Immediate Changes to New Zealand Look Through Company Taxation - March 2017
The Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill has been passed by New Zealand’s Parliament and is now awaiting Royal Assent. It is expected that this will be granted by mid-April 2017. The new legislation contains over 70 different reforms to New Zealand’s tax legislation. Included in the Bill are significant changes to the tax rules for look through companies (“LTCs”), aimed at ensuring that they operate “… as closely controlled companies, as originally intended”.
Although the legislation has only just passed through the New Zealand Parliament and has not yet received Royal Assent, the start date of the intended LTC reforms has not been amended. The new LTC rules will take effect from the beginning of the 2018 income year, which is 1 April 2017.
The changes remove many of the tax planning benefits of New Zealand LTCs and are intended to restrict the use of LTCs as vehicles for international investment. In light of the changes, we recommend that immediate tax planning advice is sought in relation to the retention, redomiciling or winding up of existing LTC structures.
The LTC Changes
The key changes to the LTC regime are:
- Presently an LTC may have only five or fewer “counted owners” and, if corporate owners, they must also be LTCs. Under the new law, trusts owning LTCs will have the beneficiaries of the trust, rather than the trustee, individually counted as “counted owners”.
- Corporate beneficiaries of a trust, which are not themselves LTCs, will be precluded from receiving distributions from the trust.
- In some circumstances charitable beneficiaries of a trust will also be precluded from receiving distributions.
- The amount of foreign income an LTC is able to earn is now limited. The tax free income threshold is whichever is the greater of NZ$10,000 or 20% of the LTC’s gross income in the relevant income year. The New Zealand corporate tax rate of 28% will apply on all worldwide income of the LTC above the threshold.
- As an example, a New Zealand LTC that is wholly owned by non-resident shareholders and which has a worldwide income of NZ$100,000 will be subject to 28% tax on NZ$80,000 of that revenue.
Please contact our New Zealand office for further information.