance and increase the administrative costs of collecting taxes.
Tax makes up the majority (around 95%) of government revenue. In 2007 government’s taxation revenue came from:
•income tax from individuals – 44%
•GST – 20%
•income tax from companies – 17%
•other indirect tax (e.g. customs duties) – 9%
•other tax (e.g. ACC levies) – 6%
•other income tax (e.g. tax on investment income) – 4%.
From 1 April 2009 individual income tax was paid as follows:
•12.5c per $1 on income up to $14,000
•21c per $1 on income between $14,001 and $48,000
•33c per $1 on income between $48,001 and $70,000
•38c per $1 on income $70,000 and over.
In 2008 the company tax rate dropped from 33% to 30%.
GST of 12.5% is paid on almost all goods and services. There are only a few exemptions to this, such as renting for domestic accommodation and financial services.
Taxation in New Zealand
Goods and services tax (GST)
The tax base was broadened by such measures as taxing fringe benefits from 1985. This is a tax on benefits that employees receive as a result of their employment (like work cars or contributions to superannuation schemes). Labour eliminated the tax incentives for business. It introduced a goods and services tax (GST) of 10% on 1 October 1986 (increased to 12.5% in 1989).
The flip side of introducing new indirect taxes was to drop income tax rates – initially from 66% to 48% for the highest earners. Finance minister Roger Douglas tried to go further with a flat tax proposal in December 1987. The result was a civil war within the Labour party. A compromise saw a two-step income tax scale of 24% on incomes up to $30,000, and 33% above that – 33% was the lowest top marginal tax rate since the early 1930s, a massive drop.
Douglas rejected any idea that wealth redistribution had been abandoned. He argued that he was replacing a system that appeared progressive with one that actually was, with loopholes for tax evasion and avoidance now closed.
Goldsmith, Paul. We won, you lost, eat that!: a political history of tax in New Zealand since 1840. Auckland: David Ling, 2008.
Gustafson, Barry. His way: a biography of Robert Muldoon. Auckland: Auckland University Press, 2000.
Gustafson, Barry. Kiwi Keith: a biography of Keith Holyoake. Auckland: Auckland University Press, 2007.
Hooper, Keith and others. Tax policy & principles: a New Zealand perspective. Wellington: Brookers, 1998.
Sinclair, Keith. Walter Nash. Auckland: Auckland University Press, 1976.