NZ Bill Reforms Taxation of Foreign Income

by Mary Swire, Tax-News.com, Hong Kong

23 September 2009

New Zealand’s Revenue Minister, Peter Dunne, has welcomed the passage of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which was first introduced as long ago as July 2008.

"I am very pleased that this omnibus taxation bill, which gives effect to a number of important business tax reforms, has passed its final stages in Parliament," he said. "The reforms are aimed variously at reducing tax costs for businesses, bringing tax law up to date with today's commercial environment, protecting our revenue base and ensuring the law works as effectively as possible.”

One of the major changes is the reform of the tax rules relating to the offshore income of companies controlled by New Zealand businesses. In the past, the latter’s overseas profits have been fully taxed in New Zealand, even if their overseas subsidiaries have received tax credits in the overseas country. The reform rectifies that situation and applies to financial years beginning on or after July 1, 2009.

Dunne said this change now “results in better alignment of our tax rules with those of comparable countries, especially Australia, and removes a tax cost for our controlled foreign companies that similar companies in many other countries do not face.”

In addition, the tax rules relating to the life insurance business have been updated to ensure that term insurance business is taxed on actual profits, in line with other businesses, and to extend the tax benefits of the Portfolio Investment Entity rules to people who save through life products. These changes will generally take effect from July 1, 2010, with term insurance products sold before that date subject to transitional rules.

Another section of the bill strengthens the income tax rules on "associated persons" in land sales, to prevent people circumventing the law because of the closeness of the relationships of the parties involved (for example, to avoid tax by putting the property into their partner’s name or in trust).

Other important reforms listed by Peter Dunne include:

• Employer payments and allowances: the law has been clarified to ensure employer payments for relocation and overtime meal allowances are tax free, thus removing longstanding uncertainty in the law.
• Petroleum mining: the tax rules have been updated to remove possible disincentives to further investment in oil and gas exploration and development in New Zealand, and to safeguard New Zealand's taxing rights on its petroleum resources.
• Films and government funding: the deductible expenditure of film companies that receive Large Budget Screen Production grants will be reduced by the amount of the grant, to prevent the creation of artificial tax losses. Also, the immediate deduction incentive will be turned off for films that receive the 40% Screen Production Industry Fund grants.
• Migrant workers: changes have been made to reduce the tax compliance costs faced by migrant workers and to ensure the correct amount of tax is deducted from their pay.
• Non-disclosure: a change to the Tax Administration Act allows the right of non-disclosure in tax matters to apply to discovery and similar processes that occur during litigation.

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