New Zealand: Tax-Efficient Regimes and Sectors
Tax-Efficient Business Forms
A trading trust (i.e. a trust that carries on a business) can be used as an alternative to a limited company. It has a trust deed and can confer wide powers and discretions on trustees.
Income derived by the trustee in an income year and distributed to beneficiaries (within six months of the end of the income year) is taxed at the beneficiaries’ marginal tax rate, but non-distributed income is taxed at the trustee rate (currently 33%) and subsequently can be distributed to beneficiaries free of tax. Tax losses cannot be passed on to beneficiaries.
Trading trusts appear to work best for owners of small and medium-sized businesses.
Investors, including trusts, can use a portfolio investment entity (PIE), such as a managed fund, which invests the contributions from investors in different types of investments, and calculates its tax based on each investor's prescribed investor rate. This can be reduced to 12.5% for investors that qualify for a lower rate. Trustees can collectively choose 0%, 19.5% or 30% to best suit the trust's beneficiaries.
The primary objective of the introduction of the limited partnerships regime was to facilitate growth in New Zealand's venture capital and private equity industries. While a limited partner is prevented from being involved in the day-to-day management of the limited partnership, he or she can become involved in key decision-making activities via a “safe harbour” mechanism. As there is no capital gains tax in New Zealand, a limited partner is only taxed individually at his or her personal marginal rate in proportion to his or her share of the partnership's income.
The New Zealand Venture Investment Fund (NZVIF) was established by the government in 2002 as a New Zealand-based private equity fund of funds investor that manages fund of funds investments as well as direct co-investments. NZVIF currently has NZD200m of funds under management, through two vehicles – the NZD160m Venture Capital Fund of Funds and the NZD40m Seed Co-investment Fund. All its investments are made either through privately managed venture capital funds or alongside experienced angel investors.
In 2010, the government changed the controlled foreign company (CFC) rules, introducing an exemption for active income earned by those foreign companies that are controlled by New Zealand investors, and is also considering similarly modifying the foreign investment fund rules. However, investment income is still taxable, limiting the use of New Zealand as a regional headquarters (without the use of double taxation treaties).