With Budget 2025 in sight, tax policy is becoming a key topic of discussion again, including what may be included in the budget announcements on 22 May. In particular, the Government's current focus on growth has prompted a renewed discussion about which tax levers could be activated to help foster growth in New Zealand.
In this edition of Tax Tips, we consider some options that could be contenders for the Government as potential tax changes to enhance New Zealand's competitiveness.
Potential company tax rate change
One key topic that has received much media attention is the Minister of Finance's comments regarding a potential reduction in the corporate tax rate. Currently, New Zealand’s corporate tax rate stands at 28%, after a number of reductions from 33% in 1989/90, reduced to 30% in 2008/09, and lowered to 28% from 2010/11. The Minister noted that at 28%, New Zealand’s company tax rate is currently higher than the OECD average of 24.9% (and also the 10th highest among OECD countries), which warrants some consideration.
What are the implications?
The idea of lowering New Zealand’s company tax rate as a strategy to attract foreign capital investment has raised concerns among experts. While a lower company tax rate could be used to encourage investment into New Zealand, there is an immediate trade-off in terms of tax revenue. In particular, the company tax base accounts for 16% of the total tax revenue in the 2023/24 year, amounting to $18.7 billion. A reduction in the company rate, without introducing additional revenue-raising measures, would create a shortfall, making it more challenging for the Government to maintain a balanced budget. Before including additional income from encouraging business in New Zealand, each 1% reduction would have an estimated fiscal cost of $668 million.
Moreover, it would likely take a significant reduction in the rate to have a meaningful impact. For example, Singapore has a 17% corporate tax rate, and Ireland has a 12.5% rate for trading corporations and 25% for non-trading corporations. To be competitive, New Zealand would need a rate closer to those of jurisdictions it competes with. This would likely be a very costly lever to pull. For instance, even reducing the company tax rate to match Ireland’s non-trading corporation rate of 25% would result in a reduction in company tax revenue of approximately $2 billion.
Given the fiscal constraints associated with a significant reduction in the company tax rate, we consider some alternative tax levers below that could also promote economic growth.
AU tiered rate approach
One alternative to a broad reduction in the corporate tax rate is implementing a progressive company tax rate, in which smaller companies pay a lower corporate tax rate, as has been adopted and developed in Australia over the last ten years.
Australia's corporate tax system aims to cater to both small and large companies through differentiated tax rates. Companies, corporate unit trusts, and public trading trusts that do not qualify for reduced rates pay a full tax rate of 30%. Small businesses may benefit from a reduced tax rate (subject to certain criteria, including a revenue threshold of AUD 50 million). Initially, from the 2017–18 to 2019–20 income years, this reduced rate was 27.5%, which then decreased progressively to 26% in 2020–21 and then to 25% from 2021–22 onwards.
The tiered system aims to support smaller businesses by reducing their tax burden and promoting economic balance by fostering smaller business viability. It also increases funds available for small businesses to invest and grow to a point where they are in a profit-making position.
While the aims of a tiered system align with growth objectives, introducing progressive company tax rates requires careful consideration to ensure no unintended consequences, such as efficiency costs due to administrative complexities. Developing and monitoring boundaries and thresholds could lead to additional compliance challenges for Inland Revenue. Finally, there is also a risk that businesses may opt to slow down investing in growth to stay in the lower tax bracket, which would undermine the general aim to promote economic growth.
Accelerated depreciation
Another option considered in Inland Revenue's 2022 Long Term Insights Briefing (LTIB) is an accelerated depreciation scheme. Under this option, companies would be able to deduct more capital expenditure early in the asset's life by raising the annual depreciation rate (‘depreciation loading’) or allowing deductions on a portion of new assets to be claimed upfront (‘partial expensing’).
The LTIB emphasised both accelerated depreciation measures' ability to boost foreign investment by lowering the effective marginal tax rates and the cost of capital. Additionally, this scheme would restrict benefits to new investments, thus minimising windfall benefits and avoiding creating tax sheltering opportunities compared to general tax rate cuts. As such, allowing these depreciation settings would provide a more controlled impact on the overall tax policy system. Notwithstanding that this option appears to have sound policy support, fiscal costs may be a barrier to implementing such a regime.
Infrastructure-oriented options
Another lever that the Government is considering is promoting investment in New Zealand’s infrastructure. Recent initiatives include the New Zealand Infrastructure Investment Summit 2025, hosted by Prime Minister Christopher Luxon and Infrastructure Minister Chris Bishop. Although specific tax measures were not outlined, speeches, such as the one by Minister of Trade and Investment Todd McClay, spoke to the Government's intention to ‘make it easier’ for foreign investors to invest in New Zealand. This, combined with the inclusion of ‘reviewing thin capitalisation settings for infrastructure’ in the Government Tax and Social Policy Work Programme from last November, indicates another potential tax policy shift the Government may utilise.
Promoting investment in infrastructure was also considered by the Tax Working Group (TWG) in 2018. The view of the TWG was that infrastructure-specific concessions would introduce issues of fairness, distort value-for-money decision-making, and draw resources away from other industries. The TWG also noted that the public-private-partnerships team in the Treasury reported that they had not struggled to attract interest from foreign or domestic investors. You can read more about potential infrastructure concessions and tax rules in our Tax Tips from last November here.
FIF changes
In addition to attracting foreign capital, attracting and retaining talent in New Zealand will also promote growth in New Zealand. With that in mind, Inland Revenue launched a public consultation on the effect of the FIF rules on immigration late last year. In this paper, Inland Revenue acknowledged some of the issues with the current FIF rules and recognised that they may be discouraging non-residents from coming and staying in New Zealand. Parallel to that, the paper also noted that attracting people to New Zealand can assist in achieving the Government’s goal to “encourage investment in the IT technology sector, as well as attracting foreign direct investment generally”. As such, the paper proposed options for change to address the discouraging factors for potential migrants.
Since then, the Minister of Revenue, Simon Watts, recently echoed the need for change, stating “the current FIF rules are a key deterrent for migrants and returning Kiwis” and that the Government intends to act swiftly to remove these barriers imposed by the FIF rules to encourage investment in the New Zealand economy. In this announcement, the Government indicated they would progress with the proposed ‘revenue account method’ proposed in the paper, which will tax unlisted investments on a realised basis. The Minister went on to state that this amendment will be released in the upcoming Tax Bill, likely to come in August - watch this space.
Other options (Overseas Investment Office, visa settings)
It is important to note that tax is only one of many levers that a Government can pull to encourage economic growth. Various reforms, including amendments to the Overseas Investment Act and the Active Investor Plus (AIP) visa category, are also part of a broader strategy to enhance economic growth by attracting more foreign investment and make New Zealand more competitive in the global market by aligning its policies with those of other countries that successfully attract international capital.
Overseas Investment Act
Associate Finance Minister David Seymour has signaled proposed changes to New Zealand's overseas investment settings in a series of speeches over the past six months in October, February, and March. His speeches have highlighted a priority to streamline and modernise the framework. The proposed changes indicate a shift in thinking towards allowing investments by default unless they pose risks to national interests. This reform intends to make New Zealand more appealing to international investors by streamlining the screening process, particularly for investments involving farmland, and consolidating key assessment tests to reduce complexity and uncertainty, to better align with the country's economic interests.
Active Investor Plus
The Government is also looking to update its visa settings to attract foreign investors and boost economic growth. These changes aim to encourage migrants to invest in New Zealand, providing jobs and increasing incomes by supporting new and existing businesses. Starting from April 1, 2025, the AIP visa will feature two simplified investment categories: the Growth category, requiring a minimum $5 million investment in higher-risk ventures over three years, and the Balanced category, requiring a $10 million investment in mixed, lower-risk options over five years. Additionally, the scope of acceptable investments will expand, and barriers like the English language requirement will be removed. The new regime is expected to attract talent and capital to New Zealand.
PwC View
As outlined earlier, New Zealand’s corporate tax rate is a significant part of the Government’s taxation revenue, accounting for roughly 16% of total tax revenue for the fiscal year 2024. Any reduction in the company rate will likely impact the Government's fiscal position, and there is a real question about the “bang for buck” if there is only a small reduction, as this would unlikely be enough to have a meaningful impact on New Zealand’s competitiveness against some of the other economies that New Zealand is competing with. It is also noteworthy that New Zealand’s corporate tax rate is already lower than Australia’s corporate tax rate (excluding the reduced rate for 'small or medium business' companies).
In the absence of an ability to deliver a meaningful company tax rate cut that will bring us in line with some of the key jurisdictions we would look to compete with, our view is that more targeted tax reform may be more impactful, including those that the Government has already signaled it is considering.
