Business tax reforms focus of bill

Wednesday 2 July 2008, 7:16PM

By Michael Cullen


A bill tabled in Parliament today introduces a number of major business tax reforms.


“The focus of several of the reforms is on reducing tax costs for businesses,” Finance Minister Michael Cullen and Revenue Minister Peter Dunne said today.


“High tax costs can arise from a range of factors, from tax rules that block sensible business transactions to others that create unnecessarily high compliance costs. The bill tackles these costs on a number of fronts.


“Other reforms introduced in the bill bring tax law up to date with today’s commercial environment, ensure legislation is working as effectively as possible and protect the New Zealand revenue base,” the Ministers said.


Reform of international tax rules


“The central feature of the bill is the reform of our international tax rules, which represents a fundamental change in how we tax the offshore income of our controlled foreign companies. The present system of taxing that income as it is earned will be replaced by one that exempts the active offshore income of these companies.


“That reform will bring our tax rules into line with the practice in other countries and help New Zealand-based business to compete more effectively in foreign markets by freeing them from a tax cost that similar companies in other countries do not face.


Raising tax thresholds for small businesses


“The bill also reduces compliance costs for smaller businesses by raising several tax thresholds. For example, the PAYE once-a-month filing and payment threshold is being raised from $100,000 to $250,000. That will allow a greater number of small employers to file and pay their PAYE deductions once a month instead of twice a month, saving them time and money.


Employee relocation and overtime meal allowances


“The bill clarifies the law to ensure that employer payments for employee relocation and overtime meal allowances are exempt from income tax and fringe benefit tax if certain criteria are met. The changes remove long-standing uncertainty and simplify the law, which will save time and money for everyone involved.


Taxation of the life insurance business


“The bill introduces a major reform of the way the life insurance business is taxed, modernising rules that date back to 1990. As life insurance products and business practices have changed over the years, the tax rules have become out of date. For example, many term insurance profits are under-taxed today, with profitable business often leading to tax losses, while income from saving through life products is over-taxed.


“The bill brings in a coherent framework of changes that taxes risk business on actual profits, in a manner similar to the way other businesses are taxed. It also extends the tax benefits of the PIE rules to all savers in life products, ensuring savings through life insurance are taxed, as much as possible, in a manner that is consistent with the taxation of savings through other vehicles.


Charitable giving and volunteering


The bill introduces a voluntary payroll giving system whereby employees can have their charitable donations deducted from their pay by their employers.


Employees who donate in this way will receive the tax benefit of their donations each payday, without the need to present donation receipts. Payroll giving will operate through the PAYE system and will be available to people whose employers file their employer monthly schedules with Inland Revenue electronically.


“The introduction of payroll giving will undoubtedly be welcomed by the growing number of employers in New Zealand who see social responsibility and good corporate citizenship as an important part of their business.


“On a similar theme, the bill also clarifies the tax treatment of volunteer reimbursements and honoraria, to make it easier for volunteers and community organisations to comply with their tax obligations and to reduce the associated compliance costs,” the Ministers said.


Petroleum mining in NZ


“The petroleum mining tax rules are being updated to remove possible disincentives to further investment in oil and gas exploration and development in New Zealand.


“The bill also introduces legislation to ensure that New Zealand receives its proper share of the benefits from our burgeoning petroleum mining industry, exports of crude oil now making a major contribution to our trade balance. The changes will allow expenditure on petroleum mining operations undertaken through a foreign branch to be offset only against petroleum mining income from outside New Zealand, to safeguard our taxing rights on our own petroleum resources.


Associated persons in income tax law


“The bill also introduces changes to strengthen the definitions of ‘associated persons’ in income tax law, which are there mainly in an anti-avoidance capacity, to counter transactions that are not conducted at arm’s length. One of the main changes is to close gaps in the definition relating to land sales that allow land dealers, developers and builders to circumvent the rules by operating through connected persons,” the Ministers said.


Other measures in the bill include:


· Non-disclosure for tax advice: changes to allow the right for non-disclosure of documents to apply to discovery and similar processes that occur in litigation with Inland Revenue.

· Emissions trading: amendments to income tax and GST legislation to provide for the tax treatment of emissions units.

· Film grants: tax changes necessitated by the introduction of the New Zealand Screen Production Incentive Fund, as announced in Budget 2008.

· GST: changes to allow certain loyalty programme operators to defer imposing GST until loyalty points have been redeemed, and to allow exported second-hand goods to be zero-rated in certain circumstances.

· General insurance: amendments will allow general insurers to take a deduction for the annual movement in outstanding claims reserves under the new financial accounting standard.

· Fine-tuning of recent legislation: changes to ensure the new PIE rules, the offshore portfolio share investment rules, the R&D tax credit rules, the KiwiSaver rules and the provisional tax pooling rules work effectively and do what they were intended to do.


Full information on these and other matters in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill are available in the commentary on the bill, published at