Income tax

Income tax treatment depends on residency status.

Residents of New Zealand are taxed on their worldwide income, and non-residents are taxed on New Zealand-sourced income.

• For residents of New Zealand and Australia, article 4 of the Australia – New Zealand Double Tax Agreement contains a tie-breaker provision that allocates residency to one of the jurisdictions.

Income tax treatment depends on residency status.

Residents of Australia are taxed on their worldwide income and non-residents are only taxed on Australian-sourced income. In most cases, temporary residents are only taxed on Australian-sourced income.

Generally, a New Zealand tax resident will only be taxable on their Australian business profits that are attributable to a permanent establishment (such as an office or warehouse) they have in Australia.

• For residents of both Australia and New Zealand article 4 of the Australia – New Zealand Double Tax Agreement The DTAExternal Link contains a tie-breaker provision that allocates residency to one of the jurisdictions.

See also:

• The DTAExternal Link
• Definitions  

The standard New Zealand income year is from 1 April to 31 March.

You may adopt a different balance date if:

• the nature of your business makes a 31 March balance date inappropriate
• you wish to align to your overseas company's balance date (that is, 30 June in Australia)
• a subsidiary wishes to align its balance date with that of its parent company
• an estate wishes to adopt the deceased's date of death
• a shareholder-employee wants the same balance date as the company. 

The standard Australian income year is from 1 July to 30 June.

Entities that can demonstrate that their particular circumstances warrant a different income year period can, with our permission, adopt a substituted accounting period (SAP).

• Tax rates for individualsExternal Link
• Tax rates for businessesExternal Link

• Tax rates for resident individuals
• Tax rates for foreign residents
• Tax rates for companies

New Zealand does not have capital gains tax however, the Parliament of New Zealand enacted the Taxation (Bright-line Test for Residential Land) Act in 2015.

See also:

• Bright Line Test

Capital gains tax (CGT) is the tax you pay on any capital gain you make when a capital gains tax event occurs, such as the sale of an asset.

Any capital gains that are taxable should be included in your annual income tax return. CGT is not a separate tax – it is a component of your income tax.

Generally, capital gains made in relation to CGT assets acquired on or after 20 September 1985 are assessable.

Residents of Australia are liable for CGT on assets worldwide.

A foreign resident, or, in most cases, a temporary resident, is not liable for CGT (nor is treated as having made a capital loss) unless the CGT asset direct or indirect interest in Australian real property or certain mining related rights. To work out whether you have to pay tax on your capital gains, you need to know:

• whether a CGT event has happened to you
• the time of the CGT event
• what assets are subject to CGT
• how to calculate the capital gain or capital loss
• whether there is an exemption or rollover that allows you to reduce or disregard the capital gain or capital loss
• whether the CGT discount applies
• whether you are entitled to any of the small business CGT concessions.

See also:

• Capital gains tax  

Australia

If your residual tax ('tax to pay' figure on your last return) was more than $2,500, you may be liable for provisional tax.

The provisional tax you pay during the year is offset against your end-of-year tax payable figure.

See also:

• Paying business income taxExternal Link

The pay as you go (PAYG) instalments system is used for making instalment payments during the income year towards your expected tax liability on your business and investment income.

Your actual tax liability is worked out at the end of the income year when your annual income tax return is assessed.

Your PAYG instalments for the year are credited against your assessment to determine whether you owe tax or are owed a refund. We will tell you if you have to pay PAYG instalments.

See also:

• PAYG instalment essentials  

At the end of the income year, you have to pay your residual income tax, that is, the amount of tax you have to pay after subtracting any tax credits you may be entitled to (excluding other tax payments made during the year).

This amount is calculated on your end-of-year tax return.

At the end of the income year, you have to pay any tax worked out for the year less any tax offsets, rebates and tax credits you may be entitled to and any tax payments you made during the year.

This amount is calculated on your end-of-year tax return

Imputation is a system that allows companies to pass on to their shareholders the benefit of the New Zealand income tax they have already paid.

Companies can do this by 'imputing' (attaching tax credits to the dividends they pay out) credits for the income tax the company has already paid.

The amount of the tax credit attached to the dividend is called an imputation credit.

The Trans-Tasman imputation legislation was enacted on 25 November 2003 and allows:

• Australian companies to elect to maintain an imputation credit account (ICA) in New Zealand
• wholly owned groups of companies (either Australian or New Zealand) to elect to form groups for imputation purposes only

Australian companies wishing to elect into the NZ imputation system should visit New Zealand Inland Revenue

See also:

• NZ Trans-Tasman imputationExternal Link – for Australian companies wishing to elect into the NZ imputation system 

The imputation system allows Australian companies (and other entities taxed like companies) that pay Australian tax to pass on to their Australian shareholders a credit for income tax paid on profits when distributing those profits. The tax paid by the company is allocated to shareholders as franking credits attached to dividends they received.

Although shareholders are taxed on the full amount of the profit represented by their dividend distribution, they are allowed a credit for the tax already paid by the corporate entity. This prevents double taxation – that is, the taxation of company profits when earned by a company and again when a shareholder receives a dividend.

A New Zealand company that has chosen to join the Australian imputation system may pay dividends franked with Australian franking credits. For example, a New Zealand company might have paid Australian income tax and might pay dividends franked with Australian franking credits (as opposed to dividends franked with New Zealand franking credits).

Australian residents who own shares in a New Zealand company or who receive a distribution from a partnership or trust that receives dividend income from the New Zealand company may be able to claim a tax offset for the Australian franking credits.

A NZ company that chooses to use the Trans-Tasman imputation rules will generally be subject to the Australian imputation rules in the same way as they apply to an Australian company.

Special rules apply to ensure that the measure operates appropriately and to preserve the integrity of the Australian imputation system.

See also:

• Imputation – for details on the general rules that apply to the Australian imputation system
• Trans-Tasman imputation special rules – for details on the specials rules

New Zealand does not have debt and equity rules.

Australia has specific that define what constitutes equity and debt for tax purposes.

These rules determine whether a return on an investment or arrangement is treated as a dividend (and therefore frankable and non-deductible to the issuing entity), or the return is treated like interest (and therefore deductible to the issuing entity and not frankable).

These rules are also relevant for the thin capitalisation rules and for withholding tax purposes.

A debt interest classification may also be important for the purposes of testing whether entities can form a consolidated tax group (which allows a group of commonly owned companies to be treated as one company for tax purposes).

See also:

• Debt and equity tests
• Thin capitalisation  

In general, the initial amount of money you put into a trust is not taxed. Any income the trust earns (for example, through investment or business income) is taxed at a flat rate of 33 cents in the dollar. The trustee is liable for paying this income tax regardless of where they live in the world.

See also:

• Trusts and estatesExternal Link

Under Australian income tax law, most trust estates are not taxed as companies.

Generally, if the income of the trust is distributed to the beneficiary, the beneficiary will include that income in their assessable income. If the beneficiary is a non-resident under 18 years of age or under a legal incapacity, the trustee will deduct the appropriate tax.

Ordinarily, if no beneficiary is presently entitled to the income of the trust, the trustee will be assessed on the trust income.

Special rules apply to certain public trading trusts that are treated as companies, and to super funds.

Depreciation is a deduction that business taxpayers can claim against their gross income. It is an allowance given in recognition of the fact that fixed assets decrease in value over their working life. Not all fixed assets can be depreciated.

See also:

• Business income tax – DepreciationExternal Link

Generally, a deduction is available for the decline in the value of certain depreciating assets that are used to earn assessable income.

Some items, like land and trading stock, are specifically excluded from the definition of a depreciating asset.

See also:

• Guide to depreciating assets 

A company is thinly capitalised when its capital is made up of a much greater proportion of debt than equity.

The thin capitalisation rules are designed to ensure that profits of foreign-controlled entities are subject to New Zealand income tax and are not removed from the tax base by way of interest expense.

Whether the thin capitalisation rules apply is subject to the ownership/control rules one entity may have in the other, whether direct or indirect.

Australia's thin capitalisation rules are designed to ensure that businesses operating in and out of Australia do not reduce their Australian tax liabilities by using an excessive amount of debt capital to finance Australian operations. An entity is said to be thinly capitalised if its assets are funded by a high level of debt and relatively little equity.

Generally, where the entity's debt exceeds 60 per cent of the net value of the Australian assets, a portion of the debt deductions maybe disallowed. The thin capitalisation rules only apply if the debt deductions of an entity and its associates exceed $2 million in the year.

See also:

• Thin capitalisation
• Understanding Thin Capitalisation  

Transfer pricing is the practice of pricing goods, services and intangibles between associated parties.

The focus of New Zealand's transfer pricing rules is to ensure that the proper amount of income derived by a multinational is attributed to its New Zealand operations.

See also:

• Transfer pricingExternal Link  

Under Australia’s transfer pricing provisions, we can adjust the prices (for tax purposes) paid or received by businesses conducted in Australia where those prices are different to those which would be expected in arm's length dealings. The transfer pricing provisions are usually only relevant in dealings between related parties.

See also:

• Transfer pricing – introduction to concepts and risk assessment
• Advance Pricing Arrangements