MAJOR DEVELOPMENTS
A progressive rewrite of the Income Tax Act is underway, aimed at simplifying the legislation through the use of plain language. The Taxation (Core Provisions) Act 1996 was enacted on July 26, 1996, to apply to the 1997/98 and subsequent income years. This represents the second phase of the rewrite of the Act and aims to clarify the interpretation of the fundamental provisions of the Act. Other major developments in the New Zealand tax system include:
q Reduction of income tax rates for individuals from July
1, 1996, with further reductions scheduled (see item 9);
q Application of a new taxpayer compliance and penalties
regime to all taxing statutes, effective from April 1, 1997, and a new disputes resolution process, effective October 1, 1996. Under the new penalties regime, a 5% penalty for late payment will be charged, with a further 2% for each month the tax remains overdue. Penalties also will be charged for failure to file a tax return, failure to take reasonable care, adopting unacceptable interpretations, gross carelessness,abusive tax avoidance, and tax evasion.
Discussion documents have been released on the topics of tax simplification: provisional Tax and Individual Tax Returns (August 1996),?trading Stock Tax Rules (April 1997),?the Taxation of Conduit Investment (May 1997),?and the Proposed Compulsory Retirement Savings Scheme (July 1997).
The Taxation (Remedial Provisions) Bill 1997, which was
introduced into Parliament on June 17, 1997, proposes amendments, of a relatively minor nature, that include changes to the method of calculating CFC currency translations, depreciation rules, provisional tax rules (as a consequence of the above discussion document), and compliance, penalty, and interest provisions.
A nationwide referendum will be held in September 1997 in which the question do you support the proposed compulsory retirement savings scheme??will be asked. If the scheme is supported, legislation will be enacted requiring an initial 3% of income to be contributed to a retirement savings scheme. The contribution rate is intended to be gradually increased to 8% if it is possible to make fiscally sustainable tax cuts that broadly match the overall increase in contributions.
INCOME TAXES ON CORPORATIONS
1.Rates
For all companies, both resident and nonresident, the income tax rate is 33%. Effective from the start of the 1996/97 income year, the tax rate on New Zealand branch income of nonresident companies was reduced from 38% to 33%.
Life insurance companies are taxed in their own right and as proxies for policyholders. Foreign life insurers may elect to be taxed as residents.
2.Local Income Taxes
None, other than taxes payable to local authorities, as a result of the ownership of land.
3.Capital Gains Taxes
There is presently no capital gains tax as such. The Income Tax Act, however, includes in gross income certain capital gains derived from real property transactions. Liability is based on factors such as length of ownership, rezoning of property, and the other business activities of the taxpayer or persons associated with the taxpayer.
Certain other rules abolish the capital/income distinction in respect of debt transactions.
4.Branch Profits Taxes
Nonresident corporations are subject to tax at 33% on New
Zealand-source income, except where the withholding tax is deemed to be final (e.g., arm-length interest, cultural royalties, or where a treaty provides for such limitation) and where a special tax rate applies (e.g., insurance or reinsurance premiums paid to overseas insurers, film rentals, and income derived from transportation by sea outside of New Zealand).
5.Foreign Tax Reliefs
Income derived by a resident corporation from outside New Zealand is taxable on the same basis as if it had a New Zealand source, including recalculation of the income according to New Zealand law. A foreign tax credit is allowed equal to the lesser of the foreign tax paid or the New Zealand tax payable on that income. Foreign dividends generally are not included in the income of a New Zealand corporation (except life
insurance companies). The foreign tax credit must be utilized in the same fiscal period in which it is paid. There is no provision for carryover of excess credits.
6.Classification of Corporations
Corporations are classified for tax purposes as either resident or nonresident. Closely held resident companies may elect to be
qualifying companies?and loss attributing qualifying companies,?thus enabling tax treatment in a similar manner to partnerships.
A resident corporation is incorporated in New Zealand or has its head office, center of administrative management, or director control in New Zealand. The distinction is important because nonresident corporations are subject
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