New Zealand’s tax outlook: no major changes in the short term

New Zealand currently has no gift tax or inheritance tax, and capital gains tax applies only to a very limited range of net investment gains. For example, the bright-line test requires tax to be paid on profits from buying and selling residential property within five years, excluding main homes, relationship property and inherited homes.

In terms of the scope of taxation on income taxpayers derive from economic activity, New Zealand’s current tax system is among the world’s most stable and straightforward.

There is no indication that New Zealand’s existing tax policies will change in the short term. The current government has promised that, apart from raising the tax rate on personal income above NZ$180,000 to 39%, it will introduce no new taxes or further income tax rate increases during its term, nor will it introduce a capital gains tax.

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Although New Zealand may have fewer types of tax than other countries, its principal taxes, including personal and company income tax and goods and services tax, operate within a broad-base, low-rate framework with very few exemptions or concessions.

This means New Zealand can still generate substantial revenue from these three main tax bases.

Taxpayers often do not understand the scope of taxable income under New Zealand’s 2007 income tax legislation, the Income Tax Act 2007 (NZ), or the scope of supplies of goods and services subject to GST under New Zealand’s 1985 goods and services tax legislation, the Goods and Service Act 1985 (NZ).

Taxpayers are similarly unfamiliar with Inland Revenue’s (IRD) targeted, ongoing process for identifying and addressing gaps in New Zealand’s existing tax laws.

Through this process, New Zealand’s Parliament introduces a range of significant tax reforms each year to refine the scope and collection of income tax and GST.

For example, given the political and social issues surrounding housing shortages and affordable housing, and taxpayers’ continuing interest in buying land for investment, development or resale, IRD has consistently prioritised land transactions in its tax compliance work.

In recent years, IRD has responded to taxpayers’ continued focus on land-related activities by tightening the rules. Changes include removing negative gearing deductions for rental property losses, extending the bright-line period from 2 to 5 years, restricting access to income tax exemptions for certain land sales, clarifying tax rules for short-term accommodation such as Airbnb, and proposing reforms concerning deductions for interest and other expenses associated with land banking and mixed-use assets.

Domestic and international administrative and tax information-gathering mechanisms play an important role in ensuring New Zealand’s tax system remains one of the world’s most effective and stable.

IRD uses these mechanisms to determine taxpayers’ liabilities and collect tax. Although New Zealand, like most countries, relies on voluntary compliance, over the past four years IRD has radically upgraded its filing and payment systems to make tax administration more efficient and user-friendly.

IRD’s new systems and reporting mechanisms also include sophisticated forensic and tax risk assessment tools. These help IRD identify taxpayers’ transactions and everyone involved in them, and obtain data from within New Zealand and overseas on matters such as taxpayers’ tax residency.

IRD can also use these tools to establish the true nature of payments described as loans or gifts, and identify the beneficial owners of certain financial accounts and assets held through legal structures, including those established in tax havens. The tools also help IRD access the information exchange and multilateral tax assistance available to New Zealand as a party to bilateral and multilateral tax agreements.

These information-gathering tools have significantly increased the number of unreported domestic and offshore transactions with tax implications that IRD detects. With close assistance from overseas tax authorities, IRD can often act against non-compliant taxpayers more quickly and effectively than before. IRD also audits transactions presenting tax risks, such as certain cryptocurrency and land transactions already recorded in tax returns or other tax documents, which it can match to check compliance with the bright-line test.

A very small number of New Zealand taxpayers may still evade some or all of their tax liabilities, but they are very much the exception. IRD has extensive resources and tax administration mechanisms to hold non-compliant taxpayers accountable. In these circumstances, the burden of proving compliance and showing that no tax adjustment is required rests with the taxpayer rather than IRD—a point taxpayers often forget.

In practice, the vast majority of New Zealand taxpayers comply fully and generally regard the tax system as fair. Compared with tax authorities in many countries, IRD, which administers New Zealand’s system, is capable and trustworthy. Although an extension of the bright-line period cannot be ruled out—the current government and IRD prefer to regard this as an incremental change to an existing tax rather than a new form of taxation—taxpayers can currently be confident that New Zealand’s tax system will not change substantially over the next three years.

About the author:

Denham Martin

Denham is a senior lawyer with more than 30 years in practice, advising on tax and trust law, including the law applying to charities. He has been a principal of major law and accounting firms in New Zealand and Australia, as well as of his own specialist tax and trust law practice. Denham has published extensively on tax and trust law and has a strong track record of helping clients and their advisers resolve contentious technical issues and disputes with regulators and other claimants.

Jessica Wu Translator

Jessica. Wu is an accountant who graduated from the University. of. Auckland with a Master of Professional Accounting and is a member of Beta Gamma Sigma. She currently works at Baicheng Chartered Accountants.