This year’s annual tax bill, the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Bill (“the Bill”) was released at the tail end of August. The Bill’s release coincided with the New Zealand Law Society’s 2025 Tax Conference, which was a happy coincidence - unless you were one of the presenters affected and had to frantically rewrite your paper.
The Conference began with a short message from Minister of Revenue Simon Watts who highlighted the key measures in the Bill such as those relating to the Foreign Investment Fund regime, digital nomads, employee share schemes as well as the exemption for households selling electricity into the grid.
FBT reforms delayed
On the other hand, the Bill was also noteworthy for what it didn’t include. In particular there are no proposals for Fringe Benefit Tax reform, which had been highly anticipated. According to the Minister, “FBT reforms are going to need more time.” This appears to have been in response to fierce lobbying from Federated Farmers over the very vexed question of the application of FBT to twin cab utes and vehicles generally.
The other area not included was the taxation of charities and not-for-profits and in particular the question of donor-controlled charities. This was less of a surprise because the Government backed away from changes earlier this year.
Digital Nomads
The Bill includes measures to improve or clarify the tax of New Zealand visitors and in particular so-called digital nomads. These follow on from announcements made in January allowing visitors on non-work visas to work remotely. The tax changes are designed to
“…address issues that may be discouraging visitors from staying in New Zealand for longer periods of time while maintaining the integrity of the underlying international tax rules.”
Effective 1st April 2026 the Bill will allow certain visitors to New Zealand, called non-resident visitors, to be present in New Zealand for up to 275 days in a given 18-month period without becoming a New Zealand tax resident. They have to be here lawfully and not undertake work for a New Zealand employer or client.
The proposals would also deal with the questions around exempting the non-resident employer from New Zealand employment related obligations, such as PAYE and FBT. Crucially, because this has become a very important question in this area, Also, and this is pretty important because of the greater ease of working remotely, the activities of a non-resident visitor are disregarded when determining whether a foreign entity has established a permanent establishment in New Zealand.
Similarly, if the visiting person is a director of a non-resident company, then as long as they meet the other conditions, the centre of management of or direct control of the non-resident company will not be considered to have moved to New Zealand for tax residence purposes.
These are welcome proposals which clarifies a grey area. That said I think it's time that Income Tax Act had a specific clause which gave the Commissioner of Inland Revenue discretion to exclude from the “days present” count days where a person has been unavoidably detained in New Zealand due to sickness or, for example, another pandemic.
Inland Revenue granted itself that discretion during COVID back in 2020, but actually there was no such provision in the Income Tax Act, which would have allowed it to do so. My view is it should have that discretion so it can deal with unique circumstances.
Foreign Investment Fund regime changes
The Bill includes the final details around the changes to the Foreign Investment Fund (“FIF”) regime which have been foreshadowed for some time. Under the Bill eligible migrants can elect into the “Revenue Account Method” which will tax FIF interests on a realisation basis.
The main person eligible will be those who are in overseas companies’ employment share schemes where the regular valuations required under the FIF regime aren't easily obtainable because the company is unlisted. The other main group are American citizens who continue to be subject to US taxes, even though they are no longer resident in the USA.
Under the Revenue Account Method eligible FIF interests together with any dividends received would be taxable on a realisation basis. However, only 70% of any gains or losses will be reported and subject to tax. Assuming a taxpayer’s marginal tax rate is 39% this works out to be an effective 27.3% tax rate. I thought the Government might go with the highest prescribed investor rate, which would have been 28%.
This measure takes effect retrospectively from 1st April 2025. On the whole I think it's a welcome move although there will be grumblings that the capital gains discount should have been higher.
Employee share scheme changes
The Bill allows unlisted companies to elect into a regime where the tax liability for employees who receive shares or share options as part of an employee share scheme can generally be deferred until a liquidity event, such as the sale of shares.
That obviously makes sense in terms of the point at which you can value the shares and the employee who is doing a lot of work there will have the ability to raise the funds to cover their tax liability.
Controversial provision repealed
The Bill repeals the controversial section 17GB of the Tax Administration Act 1994 introduced in 2020 by the last Labour government. Section 17GB allowed the Commissioner of Inland Revenue to collect information for purposes relating to the development of policy for the improvement or reform of the tax system. This section was then used to carry out the high wealth individual research project, which was highly controversial.
The section’s repeal isn’t universally applauded. John Cuthbertson, the head of tax for Chartered Accountants Australia and New Zealand (“CAANZ”) suggested it was useful for Inland Revenue to have such data gathering powers to help develop tax policy.so long as the powers are judiciously used and managed. I sparked a lively LinkedIn discussion after I commented in support of John’s comments as I don’t believe we get enough data and information on our tax system, certainly compared with other jurisdictions.
In the discussion it emerged that according to the accompanying Regulatory Impact Statement (“RIS”) Inland Revenue undertook targeted consultation with eight key stakeholders in September 2024. This consultation included “stakeholders from the private sector, public interest groups, as well as academics.” This is pretty standard as part of the Generic Tax Policy Process. However, John Cuthbertson revealed CAANZ was NOT part of that consultation, which is very surprising. I'm now quite intrigued to know who exactly was consulted in that group. (Interestingly, according to the RIS Inland Revenue’s preference was for retention of section 17GB but restrict the use of information collected to the development of policy.)
Privacy Commissioner disapproves of proposed ministerial-level information sharing agreements
One of the counterpoints to section 17GB was the potential invasion of privacy, which is fair enough. It’s therefore ironic to see the Bill’s proposal to enable the Commissioner of Inland Revenue to disclose information to another government agency pursuant to a ministerial-level agreement. These would by-pass the existing Approved Information Sharing Agreements.
The new ministerial-level agreements enable the Minister of Revenue and the Minister in charge of the other agency the power to agree to the disclosure of information to determine entitlement or eligibility for government assistance, for the detection, investigation, prosecution or punishment, or suspected or actual crimes punishable by terms of imprisonment or two years or more, or to remove the financial benefit of crime.
On the face of it this seems reasonable, but according to the accompanying RIS the Privacy Commissioner raised the following concerns:
“The Privacy Commissioner has concerns as it relates to the proposed changes to enable and earn revenue to disclose tax information to other government agencies. He believes the disapplication of principles 10 and 11 of the Privacy Act in the proposal is unjustified. The privacy commissioner is. Is of the view that there are existing mechanisms to facilitate the sharing of the types of information Inland Revenue are proposing, including Approved Information Sharing Agreements under the Privacy Act 2020 and the board information sharing provisions available under section 18F of the Tax Administration Act 1994.”
The measure will probably go through as proposed but it will be interesting to see if any amendments are made following submissions on the Bill (which are now open until 23rd October).
Do we really need a Capital Gains Tax?
At the NZLS Tax Conference there was a very entertaining session on the issue of a capital gains tax (“CGT”) presented by Joanne Hodge and Geof Nightingale. Joanne and Geof were both members of the last Tax Working Group the big controversy of which was its recommendation for “a broad extension of the taxation of capital gains". However, Joanne was of part a minority group alongside Robin Oliver and Kirk Hope of Business New Zealand, who did not support the recommendation.
Joanne and Geof’s opposing positions made for a very lively session. Geof remains of the view that it is needed not only as a revenue raiser but for addressing inequality and the question of economic efficiency. Joanne is more of a sceptic about CGT. She's concerned in part mainly about the economic inefficiencies that can result from a CGT and also considers that the costs of doing so relative to the revenue raised means that perhaps it's not really worthwhile.
This was a key factor for Joanne together with Robin Oliver and Kirk Hope to that was what drove her, and the other two minority opinions to dissent from the proposal for a comprehensive CGT. But always keep in mind that the entire Tax Working Group agreed “that there should be an extension of the taxation of capital gains from residential rental investment properties.”
Addressing the fiscal shortfall
In making the argument for a CGT Geof picked up matters we’ve raised in previous podcasts (and in Inland Revenue’s draft Long-Term Insight Briefing) about the coming fiscal shortfall which needs to be addressed. He described the outlook as “dire” and that we cannot outgrow these fiscal projections.
Joanne took a different approach. In her view the correct question is really “how comprehensively should we tax capital gains?” Although she's opposed to a comprehensive capital gains tax because of the complexity involved, she's NOT opposed to broadening the net. For example, she raised a question about private equity venture capital and how many people involved in capital raises are treating shares on non-taxable capital account when in fact they should be taxed on sale because they acquired the shares with a purpose or intent of sale. In Joanne’s view better enforcement will deal with a lot of issues and raise tax revenue.
She made a very interesting point that all blocks of land should have their own IRD number which would help with better enforcement. I think it's a really good idea.
A matter of faith?
Joanne does raise valid concerns about the complexities that are involved in a CGT. Amusingly she and Geof also referred to an informal comment from Professor Len Burman an American CGT specialist to the 2010 Tax Working Group (of which Geof was also a member). Professor Burman suggested that you can do all the analysis on capital gains tax that you want, but in the end, whether you support it or not becomes analogous to religion, a matter of faith.
It's an interesting proposition; I worked for 10 years in a system with CGT prior to arriving in New Zealand so the arguments around whether or not it should exist simply never arose in my professional career until I came here. So perhaps I am a believer in that regard, but it's worth noting this year is 60 years since the UK introduced capital gains tax, 40 years since Australia introduced its CGT, Canada has had one since 1972 and South Africa since 2001. As is well known, the absence of a CGT makes New Zealand an outlier. The debate over a CGT will continue to rage, and no doubt we will bring you more commentary on future developments.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
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