Taxation of New Zealand assets owned by non-residents
The New Zealand tax system is generally favorable to non-resident investors who normally pay no more tax than New Zealand residents on investor returns. This has changed from previous years when non-resident investors were taxed on their New Zealand earnings as they arose and then again when they were paid to the non-resident.
The current tax rates have been stable for a number of years but changes are possible with movements in government. Companies are taxed at a flat rate of 28% whereas individuals and trusts are taxed at a top tax rate of 33%. However companies are also subject to withholding tax on the distribution of dividends, which will vary depending on the shareholder and the level of tax credits which can be attached to the dividend.
Non-residents normally invest in New Zealand assets by way of debt (which earns interest) or equity (which earns dividends). Interest is taxed at a non-resident withholding tax rate, based on whether a tax agreement exists with your country of residence. Dividends could be subject to a zero withholding tax rate depending on the circumstances, otherwise a tax agreement rate may apply depending on your country of residence.
Currently New Zealand does not have a capital gains tax and therefore certain gains can be tax-free to investors.
The type of investment vehicle used will impact the tax treatment for the non-resident investor. There are a number of different investment structures available to non-residents, but the most common are limited partnerships and limited liability companies. Less common are direct personal ownership, general partnerships and joint ventures.
Limited partnerships are a recent introduction to New Zealand. They were specifically introduced to make investment easier for non-residents. Non-residents normally invest as limited partners, leaving the unlimited liability with the general partner.
They are look-through entities with the limited partners being taxed on their share of the partnership profits (i.e. income and expenses), whilst the limited partnership itself is not subject to income tax. The tax rate depends on the status of the limited partner (e.g. company, individual or trust).
For income tax purposes, each limited partner is treated as carrying on the activities of the limited partnership so each limited partner is taxed on the same basis.
Any non-taxable capital gains will flow directly through to the limited partners. This is an advantage over a company, which can only pass capital gains through to shareholders via liquidation.
The general partner, on behalf of the partnership, manages Goods and Services Tax and other taxes, such as PAYE and withholding taxes.
Non-resident limited partners will generally be able to claim a foreign tax credit in their home country for any New Zealand income tax paid, but this should be confirmed.
An exiting partner will be treated as having disposed of their share of the underlying partnership assets and tax will apply accordingly on any income arising whereas any capital gains will be tax-free.
The losses of a limited partnership are passed through to the limited partners and available to offset against their other NZ income.
Non resident investors are likely to have a “permanent establishment” in NZ based on activities of the limited partnership, but this is primarily to enable the NZ Inland Revenue Department to collect tax on the NZ sourced income derived by non resident limited partners.
The general partner has a responsibility to act as agent for the non-resident partners with regard to their NZ tax obligations on NZ sourced income. This responsibility includes the filing of annual tax returns, keeping records and paying any tax due.
Limited Liability Companies
Companies are subject to income tax on their net taxable income at the rate of 28%. Certain capital gains will be tax-free.
The shareholders will be taxable on any dividends or interest received from the company depending on whether they invested by way of equity or debt.
A company can use the income tax it has paid to attach to dividends to reduce the tax shareholders pay. In certain cases no further tax is payable on a dividend paid to non-resident shareholders.
Tax-free capital gains of a company cannot be paid through to the shareholders in a tax-free manner unless the company is liquidated.
Personal direct ownership of an agricultural investment is common amongst farmers who operate a family farm but not amongst investors seeking an exposure to the agricultural economy. Alternative structures exist which allow the benefits of direct personal investment, without the exposure to the liabilities to which direct personal investors can be exposed, for example, limited partnerships.
Joint ventures have a similarity to limited partnerships but they are not governed by a specific code, unlike limited partnerships. The parties involved in a joint venture generally bring different resources to the arrangement and the arrangements will be subject to a joint venture agreement.
The tax treatment should be similar to a partnership with income and expenses being shared between the parties. However, without proper care joint ventures can fall into the definition of a company with the joint venture being subject to tax with the parties being taxed on the distributions as dividends.
This income tax summary was prepared by Colin De Freyne of De Freyne & Associates Limited. The summary is generic and investors are recommended to seek their own professional tax advice.
Should you wish to engage Colin De Freyne his contact details are:
Colin De Freyne
DDI - +64 9 3028449
Mobile - +64 027 4899885
Email - firstname.lastname@example.org