Australia is New Zealand’s (NZ’s) biggest trading partner, while NZ is Australia’s sixth biggest. Many Australian business have operations in NZ, and vice versa. It is important that you are aware of the NZ tax landscape, especially if responsibility for NZ tax compliance sits in Australia.
Some common tax traps for the unsuspecting Australian tax manager to be mindful of include:
- Returning capital. NZ has strict rules for returning a company’s share capital tax-free – certain 'bright-line' requirements need to be met, if this is other than on liquidation. If not, the distribution will be a dividend for tax purposes and may attract withholding tax.
- Balance dates and bank accounts. NZ’s tax year ends 31 March. This is the default income year unless the NZ Inland Revenue Deparment (IRD) approves a balance date change (e.g. to 30 June to align with the Australia parent). Also, from 1 October 2015, a NZ bank account is generally needed before IRD will issue a tax number.
- Shareholder continuity. Unlike Australia, there is no 'same business' test concession. A minimum of 49 percent shareholder commonality (for carrying forward losses) or 66 percent (for carrying forward imputation credits) is required. This may have implications if you are looking to sell some or all of your NZ business, and the value attached to any NZ tax losses or credits.
- Different classifications, different tax outcomes. NZ has rules which re-characterise certain debt instruments as equity. Redeemable preference shares (RPSs) are also treated as equity for NZ tax purposes. Accordingly, interest on re-characterised debt (and dividends on RPSs) are non-deductible.
- NZ transfer pricing (TP) and thin capitalisation. Reliance on foreign (e.g. Australian) TP documentation, for NZ purposes, is not acceptable to the IRD. NZ TP documentation will need to be prepared, unless any cross-border transactions are minimal. NZ’s thin capitalization rules limit the amount of deductible interest if the NZ group's debt ratio is greater than 60 percent or more than 110 percent of the worldwide group’s gearing level (whichever is higher).
- Base Erosion and Profit Shifting (BEPS). NZ’s response to BEPS is so far 'slower' than Australia’s. Changes to interest deductibility and hybrids (instruments and entities) will be consulted on later this year. There is on-going work on TP and double tax agreements through the Organisation for Economic Co-operation and Development's (OECD's) work. These have the potential to further change the tax landscape.
- Goods and Services Tax (GST). The NZ GST system is comprehensive (the only exclusions are for financial services and residential accommodation), the registration threshold is NZ$60,000 (annual sales value) and, from 1 October this year, Australian businesses supplying services or digital content directly to NZ consumers will need to register and pay NZ GST.
It is important that Australian businesses think ahead, and seek appropriate tax advice, in relation to their NZ operations and transactions.