01 October 2007

New Zealand has unveiled new incentives to encourage investment and innovation, including a cut in the company tax rate and tax credits for research and development (R&D). Other changes include moves to attract more investor migrants, boost domestic savings and make a “limited partnership” business structure available to venture capital entities.

A package of business tax reforms announced in the Government’s April Budget includes:

• A cut in the company tax rate to 30% from the 2008-09 tax year.

• A tax credit of 15% of allowable expenditure for New Zealand businesses conducting R&D.

• An “active income exemption” for New Zealand-controlled foreign companies.

• A reduced, 30% tax rate for certain savings vehicles.

The drop in the company tax rate, from 33% currently, brings New Zealand’s headline rate into line with Australia’s. The cut is expected to make New Zealand a more attractive location for generating profits, particularly as it doesn’t have some taxes levied in Australia (payroll, capital gains tax) and in other countries (inheritance, wealth and estate taxes). It will make New Zealand more competitive globally.

The R&D tax credit is available to New Zealand businesses, and is worth 15% of allowable expenditure. To qualify for the credit, a business must control the R&D project, bear the financial and technical risks of it, and own the project results. The R&D must be carried out predominantly in New Zealand.

R&D credits will be paid out in cash to loss-making businesses such as start-ups.

Expenditure eligible for the tax credit includes the cost of employee remuneration, the depreciation of tangible assets used primarily in conducting R&D, overhead costs, and the costs of consumables and payments to entities conducting R&D on behalf of the business. Some activities are ineligible, as they are in other jurisdictions, and some spending is ineligible.

The proposed “active income exemption” for New Zealand-controlled companies based overseas will lower tax and compliance costs, and make it easier for New Zealand firms to expand internationally. The move is in line with world best practice in this area.

The reduced tax rate for some savings vehicles is one of several initiatives aimed at increasing New Zealand’s level of domestic savings and investment. Vehicles such as unit trusts and widely held superannuation schemes will be taxed at 30%, down from 33%. The top tax rate for portfolio investment entities will also be capped at 30%.

A second initiative is the extension of the country’s voluntary work-based retirement savings scheme to include an employer’s contribution and tax credits.

From 1 April 2008, all employers (including not-for-profit organisations) will be required to match employee contributions to KiwiSaver. This requirement will be phased in over four years, starting with 1% of gross salary from 1 April 2008, and moving by 1% per year to reach 4% of gross salary by 1 April 2011.

However, employers will be eligible for tax credits on their contributions, of up to $20 per week ($1,040 per year) per employee. To minimise compliance costs and impacts on cash flow, the tax credit will be offset against an employer’s contribution and other payroll tax liabilities.

Legislation has also been introduced to allow “limited partnerships”, a move aimed at making it easier for New Zealand entities to access investment capital. Limited partnerships are an internationally preferred business structure for foreign private equity and venture capital investments. They offer the advantages of a separate legal status (enabling partners to limit their liability) and “flow-through” tax treatment (allowing investors to be taxed in their own jurisdictions).

Limited partners will not be taxed at the partnership level. Instead each will be taxed individually at their personal marginal rate in proportion to their share of the partnership's income. Limited partners’ tax losses will be restricted to their economic losses in that year. There is provision for limited partners to have a say in how the partnership is run, without being treated as participating in the management of the partnership and thus losing their limited liability status.

In another move aimed at boosting investment, a new policy to attract “active investor” migrants was unveiled in June. The policy groups people wanting to move to, and invest in, New Zealand into three categories, and in some cases provides for fast-track processing of applications.

The categories are:

• Global investors – the top-priority category for high-value migrants investing NZ$20 million (including NZ$5 million in active investment), which requires minimal policy conditions and facilitated, fast-track processing.

• Professional investors – a second-priority category for migrants investing NZ$10 million (including NZ$2 million actively) with moderate policy conditions and facilitated, fast-track processing.

• General active investors – a category for those investing a minimum of NZ$2.5 million.

This policy is designed to target top-quality business people wanting to invest in New Zealand businesses. They can invest directly, as angel investors providing venture capital to start-up firms, or they can invest indirectly into New Zealand firms through fund managers.

Immigration rules for skilled migrants have also been fine-tuned in an attempt to attract more talented workers to the country.

The article contains general information only. For advice on your specific situation, talk to your tax advisor or visit http://www.ird.govt.nz. For immigration information, visit http://www.immigration.govt.nz.

For more information, please contact:

ross.campbell@investmentnz.govt.nz

+64 4 910 4384