Rather than pay tax on dividend income, the rules require investors to pay income tax on 5% of what their shareholdings are worth every year (exemptions apply). This means investors need to pay tax even if they don’t receive any income from their investments.
While the rules can be a headache for Kiwis invested directly in offshore entities (rather than via managed fund), they can also hit immigrants, likely to have most of their money invested offshore, particularly hard.
The concern is the tax burden could be such that it prompts wealthy foreigners to leave New Zealand. It could also prevent Kiwis, who have made a bit of money while living abroad, from returning home.
These issues would need to be considered alongside the aim of the FIF regime, which is to prevent people from avoiding paying tax by investing in offshore companies that don’t pay large dividends.
Inland Revenue is understood to have received a number of submissions in response to a review it’s doing on the regime.
Willis said she wanted to ensure the rules weren’t deterring people from bringing their “talent, skills and capital to New Zealand”.
She said she was still seeking advice on how tax settings could be changed to support economic growth and Cabinet was yet to deliberate on the matter.
Nonetheless, she was clear: “If New Zealand wants to remain a competitive place in which businesses can grow, then we can’t leave tax off the table.
“There are many different ways we can approach the tax system. One thing is the corporate tax rate, but there are all sorts of tax rules that sit underneath that, and I’m actually interested in the detail of the way the whole system works, not just the headline rate.”
Willis was keen to consider changes that could be implemented quickly, as well as those that could be phased in over time.
She was cognisant that Government debt is expected to continue rising as a percentage of gross domestic product (GDP) before tracking down. Meanwhile, the Government’s books are expected to stay in the red until at least 2028/29.
Nonetheless, Willis said it was important to consider what the overall impact of any business-friendly tax changes would be on the Government’s finances. While they could leave a hole when looked at in isolation, they could stimulate the economy to the extent this brought in more tax revenue than would otherwise be the case.
At $17 billion, corporate tax made up 14% of the Crown’s tax revenue in 2023/2024.
Willis stressed potential tax changes weren’t the silver bullet to spurring growth, and would be considered alongside changes the Government is making to resource consenting, foreign investment rules, and employment law, for example.
She was supportive of the FIF regime being looked at, suggesting it could be changed so that investors only paid tax once they received income from their investment.
She noted there might be some urgency in Government to change the rules soon to prevent the influx of people who came to New Zealand around the time of the pandemic from leaving. New immigrants are exempt from the rules for four years to give them time to comply.
Willis said there was a raft of other tweaks that could be made to the tax system to make it easier to comply with.
She pointed to fringe benefit tax, which is also being looked at by Inland Revenue, as well as niggly rules, such as one that requires businesses to capitalise assets purchased for more than $1000.
This meant that if a business bought two new chairs for $600 each in one go, the chairs would be considered a capital investment that could be depreciated.
But if the business bought the two chairs separately, they would be considered a tax-deductible expense.
Exploring compliance cost reductions is also on Inland Revenue’s “work programme”.
The Government is not, however, considering easing the tax burden on commercial and industrial property owners by allowing them to deduct depreciation as an expense.
Depreciation deductibility rules have flip-flopped over the years, with the coalition Government preventing deductibility to generate more than half a billion dollars a year in tax revenue to help pay for adjusting income tax brackets and to account for some inflation.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
