On 26 August, the Minister of Revenue introduced the Taxation (Annual Rates for 2024–25, Emergency Response, and Remedial Measures) Bill (the Bill) into the House.
Measures proposed in the Bill include:
Confirmation of the annual rates of income tax for the 2024–25 tax year
Tax relief measures for future emergency events
Implementation of the OECD’s Crypto-Asset Reporting Framework (CARF)
Amendments which affect the transfer of overseas pension and superannuation funds to New Zealand
Allowing retrospective registration for Approved Issuer Levies (AIL) in limited circumstances
Increases to the thresholds relating to exempt employee share schemes
Introducing a “one-off” information sharing provision with the Ministry of Business, Innovation and Employment to encourage the use of NZBN numbers among unincorporated entities
Beyond the headline policy items, the Bill also includes a number of technical remedial changes across several different tax types and regimes, including GST, trustee tax rate, partnership, land tax, international tax, and R&D.
The Bill includes a number of policy and remedial items, largely intended to deliver on the Minister’s goal of reducing compliance costs for taxpayers which have relatively low fiscal costs for implementation. The Minister and his officials had a difficult task - but in our view this Bill appears to thread the needle by delivering this.
We also discuss a long awaited legal opinion from Inland Revenue regarding the GST treatment of fees paid in relation to managed funds, following the previous Government's aborted attempt at law reform in 2022.
Generic response measures for emergency events
The Bill is headlined by a series of amendments aimed at improving the Government’s ability to quickly provide tax relief in response to emergency events. This comes in the context of several emergency events in recent years including the COVID-19 pandemic, the Canterbury and Kaikōura earthquakes, the 2023 North Island flooding events, and the Mycoplasma bovis outbreak in 2017.
Tax relief provided in response to these emergency events is generally intended to address scenarios where there could be an unexpected tax liability that would not have arisen but for the emergency event occurring. For example, rollover relief to allow deferral of unexpected income resulting from an insurance payout on a destroyed asset.
Under current law, most tax measures would need to be given effect by enacting primary legislation. This includes:
Rollover relief for revenue account property, depreciable property, and amortisable land improvements;
Various employment tax measures (ability to provide tax-free payments to support employees who need, for example, alternative accommodation and transport);
Income spreading provisions for forced livestock sales; and
Turning off the bright-line test and other time-based land sale rules.
The proposals are taxpayer-friendly and draw on recent experience gained from responding to various emergency events to help future Governments respond more quickly to future emergency events. Primary legislation can take up to a year to be enacted, and this wait can create uncertainty and stress for affected taxpayers. Under the proposal, these measures would instead be actioned by way of an Order in Council which should take no more than two months to activate.
The proposals would also shift the power to remit use of money interest rates from an Order in Council into a Commissioner’s discretionary power, and introduce limited information-sharing power consistent with the powers of other agencies in a national emergency.
Crypto-Asset Reporting Framework and amendments to Common Reporting Standard
The Bill proposes to incorporate the OECD’s Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (CARF) into New Zealand domestic law (and proposes associated amendments to the Common Reporting Standard (CRS), which are information reporting requirements already in place for traditional financial institutions). This change has been well signalled, following targeted consultation in late 2022.
Inland Revenue will use information on New Zealand tax resident crypto investors for tax administration and compliance purposes including ensuring that taxpayers pay the appropriate amount of tax on income from crypto-assets. Inland Revenue will share information which relates to non-resident investors with the corresponding tax authorities for use in their own tax administration and compliance functions - and in return may receive information from overseas tax authorities regarding New Zealand resident investors in crypto exchanges based overseas. In the Government’s 2024 Budget documents, the Treasury forecast $50m of additional tax to be collected as a result of compliance interventions informed by information collected under the first two years of the CARF.
From 1 April 2026, information collection and reporting requirements are proposed to apply to New Zealand based crypto-asset service providers. These service providers would be required to report information to Inland Revenue in respect of a one year reporting period (i.e. 1 April to 31 March) by 30 June the following year (i.e. 30 June 2027 for the first reporting period). Inland Revenue would exchange this information with other tax authorities by 30 September 2027.
Reporting crypto-asset service providers (RCASPs) will be required to collect and report personal information about its reportable users, and conduct due diligence procedures, including obtaining self-verification from crypto-asset users to determine whether they are reportable users. Personal information to be collected includes:
Name
Address
Date of birth
Tax identification number
RCASPs are also required to collect aggregate level data on all relevant crypto-asset transactions in relation to each reportable user. This encompasses:
Crypto-to-crypto transactions
Crypto-to-fiat transactions
Transfers of relevant crypto-assets
It is generally in New Zealand’s best interests to implement OECD initiatives if other jurisdictions are also adopting them as a multilateral solution. There is a good chance of broad adoption of the CARF and as such, it will likely become a minimum standard for a majority of the OECD member countries. Adopting a multilateral solution developed by the OECD will help provide global consistency, which reduces compliance costs for those impacted by the CARF.
The extended lead-in time provided to comply with the CARF reporting obligations is positive, as the proposed amendments would take effect from 1 April 2026. Experience from the introduction of similar information reporting requirements (e.g. for payment service providers and platform operators in the gig and sharing economy) has shown that system builds to comply with information reporting requirements can take a significant amount of time and resource.
Taxation of transfers from overseas pension schemes
New Zealand’s approach to taxing retirement savings involves taxation of scheme contributions and investment returns, with withdrawals being treated as tax-exempt (described as the taxed-taxed-exempt or “TTE” model of taxing savings). Other jurisdictions, including the United Kingdom (UK), take an alternative approach to taxing retirement savings where contributions and returns are exempt, while withdrawals are taxed (exempt-exempt-taxed or “EET”).
New Zealand’s tax rules provide a four year transitional residence period whereby a migrant’s passive foreign-sourced income is exempt from New Zealand tax. If a foreign pension is transferred to New Zealand after the transitional residence period, some of that amount (the fund growth) is subject to tax in New Zealand at the individual’s marginal rate. This is intended to act as a catch-up of the tax that would have been paid on the fund if it had been invested in New Zealand from the time the person became resident here.
For UK pension schemes, a tax free transfer of retirement savings is permitted to certain “qualifying recognised overseas pension schemes” (QROPS). QROPS are schemes which include certain rules including disallowing withdrawals before the United Kingdom’s minimum retirement age of 55. Transfers to schemes which are not QROPS are subject to a charge of up to 55% in the UK, which is intended to claw-back the tax relief given to the funds accumulated in the UK.
Issue One: payment of tax on transfer
The mismatch of tax settings described above could give rise to a substantial tax liability for UK migrants to New Zealand.
If they transfer their pension to New Zealand after their transitional residence period, they could be subject to New Zealand tax on the transfer. Unless they have cash on hand to pay the tax (which could be substantial), they may need to withdraw from the fund to pay the tax - which could in turn trigger the UK tax charge of 55%.
The Bill proposes new rules which allow taxpayers who transfer their UK pension fund to a New Zealand scheme to elect to have the New Zealand scheme pay the tax due on transfer on their behalf. Importantly, as the payment of tax by the scheme means that funds do not flow to the migrant personally, the UK will not impose the 55% tax charge.
This proposal would apply only to the tax due on the transfer, while withdrawals would continue to be taxed at the tax payer’s marginal rates. It would also be limited to transfers to a “transfer scheme” defined to refer to a QROPS or a KiwiSaver scheme, all of which would be required to participate in “scheme pays” rules. The scheme would withhold and pay the ‘Transfer Scheme Withholding Tax’ (TSWT) calculated at a flat rate of 28%. This would apply as a final tax on the assessable withdrawal amount for the person.
Issue Two: locked-in KiwiSaver schemes
Before 6 April 2015, KiwiSaver schemes were considered to be QROPS. However, following changes to the KiwiSaver rules which allow withdrawals before the age of 55 in certain circumstances (e.g. first home purchase), KiwiSaver schemes are no longer recognised as QROPS. As a result, UK pension funds transferred to a KiwiSaver scheme before this change may attract UK tax if they subsequently want to transfer to another KiwiSaver scheme. This means that migrants in these circumstances are effectively “locked-in” to their current KiwiSaver scheme.
Proposed changes to the KiwiSaver Act 2006 would allow a KiwiSaver provider or individual member to elect for UK retirement funds which are currently locked-in to a KiwiSaver scheme, to be transferred into a New Zealand QROPS.
Approved issuer levy retrospective registration
Under New Zealand’s Approved Issuer Levy (AIL) regime, approved borrowers are able to make interest payments to non-residents without having to deduct non-resident withholding tax (NRWT) on the payments. Instead, approved issuers are required to pay a 2%1 levy on interest paid on the security. Where the interest paid is tax deductible the levy can also be deducted in the payer’s New Zealand tax return.
Historically borrowers are only able to register the relevant security on a go-forward basis and are subject to NRWT on any interest payments made to date. This means a significantly higher tax liability on the payments (typically 15% or 10% under a double tax agreement) compared to what would have applied under the AIL.
The proposed amendment would allow AIL registrants to apply the levy to securities retrospectively. The Bill proposes that retrospective registration would only be approved if:
- the application for retrospective registration of the AIL on the security is made within two years of the first payment which was subject to NRWT; and
- the Commissioner is satisfied that the delay in making the application was caused by an oversight (subject to a number of considerations).
The proposed amendment would take effect from 1 April 2025.
1 Reduced to 0% for certain widely held retail bonds.
Remedial amendments
In addition to the proposed policy changes summarised above, the Bill also proposes a number of fixes to existing legislation. These remedial amendments are proposed to ensure that the current law works as intended - for example, fixing drafting errors or addressing unforeseen circumstances which were not contemplated when the rules were originally brought in.
In particular, there is a huge volume of GST remedials proposed in this Bill - which in part reflects the volume of change to the GST rules in the last 3-4 years (for example, various remedial amendments relating to the recently introduced platform economy rules; and recent changes to the GST adjustment rules, GST grouping rules, and documentation and record-keeping rules). The Bill also proposes fixes to longstanding issues, such as the inability to zero-rate certain kinds of services provided in relation to commercial non-resident vessels. Finally, a number of proposed amendments are intended to help reduce compliance costs for businesses, including making it easier for certain businesses to align their GST filing frequencies to their accounting cycles; and removing the requirement to notify the Commissioner in advance of applying the business-to-business zero-rating rules for financial services.
In addition to the GST remedials, the Bill also proposes:
Various amendments to the rules relating to the recently enacted 39% trustee tax rate;
Amending provisions relating to partnerships to clarify the application of the associated persons rules to limited partnerships, allowing limited partnerships to apply for RWT-exempt status under the name of the partnership, ensuring limited partnerships can access the AIL regime, and addressing other minor and technical issues;
Ensuring that the bright-line period is not restarted when a co-owner acquires land from another co-owner on a partition or subdivision; ensuring the new bright-line test does not apply to transfers of inherited land by a beneficiary of an estate; and various other amendments to the land rules; and
A number of other technical amendments to the international tax rules and R&D tax incentive.
PwC View
As the Government prioritised the delivery of the personal tax cuts promised during the 2023 general election campaign, there is currently no Tax Policy Work Programme to indicate the Government’s priorities across the next 18 months or the rest of the Parliamentary term. Meanwhile, the fiscal position according to the Treasury’s Budget forecasts paints a bleak picture - sluggish economic growth and growing unemployment, resulting in more modest collection of corporate tax and PAYE than previously anticipated.
Further complicating matters are the Government’s Coalition arrangements, which require careful negotiation and agreement between the three coalition partners in order to adopt major policy proposals as Government policy.
It is in this difficult environment that the Minister of Revenue instructed his officials to carry out what seems like an almost impossible task: deliver meaningful compliance cost reduction for taxpayers and business, but only if it doesn’t cost too much!
It is to the Minister and tax policy officials’ credit that this Bill appears to have delivered on that difficult task. According to Regulatory Impact Statements for the policy changes proposed in the Bill, the policy proposals are likely to have a minimal fiscal cost (the CARF will bring in more tax revenue, whereas the AIL and overseas pension changes are forecast to cost only a few million dollars a year combined).
Meanwhile, the changes proposed in this Bill will provide a meaningful positive impact for taxpayers.
The generic response measures for emergency events will give the Government much greater ability to provide certainty for taxpayers. After a traumatic event like the recent North Island flooding events, tax should be the last thing on the minds of people impacted. The ability to give taxpayers peace of mind within a few months is positive.
The current tax settings with respect to transfers of overseas pension schemes are not fit for purpose. Tax should not be a barrier to the efficient movement of labour or capital - and the current rules can at times be an impediment to both.
Retrospective registration for AIL addresses a current quirk of the rules where an administrative oversight could result in a larger tax bill than expected.
Finally, we welcome the large number of remedial amendments which have been proposed in this Bill. Remedial legislation (amendments to address drafting errors or unforeseen issues within existing policy settings) is in our view a crucial aspect of the tax policy work programme. Remedial legislation resolves legislative uncertainty which can give rise to greater compliance costs. In our view, a regular remedial work programme also provides “bang for buck” in terms of the benefit to the tax system (greater certainty for taxpayers and maintaining the revenue base) relative to the cost associated with progressing them.
It is interesting to juxtapose the Government’s commitment to reducing compliance costs from a policy perspective, with the Government’s commitment to increasing enforcement and collection efforts. Greater Inland Revenue audit activity (while necessary from an integrity perspective) will inevitably give rise to greater compliance costs to taxpayers. However, in the current fiscal climate, this does seem like broadly the right strategic direction - to make it easier to comply from a policy perspective, coupled with strong enforcement of non-compliance.
Given our expectation that this Government cannot or will not (due to the Coalition arrangements and political commitments made to the public) introduce new taxes or increase existing taxes, extracting more tax revenue from the current tax base is likely the most logical (or only) way to raise the additional tax revenue needed to meet the Government’s spending priorities.
With that said, it is difficult to make any definitive predictions in the world of tax policy as there have been plenty of policy surprises in the past. We look forward to further engagement with the Government with respect to its upcoming Tax Policy Work Programme.
GST treatment of fees paid in relation to managed funds
The GST treatment of fees paid in relation to managed funds has had an interesting history, including long periods of uncertainty. The GST treatment of the different types of services supplied to managed funds is complex and inconsistent, which historically has led to a range of different GST treatments to be adopted across the industry.
Following a 2001 operational agreement between Inland Revenue (IR) and certain industry participants, fees payable to a fund manager have predominantly been treated as 90% exempt and 10% taxable (effectively applying a 1.5% GST rate) - although some have taken alternative approaches.
In August 2022, the Government proposed a legislative change to treat fund management services as fully subject to GST at 15%. This was intended to provide greater certainty and consistency across the industry and minimise economic distortions. However, the Government’s proposal was expected to have a significant impact on savings - with savers’ fund balances being reduced by an estimated $186 billion by 2070 (across both KiwiSaver and non-KiwiSaver managed funds). The subsequent political backlash to the proposals forced the Government to withdraw the proposal, and eventually IR went down the current path of reaching a technical position under the existing law.
At long last, IR has released a draft interpretation statement which sets out IR’s view of the application of the current law. At a high-level, IR’s draft views are that:
Fees payable to a fund manager are GST exempt.
In relation to services that the manager has outsourced to others:
Administrative services (including registry services, fund accounting and unit pricing) will be fully subject to GST.
Investment management services will either be:
GST exempt, if the investment manager has authority to make and implement investment decisions; or
Fully taxable, if the service is essentially advice, without the power to make and implement investment decisions.
PwC View
Following the previous Government’s aborted attempt at legislative reform, IR’s draft statement has been keenly anticipated by the managed funds industry. We agree with the conclusions reached from a technical interpretation point of view, and from a policy perspective the current approach of diverse positions is problematic. This position also aligns non-KiwiSaver funds with the current position for the management of a KiwiSaver fund, which has a specific GST exemption.
However, the fully GST exempt position results in a bias towards in-sourcing (as employee costs do not attract GST). Interestingly, from a regulatory perspective, the trend internationally (and signalled for New Zealand) has been to require or encourage outsourcing as much as possible. The wider impacts will need to be considered, including whether further legislative reform is appropriate.
There are still some remaining areas of uncertainty which are not addressed by the draft statement. In particular, the position with respect to:
KiwiSaver: Although the draft statement goes into detail on outsourced services to managed funds, it does not comment specifically on outsourced services to KiwiSaver funds (beyond commenting that it may be possible for more than one person to fall within the exemption for managing a retirement scheme).
Other services to funds: The GST treatment of certain other services / roles in relation to funds (including bundled services) are not covered by the statement and the treatment currently remains uncertain.
Other investment management services: While IR’s views apply to services provided to unit trust managed investment schemes, this statement could impact the GST position taken with respect to investment management services in other cases, including discretionary investment management (DIMS) mandates, private equity and private credits funds.
Although not included in the draft statement, IR has acknowledged for many years that changes should apply on a go-forward basis and that the industry will need time to implement changes in approach. We expect this period will be agreed with the industry and will be crucial to a successful transition.
