Budget 2026 – potpourri of targeted tax changes

On 28 May, Finance Minister Nicola Willis announced the Government’s 2026 Budget — its last before the election later this year.

Released against a backdrop of greater economic uncertainty than last year’s “Growth Budget”, Budget 2026 is framed around “securing New Zealand’s future”. This is reflected in domestic fiscal consolidation through cost savings, investment in health, education, transport and, notably, defense, and a number of bespoke revenue-raising measures. These are balanced by targeted tax simplifications intended to reduce compliance costs and ease the impact on businesses and taxpayers.

Overall, Budget 2026 contains a wider range of tax announcements than we have seen in recent years.

In this issue of Tax Tips, we outline the key tax changes, including changes to the foreign investment fund (FIF) rules, financial arrangements rules, fringe benefit tax (FBT), research and development tax incentive (RDTI), charities and not-for-profits, non-resident contractors’ tax, shareholder loans, thin capitalisation for foreign-owned banks, the proposed prudential levy, Working for Families, and Inland Revenue compliance funding.

Following the changes to the FIF rules announced as part of last year’s Budget, the Government has announced a further round of initiatives focused on reducing barriers for new migrants and retaining talent in New Zealand. A range of updates will be made which should provide significant compliance cost benefits for taxpayers holding foreign shares.

Expansion of the Revenue Account Method (RAM)

Following the enactment of a new FIF calculation method earlier this year, the Government has decided to extend the RAM for calculating FIF income on unlisted foreign shares to all New Zealand residents.

Under the RAM, eligible taxpayers will be taxed on dividends received and 70% of any realised gain on disposal of unlisted foreign shares. Where there is a loss on disposal, 70% of the loss may be offset against future RAM gains. This method was previously only available to recent migrants as a way of reducing barriers to attracting talent to New Zealand. The RAM provides an alternative so that tax is only paid on realised gains and dividends.

The “extended RAM” will also be made available to New Zealand residents who are subject to double tax due to citizenship or a right to work in another country, regardless of the date they migrated. This is because tax paid under other FIF calculation methods may not be creditable against their US taxes.

Increased FIF de minimis to $100,000

The FIF de minimis threshold will increase from $50,000 to $100,000 to reflect CPI inflation since the original threshold was set. This change will reduce the number of smaller investors required to apply the FIF rules. Instead, these investors will generally be taxed on their dividend returns, or disposal gains if held on revenue account.

Expanding access to the attributable FIF income (AFI) method 

The AFI calculation method is currently available to taxpayers with an income interest of 10% or more in a foreign company FIF. Under this method, no FIF income generally arises if the company is a non-attributing active FIF. Instead, the investor would typically only pay tax on dividends received.

The 10% interest requirement means that where investors, often founders or other early active investors, have their interests diluted, for example through a capital raise, they can lose the ability to use AFI. They may then be required to use another FIF calculation method, which could result in tax being payable on a deemed income basis.

The proposed change will allow AFI to remain available for active investors, such as entrepreneurs, who previously held at least a 10% interest in the FIF and had been using the AFI method. This removes the issue of having to pay tax where there is no actual income. A key point is that the individual must continue to be an active investor.

Clarification on the 10-year FIF exemption

The proposed change addresses an unintended issue with the existing 10-year FIF exemption for New Zealand shareholders where a New Zealand company migrates offshore and later lists overseas. Specifically, New Zealand shareholders had been falling out of the exemption when the company lists on a US stock exchange using a special purpose acquisition company, commonly known as a SPAC.

The change will clarify that shares received through a SPAC listing are treated as a continuation of the investor’s original investment.

The proposed changes are aimed at reducing the impact of exchange rate movements on a range of financial arrangements. The potential volatility of the tax impact from year to year can be high because the FA rules are designed to recognise income and expenses on an accrual basis. As a result, unrealised movements can result in tax consequences.

The overall package includes measures to allow some taxpayers to calculate income under parts of the FA rules in a foreign currency rather than New Zealand dollars, targeted protections for certain individuals exposed to cross-border double taxation, a new calculation method for arrangements acquired to meet Active Investor Plus visa requirements, and the removal of low-risk personal foreign currency arrangements, such as overseas bank accounts, mortgages on private homes and credit cards with foreign banks, from the FA rules altogether.

The changes are expected to apply from 1 April 2027, except for changes relevant to the Active Investor Plus visa, which would be backdated to 1 April 2025.

In a timely update to our recent Tax Tips on a number of employment taxation matters including FBT, and following our earlier Tax Tips regarding an earlier version of the proposals, Budget 2026 includes a significant simplification of the rules for motor vehicle FBT.

The key proposal is to replace the current day-counting approach with a category-based method. Employers would select a vehicle-use category upfront, based on the nature and extent of private use, and apply the corresponding prescribed inclusion rate to calculate their FBT liability.

The proposals also include updated rates for valuing motor vehicles for FBT purposes, including separate rates for standard, hybrid and electric vehicles.

These measures should be welcomed by businesses, as they are expected to reduce compliance costs and provide a more practical framework for assessing motor vehicle FBT, while still requiring employers to consider matters such as permitted private use and, for some categories, vehicle branding. The changes are proposed to apply to benefits provided after 1 April 2027.

Budget 2026 includes a package of RDTI reforms, with a mix of administrative simplification, cashflow support and some trade-offs for internal software claims.

The key positive change is the introduction of quarterly in-year payments. This should reduce the current delay between R&D expenditure being incurred and the tax incentive being paid, improving cashflow for eligible businesses. These payments would be limited to labour-related taxes paid by the business, consistent with the current RDTI cash refund rules. Inland Revenue would also be given greater administrative flexibility to accept late RDTI returns and correct minor administrative errors.

That support is balanced by a material reduction in the cap for eligible internal software expenditure, from $25 million to $3 million per year. The policy intent is to improve the cost-effectiveness of the regime by prioritising R&D that is more likely to generate wider spillover benefits, including new knowledge, technology and skills. Importantly, the proposed cap reduction would not affect other software R&D, such as software developed for sale or license to external customers.

Budget 2026 also includes an industry-specific change for mining businesses, expanding the range of R&D expenditure they can claim so their treatment is more aligned with other industries. Most of the proposed RDTI changes would apply from the 2027–28 income year.

The charities and NFP sector has seen a significant amount of consultation over the past 15 months, following an issues paper released in February last year. The Budget announcements outline a range of changes that will apply to the sector going forward.

Increasing tax-free and filing threshold for smaller NFPs

At present, NFPs benefit from a $1,000 effective tax-free threshold, which has not been reviewed since 1979. Budget 2026 proposes increasing this threshold to $10,000 from the 2027–28 income year. However, the new threshold would apply on a cliff-edge basis, meaning NFPs with income above $10,000 would not be eligible and all income would be taxable.

Budget 2026 also proposes a legislative filing exemption for taxable NFPs with income of $10,000 or less, unless Inland Revenue specifically requests a return. This would replace the current operational guidance, which applies where income is $1,000 or less. The filing exemption would apply from the 2027–28 income year, while financial institutions would be required to provide Inland Revenue with interest income information for RWT-exempt customers from 1 April 2028.

Membership subscriptions and levies

Budget 2026 confirms a legislative change to ensure membership subscriptions and levies received by taxable NFPs, such as clubs and societies, remain non-taxable. This provides welcome certainty for organisations that rely on member funding as a core source of income, particularly in light of recent discussion about Inland Revenue’s interpretation of the current law.

Donation tax credits (DTCs)

Budget 2026 proposes a number of changes to donation tax credits, including:

Budget 2026 proposes changes to modernise the NRCT rules from 1 April 2027.

The main proposal is to increase the exemption threshold from $15,000 to $75,000 in a 12-month period, reducing withholding obligations for lower-value engagements. A proposed “single-payer” approach would also mean New Zealand businesses only need to consider their own contract with the non-resident contractor, rather than the contractor’s wider New Zealand activity.

Certain low-risk entities, such as branches, limited partnerships and representative offices, would also be excluded from NRCT where they can demonstrate steps taken to be tax compliant. Inland Revenue also proposes a bespoke NRCT tax code within the PAYE system to improve administration.

A separate targeted change would exempt payments for aircraft and aircraft parts leased from non-resident suppliers under a “dry lease” from NRCT from 1 April 2026, reducing withholding friction and potential gross-up costs for affected aviation businesses. 

Overall, the changes should reduce compliance costs and withholding friction for New Zealand businesses engaging offshore contractors, while retaining NRCT’s core tax base protection purpose.

Budget 2026 proposes a more targeted rule for company loans to shareholders, directors and their close relatives than those considered in the consultation paper released in December 2025. Where a company is removed from the Companies Register with an outstanding shareholder loan or overdrawn shareholder current account still in place, the borrower would be treated as deriving taxable income six months after deregistration.

Inland Revenue has stated that widely held companies, partnerships and sole traders are expected to be unaffected by the proposed change. The rule would operate through the financial arrangements regime by treating the remaining payments under the arrangement as discharged, triggering a base price adjustment.

The proposal would apply to companies removed from the register on or after 4 December 2025, with the six-month period intended to allow time for reinstatement where a company has been removed inadvertently.

In alignment with the Reserve Banks new prudential capital requirements, , Budget 2026 includes proposals to update the thin capitalisation rules applying to foreign-owned banking groups. This would raise the minimum thin capitalisation percentage for tax purposes from 6% to:

• 12% for groups that include a domestic systemically important bank; and 
• 11% for all other groups.

This effectively limits the amount of cross-border related-party debt that foreign-owned banking groups can use to generate interest deductions in New Zealand. It is a targeted base protection measure and sits somewhat apart from recent more taxpayer-friendly changes aimed at encouraging foreign investment into New Zealand, such as the infrastructure thin capitalisation reforms and the FIF reforms announced in last year’s Budget.

One of the bigger Budget Day surprises was the proposed “prudential levy on banks and other financial institutions”. While the final design has not yet been announced, the Minister of Finance referred to similar regimes in the United Kingdom and Australia, under which the Reserve Bank would be partly funded through a levy on “banks, non-bank deposit takers, insurers and some other financial institutions”.

At this stage, the levy is expected to raise $209 million over the next four years, which is less than one percent of the total profits of New Zealand’s big four banks. Consultation is expected to run from July to October, with the levy applying from August 2027.

In addition to other tax simplification measures, Budget 2026 includes proposed changes to the Working for Families scheme. These would remove several income types from the net income calculation used to determine entitlements.

The “other payments” adjustment would remain, but with an expanded de minimis threshold of $8,000. This means families receiving up to $8,000 in a year to support day-to-day living costs would no longer need to include those amounts when calculating family scheme income.

The residence requirements would also be simplified, moving away from traditional tax residence concepts. Under the proposal:

• both the principal caregiver and dependent child must be physically present and ordinarily resident in New Zealand; and
• either the principal caregiver or the dependent child must be a New Zealand citizen or hold a residence class visa, rather than a temporary entry class visa.

The proposed approach would also allow periods of overseas travel without affecting eligibility or requiring notification to Inland Revenue.

Budget 2026 confirms Inland Revenue’s continuing focus on compliance. A further $15 million per annum has been allocated specifically to debt compliance, building on Inland Revenue’s unpaid tax debt campaigns through 2024 and 2025.

The return to date is significant, with Inland Revenue’s most recent published statistics reporting $11.81 collected for every dollar spent on compliance, with $1.4 billion generated through its compliance function in 2025.

Given the continued increase in funding and activity in this area, taxpayers should ensure their tax affairs are in order and give proper consideration to tax governance policies and procedures. We expect tax governance to be a live issue in Inland Revenue risk reviews and audits, and Inland Revenue’s recent interpretation statement makes clear that governance will be relevant when assessing whether reasonable care has been taken.

Overall, Budget 2026 does not represent major tax reform. Rather, it is a broad package of targeted measures: simplifying where possible, encouraging investment and talent, addressing known pressure points, and protecting the tax base.

The direction of travel is clear, but the practical impact will depend on the final legislative design, including eligibility criteria, transitional rules and commencement dates. Most of these proposals are expected to be included in a tax bill introduced later this year. With 2026 being an election year, there will be added timing pressure for the bill to progress through the parliamentary process before the next income year.