Taxation in New Zealand

• Tax is a mandatory financial contribution to the government, not directly tied to payer benefits
• A tax must be compulsory, legally enforceable, imposed by a public authority, used for public purposes, and not a direct service payment

Objectives of Taxation in New Zealand

• Finances public services like education and healthcare
• Acts as an economic tool to influence savings and stability
• Redistributes income, with higher earners contributing more to social welfare

Forms of Tax

• Direct tax: Levied on income and profits, such as income and company tax
• Indirect tax: Shifted from one group to another, such as GST and excise taxes

Tax Bases

• Income tax includes PAYE, provisional tax, and withholding taxes
• Consumption tax is levied on spending, like GST and excise tax
• Wealth tax includes capital gains, estate, and inheritance taxes

Taxation Categories and Rates

• Progressive tax: Higher earners pay a higher percentage, e.g., NZ income tax
• Proportionate flat tax: Same percentage for all incomes, e.g., corporate tax
• Regressive tax: Disproportionately affects lower-income groups

Marginal vs. Average Tax Rates

• Marginal tax rate: Applied to each additional dollar of income
• Average tax rate: Total tax paid divided by taxable income

Role of the Commissioner of Inland Revenue (CIR)

• Oversees tax collection and compliance under the Tax Administration Act 1994
• Aims for the highest revenue collection while promoting voluntary compliance
• Can delegate powers to Inland Revenue (IRD) officers

Costs of the Tax System

• Administration costs: Government expenses for tax management
• Compliance costs: Taxpayer expenses to meet obligations like filing and payment
• Deadweight loss: Economic inefficiencies caused by taxation disincentives

Principles of Good Taxation

• Equity: Fair tax distribution via horizontal and vertical equity
• Certainty: Clear tax laws and obligations
• Convenience: Easy tax collection, like PAYE and GST
• Efficiency: Minimizing unnecessary collection and compliance costs

Sources of Tax Law

• Primary sources: Acts of Parliament, court decisions, delegated legislation
• Secondary sources: Journals, textbooks, government guidelines, and IRD rulings

Capital Gains Tax & Bright-Line Test

• New Zealand lacks a comprehensive capital gains tax (CGT), but some gains are taxed
• Bright-Line Test
  • 2-year rule applied from 2015-2018
  • 5-year rule applied from 2018-2021
  • 10-year rule applies from 2021 onwards, excluding new builds

Synonyms for Tax

• Levy, Duty, Charge, Tariff, Contribution

Why Study Taxation Law?

• Understand tax functions and societal impacts for individuals, businesses, and policymakers

Proportional Tax

• Same tax rate for everyone, such as company tax

Progressive Tax

• Higher earners pay a higher percentage, such as income tax

Regressive Tax

• Lower earners pay a higher proportion of income, such as GST

Three Core Functional Objectives of Taxes

• Financing government expenditure for education, healthcare, and social welfare
• Economic regulation to improve national savings and stabilize the economy
• Income redistribution to support social welfare and public services

False Statements

• Costs incurred to comply with the tax system are compliance costs, not administration costs

Four Principles of the Tax System or Adam Smith's Four Canons of Taxation

• Equity, certainty, convenience, and efficiency

Bodies Involved in Tax Laws

• Parliament makes laws via Acts
• IRD administers laws, overseen by the CIR
• Courts adjudicate laws, interpreting and settling disputes

Principal Taxation Statutes

• Income Tax Act 2007
• Tax Administration Act 1994
• GST Act 1985
• Customs and Excise Act 2018

Five Direct Taxes

• PAYE
• Company Tax
• Withholding Tax (Resident)
• Withholding Tax (Non-resident)
• Provisional Tax

Five Indirect Taxes

• GST
• Excise Tax
• Road User Charges
• Gaming Duty
• Environmental Levies

Tax Bases

• Income tax: Income earned by individuals and companies
• GST: Most goods and services
• FBT: Employer-provided benefits like company cars

Capital Gain

• Increase in asset value from purchase to sale, minus costs

Arguments For CGT Implementation

• Equity: Ensures similar taxation for income and capital gains
• Reduce Speculation: Can discourages property speculation
• Revenue Generation: Generates additional government revenue
• Encourages Productive Investment: Shifts investment focus for economic growth

Arguments Against CGT

• Economic Distortion: May encourage tax avoidance
• Increased Compliance Costs: More administrative costs for taxpayers and government
• Disincentive to Invest: Discourages savings and investment
• Complexity: Leads to confusion and disputes

Features of Typical Tax Systems

• Defined Taxpayers: Legal entities liable to pay tax
• Tax Base: Types of property or activities taxed
• Tax Periods: Specific periods for tax payments (e.g., April 1 to March 31 in NZ)
• Tax Rates: Percentage levied on the tax base

Individuals Deemed Residents for Tax Purposes If

• They have a permanent place of abode (PPOA) in NZ
• They are physically present for more than 183 days in 12 months
• They are overseas in the service of the NZ government

Definition of Residence

• Tax liability in NZ depends on this
• NZ tax residents are taxed on worldwide income, whether remitted or not
• Non-residents are taxed only on NZ-sourced income
• Double tax treaties prevent double taxation or non-taxation

When Individuals Cease to be Residents in New Zealand

• They are absent from NZ for more than 325 days in a 12-month period
• They do not have a PPOA in NZ during their absence
• They are not overseas in NZ government service

Permanent Place of Abode (PPOA)

• It is not legally defined
• Courts interpret it
• There must be an enduring relationship with the place

Considerations

• Nature and use of the dwelling
• Intentions regarding to residence
• Family, social, and economic ties
• Case: IRD v Diamond clarified a rented property isn't a PPOA

Company Residency

• Company is a NZ tax resident if
  • Incorporated in NZ
  • Head office is in NZ
  • Centre of management is in NZ
  • Directors exercise control in NZ

Concept of Income

• Applies to taxable income under the Income Tax Act 2007
• Types of this include
  • Employment income (PAYE)
  • Business income (PAYE or company tax)
  • Investment income (dividends, rent, interest)
  • Trust and beneficiary income
• Agricultural income

Income Classification in ITA 2007

• Business and trade income
• Property-related income
• Employment income
• Allowances, grants, and compensation
• Voluntary activity income
• Portfolio investment income
• Foreign-controlled company and investment income

Income Under Ordinary Concepts

• Sect CA 1(2) includes income classified in everyday usage
• Case: IRD v Boyton clarified "income" applies under ordinary concepts
• This is problematic because ITA doesn't provide a single definition of "income"

Three Defining Features of Income

• Something that 'comes in'
• Regularity
• Value in the hands of the recipient
• A gift to a daughter is not deemed income, as the giver receives no benefit

Exempt and Excluded Income

• Exempt income such as Treaty settlements and scholarships
• Excluded income such as GST, FBT, and employer superannuation contributions

Income vs. Capital Distinction

• This matters because income is taxable, while capital gains are not always taxed
• Income = regular earnings from work, investment or business
• Capital = One-time gains from asset sales or inheritances.

New Zealand Source Income

• Business and contracts performed in NZ
• Personal services, pensions, and land ownership
• Dividends, royalties, and transport income.