New Tax Bill brings major changes: what businesses need to know

On 26 August 2024, Inland Revenue introduced the Taxation (Annual Rates for 2024-25, Emergency Response, and Remedial Measures) Bill (Emergency Response Bill). This Bill proposes several significant changes that will impact businesses and individuals in New Zealand. These changes are generally positive, offering more flexibility in certain areas. Below, we outline the key amendments and their implications.

 

Summary of key changes in the Emergency Response Bill

Broadly, the Emergency Response Bill confirms the income tax rates for the 2024-25 income year and proposes the following changes:

• Emergency response: The Government will be empowered to provide relief during future emergencies without adverse tax consequences.
• Approved Issuer Levy (AIL) registration: Borrowers who miss the deadline to register a security for AIL may be able to do so retrospectively under certain conditions.
• Portfolio Investment Entities (PIEs): The eligibility rules for PIEs will be tightened, clarifying broadly that certain entities cannot be PIEs, including certain entities in the business of borrowing and lending money and entities that receive passive income from associates.
• Securitisation rules: Amendments to the securitisation rules will extend the eligibility criteria and allow the originator to be an entity other than a company in certain situations.
• Overseas pensions and KiwiSaver: Individuals with overseas pensions locked in KiwiSaver may be able to transfer those funds to a New Zealand qualifying recognised overseas pension scheme (QROPS) under specific conditions.
• Exempt employee share schemes: The thresholds for exempt employee share schemes will be increased, with the annual maximum value of shares offered rising to NZD7,500 and the annual maximum tax-exempt benefit increasing to NZD3,000.
• Crypto: As part of Inland Revenue's efforts to monitor crypto-asset traders, crypto-asset service providers will be required to collect and report information on their users. This amendment also allows Inland Revenue to exchange this information with other tax authorities.
• GST and B2B elections: The requirement for financial service providers to notify the Commissioner of Inland Revenue when electing to zero-rate business-to-business (B2B) supplies of financial services will be removed.

 

Detailed analysis

Emergency response measures

The Emergency Response Bill includes provisions enabling the Government to provide swift tax relief during future national emergencies. During the 2023 Cyclone Gabrielle floods, relief was granted through Commissioner of Inland Revenue discretions, Orders in Council, and legislative amendments. These measures included fringe benefit tax (FBT) alleviations, tax rollover relief, and the suspension of the bright-line test, among others. The proposed amendments to the Tax Administration Act 1994 (TAA) would allow these measures to be activated by Order in Council in future emergencies, expediting tax relief when it is most needed.

Retrospective AIL registration

The Bill proposes amendments to the Stamp and Cheque Duties Act 1971 (SCDA) and the TAA, allowing a New Zealand borrower paying interest to a non-associated, non-resident lender to retrospectively register a security for AIL under certain conditions. This change could enable AIL payments on interest paid prior to registration.

To recap, the AIL regime can significantly reduce the tax cost for borrowers when the lender passes on tax costs (typically through a gross-up clause). Without AIL, a New Zealand borrower paying interest to a non-resident lender must pay non-resident withholding tax (NRWT) on interest amounts, which can range from 10% to 15%, depending on the applicable double-tax agreement (DTA). With AIL, the borrower can pay interest with a 2% AIL and no NRWT.

Key changes will be implemented through the new section 86H(3) of the SCDA, allowing the Commissioner of Inland Revenue to backdate AIL registration if:

1. The application for retrospective registration is made within two years of the first interest payment on which the borrower had an NRWT liability; and
2. The Commissioner is satisfied that the delay in making the application was due to oversight.

The proposed section 86H(4) of the SCDA outlines the factors the Commissioner will consider when determining whether there was an oversight:

• The explanation and evidence provided by the borrower for the error.
• The borrower's history of tax compliance.
• Whether the loan documentation includes an AIL clause.
• Whether the borrower has already paid an amount that would have been AIL if the security had been registered and the borrower had been an approved issuer.
• The borrower's tax residence during the term of the security.
• Whether the borrower is a natural person.
• Whether the borrower voluntarily disclosed the error.

The proposed arrangements include:

• Retrospective registration for securities on which AIL is payable at 2% and for those qualifying for 0% AIL.
• If the Commissioner backdates a person's registration under section 32M(2C) of the TAA, that person will also be treated as an approved issuer from the date of registration (if they were not already an approved issuer).
• Decisions by the Commissioner regarding retrospective registration under section 138E(1)(e)(iib) of the TAA will not be challengeable.

In our view, these changes reflect a commercial and practical approach by Inland Revenue, allowing businesses to rectify oversights in AIL registration. However, Inland Revenue is unlikely to grant retrospective AIL registration if the borrower fails to provide substantial explanations, relevant documentation, or a history of tax compliance. Therefore, we recommend engaging knowledgeable advisors before entering and negotiating security arrangements with offshore borrowers to utilise New Zealand's concessionary AIL regime and potentially flexible registration rules.

Portfolio Investment Entities (PIEs)

The PIE rules are being tightened with two main changes:

• Entities engaged in borrowing and lending money (further defined below) cannot be PIEs.
• Income cannot be channelled into a PIE via interest payments from an associated non-PIE entity.

The first change clarifies that a “registered bank” and “licenced NBDT” (non-bank deposit taker), and in the future a “licenced deposit taker” as defined in the Deposit Takers Act 2023 cannot become a PIE, despite theoretically meeting the PIE requirements. The second change serves as an anti-avoidance measure, preventing the channelling of passive income into a PIE from an associate.

These changes are relatively narrow. There was earlier concern that the Inland Revenue may further narrow the use of PIEs but they do not seem to have made more significant changes. The Commentary to the Bill, for example, confirms that these changes are not intended to prevent cash PIEs or mortgage lending by KiwiSaver funds.

Securitisation rules

Amendments to the securitisation rules clarify that the originator can be an entity other than a company that originated the debt in certain situations. In particular, the change is aimed at allowing one bankruptcy remote transparent securitisation trust to transfer assets to another, new bankruptcy remote transparent securitisation trust, for example, in the event of refinancing. This is a helpful change and removes the need to first transfer assets back to the company that originated the debt.

Crypto-Asset Reporting Framework

The proposed amendments will implement the Crypto-Asset Reporting Framework and amendments to the Common Reporting Standard (CARF) in New Zealand, as developed by the Organisation for Economic Co-operation and Development (OECD). This will require New Zealand-based “reporting crypto-asset service providers” (e.g., trading platforms) to collect and report transaction information of reportable users. This change is effective from 1 April 2026, with reporting due by 30 June 2027.

This change follows Inland Revenue's recent focus on crypto-asset traders, including sending letters reminding traders of potential income tax liabilities.

Exempt employee share scheme threshold increase

The Bill proposes increasing the thresholds for exempt employee share schemes. The maximum value of shares offered will rise from NZD5,000 to NZD7,500, and the maximum tax-exempt benefit provided to employees will increase from NZD2,000 to NZD3,000. These changes will be effective from 1 April 2025.

According to the Commentary, these adjustments recognise past inflation and provide a buffer against future inflation. The current thresholds were last set in 2018.

This is positive news for companies looking to implement employee share schemes as a tool for attracting and retaining top talent.

Trust tax remedials

The Bill clarifies that the trust tax rate for minors and corporate beneficiaries will be 39%, regardless of any exclusions available to the trust. The exception is for disabled minor beneficiaries, where income will instead be taxed at 33%.

GST and B2B elections: Removing the requirement to notify the Commissioner of zero-rate B2B elections

The Bill proposes removing the requirement for financial service providers to notify the Commissioner of Inland Revenue when electing to zero-rate B2B supplies of financial services.

Currently, section 20F of the Goods and Services Tax Act 1985 (GST Act) requires “registered persons” to notify the Commissioner to zero-rate B2B supplies of financial services. The proposed amendment would allow GST-registered financial service providers to simply elect to zero-rate by reflecting the relevant GST position in their GST return (i.e., self-assessment).

This change should reduce compliance costs for GST-registered financial service providers and minimise administration costs for Inland Revenue.

 

Going forward

The proposed amendments reflect a move towards a more transparent and efficient New Zealand tax system. As of the time of publication, the Bill is in its first reading and is open for public submissions until 9 October 2024. We expect the Bill to be enacted shortly thereafter, with most amendments taking effect from 1 April 2025.

For any specific queries or further assistance regarding these changes, please reach out to our team at DLA Piper.

For more insights, our Global Tax Reform hub features related articles covering developments in global tax legislation.