While higher earning Brits are now paying top marginal tax at 50 percent, Kiwis in the same position are looking forward to tax cuts from October.
The New Zealand Government made tax reform the major focus of its latest Budget. Among the big changes, are cuts to personal top tax rates (the 38% tax rate that kicks in from $70,000 will reduce to 33%), balanced by a rise in the goods and services tax (GST) from 12.5 to 15 % and the removal of property depreciation for tax purposes. Company tax rates will also fall from 30% to 28% from next year, beating a similar proposed move for Australia by one to three years (depending on company size).
It has ruled out any prospect of a comprehensive capital gains or land tax despite a tax task force recommending wide-ranging reform to broaden the base.In comparison the June UK emergency budget involves increases in capital gains taxes, VAT and national insurance levies and the prospect of reduced savings allowances.
New Zealand’s tax advantages
The latest tax changes enshrine New Zealand’s general approach to tax: while it is no tax haven, it has comparatively simple tax laws with a focus on minimising loopholes.Trying to compare tax environments between countries is always a fraught exercise, as it is never possible to exactly compare like with like. For example, GST is lower in New Zealand than the UK’s VAT equivalent, but it is payable on most purchases. Even ignoring the tax changes, New Zealand’s tax environment appears to be more benign for high net worth individuals, than it does in Britain.
At a headline level in New Zealand, there is
- No inheritance tax
- No stamp duty on property transactions
- No general capital gains tax (it can apply to some investments)
- No local or state taxes apart from property rates paid to local authorities
- No compulsory pension contributions
- No social security tax.
Overall New Zealand per capita tax revenue from income and profits and goods and services is higher than the UK’s but to balance that, there is no social security tax and little in the way of property taxes. There is more tax on savings such as bank deposits (which the advisory group recommending tax reform said adversely affected economic growth) but no tax on local New Zealand retirement fund payouts.
In comparison, the UK offers many low taxed investments as an incentive to saving, and its remuneration packages are much more tax-influenced. While in the UK the tax rates are higher, there are often exemptions and relief. In New Zealand tax rates may be lower, but there are far fewer exemptions. It’s one reason why property investment has become such a holy grail, and why the depreciation change was one way of trying to temper enthusiasm for real estate.
Tax exemption for migrants
A big enticement for people considering living Down Under is the tax concession on overseas investment income and pensions for the first four years of living in New Zealand. This also applies to New Zealanders returning after a long period abroad. It generally means they only pay income tax on any New Zealand sourced income. The exemption period allows plenty of time to manage foreign investments in a tax efficient way. People don’t have to make any decisions in a hurry – with four years to work through the tax implications.
PricewaterhouseCoopers strongly advises transferring certain pension funds during that time as tax may apply after that period. But it is not possible to transfer pensions back to the UK once a fund has moved to New Zealand. So, migrants need to be sure they don’t want to come back to the UK to live, because they may face tax penalties.
Those renting out a UK property can join the Non-resident Landlords Scheme to receive income without any withholding tax; though they might still need to fill out a UK tax return. But note they may have to pay New Zealand withholding tax on mortgage interest, after the exemption period.
People should be aware that while a general capital gains tax does not apply on New Zealand investments, tax can apply to realised and non-realised gains on overseas portfolios, including exchange gains, after the four-year adjustment period.
New Zealand’s attractions
New Zealand has a healthy influx of Brits choosing to migrate Down Under and few regret their decision. A survey by New Zealand Immigration found 91 % of skilled migrant respondents were satisfied or very satisfied with living in New Zealand, and only 1 % very dissatisfied, and 97% would recommend New Zealand as a place to live.
The main reasons people gave for wanting to live in New Zealand are its natural beauty, clean green environment, climate, friendly and relaxed way of living, and great recreation activities – in summary, lifestyle. Even kiwi schools are well regarded.New Zealand has always had special appeal for the Brits because of its cultural similarities. Nevertheless, New Zealand’s tax system stacks up well, compared with the UK’s, and a range of other European countries.
Tax residency
Tax residence applies to anyone present in New Zealand for more than 183 days in any rolling 12 month period or with an enduring relationship with New Zealand which includes physical presence of the business migrant, their immediate family, use of a dwelling, employment or business interests, family or social ties, intent to stay etc.
The New Zealand Inland Revenue Department decides if someone qualifies for tax residency after considering factors such as:
- Whether they are in New Zealand for continuous periods from time to time
- Whether they have property interests, keep possessions or have an intention to live in New Zealand
- Social ties such as children being educated in New Zealand
- Economic ties such as bank accounts, life insurance, investments or employment
- Receipt of pensions or other payments.
It is possible to keep similar ties, or homes, in other countries but still be New Zealand resident for tax purposes and or to have tax residence in two countries. New Zealand’s double tax agreement with the UK means it is possible to determine which country has the first or sole right to tax certain types of income.
Business migrant criteria
New Zealand has recently freed up its business migrant requirements and now has two options for business migrants – the Investor and Investor Plus categories. Investor migrants must:
- Be 65 or younger with three years’ business experience
- Have settlement funds of $NZ1 million and invest $NZ1.5 million in New Zealand for four years
- Meet English language, health and character requirements
- Spend 146 days in New Zealand for each of the final three years of their four-year investment term.
The Investor Plus category requires less time to be spent in New Zealand (73 days in both of the final two years of a three-year term during which they are required to invest $10 million). The types of permitted investments include New Zealand government, local authority or other approved private sector bonds and equity in a wide range of New Zealand companies or funds. The money invested cannot include private use, residential property development or bank deposits. Immediate family is included in the Investor Plus migrant application.
The migration criteria have been freed up to attract entrepreneurial investment. It recognises a lot of business people today do not have just one home or place of business. So a person could easily be a New Zealand resident for tax purposes, while continuing business interests in other countries, including the UK, only needing to spend 21 weeks a year in New Zealand, if business demands it.
Business Investment
New Zealand is keen to attract foreign investment; it promotes its primary attractions as having strong economic fundamentals, good infrastructure and competitive business costs. New Zealand always fares well in economic freedom and international competitiveness comparisons, leading the world in freedom from subsidies, effective business legislation and the absence of corruption.
It has a number of free trade agreements (the most important being with Australia and China) and is often seen as a good test market for new products, while its time zone is convenient for managing work flows across a range of international locations.
There are few restrictions on foreigners doing business; New Zealand topped a recent World Bank survey of 155 countries for economic freedom. Government consent is required for a limited number of investments including assets of more than $NZ100 million, coastal land or seabed and fishing assets. On the plus side though there are no restrictions on capital flows and incentives for certain research and development, and industries such as films (New Zealand has a thriving film industry) and petroleum exploration. Government agencies are available to assist.
There are many stories of foreign companies succeeding in their New Zealand endeavours, ranging from technology to arts, engineering to agriculture.
Investment Savings
Nominal interest rates are higher in New Zealand than in the UK, despite the government official cash rate being at near an historic low at around 2.75% (June 2010). There is a wide range of interest bearing investments and bonds. Retail bank term deposits are currently at around 5% for a year or 6.5% for 5 years. Obviously the risk-return approach applies but rates of 9% are available from higher-risk bonds issued by leading companies.
Retail deposits of approved banks, building societies, credit unions and finance companies are guaranteed by the government, provided each institution meets minimum benchmarks. The scheme, extended until the end of 2011, is in response to the global financial crisis and follows the collapse of a large part of the finance company (as opposed to retail banks) industry. The amount guaranteed is limited to NZ$1 million per person in each institution. Generally New Zealand residents are covered for deposits in all approved institutions.
New Zealand offers fewer tax advantages than the UK for savings, particularly longer-term funds that are retirement-focused. The tax approach to savings is one reason why many Kiwis have favoured property investment; because – until the Budget – there have been tax advantages such as being able to claim depreciation and losses on the costs of rental properties against personal income. The Government is changing the depreciation rules, because it skews investment; New Zealanders have invested roughly $200 billion in property compared with $50 billion in shares.
Gains on New Zealand share investments are not taxed unless they are part of a share trading activity or where they are purchased with the dominant purpose of disposal. However New Zealanders generally remain cautious share investors and the market is relatively thin; the severe impact of the 1987 share market crash has left many mental scars, despite the regime now being much more robust, with strong disclosure.
Skilled Migrants
In addition to wanting to attract migrants wanting to invest in New Zealand, there are opportunities for people with the right skills. There is a broad range of categories including education, health and medicine, information and communications technology, agriculture, engineering, trades and hospitality. Occupations as diverse as doctors to restaurant managers, ski instructors to farm managers are listed, where there are either regional or national shortages. People need to be aged 20 to 55, in good health, of good character and with a reasonable level of English.
New Zealand salaries may appear low, relative to Britain, but it is not appropriate to compare New Zealand and UK salaries without considering a range of other costs such as housing, food, travel etc.
Dealing with Pensions
How to manage pensions is a big subject. New Zealand pension schemes are very different to those in the UK. Essentially the New Zealand government’s approach is to tax contributions on the way through while people save, but not the nest egg once it is paid out. Beware; the tax treatment of New Zealand versus offshore pension schemes needs careful consideration.
New Zealand tax residents who have interests in overseas superannuation schemes or life insurance policies (generally those with savings components such as endowment policies) may have to include annual income in their New Zealand tax return even where no income is received / paid out. There are complex exemptions that try to distinguish schemes locked in until retirement, compared with schemes where the funds can be easily accessed pre-retirement.
If pensions are taxable in the UK, New Zealand tax residents can claim a credit for tax paid overseas for the amount that otherwise would have been paid in New Zealand.
There are advantages to transferring UK pensions to New Zealand – such as more flexibility with investment choices, how it is paid out and there being no exchange rate risks or additional taxes. There are factors to consider around the potential tax liability on any pension contributions made once a person leaves the UK.
Getting advice
Anyone considering a move across the world needs to consult advisors expert in international conditions, as there is a raft of complex factors to consider. This relates not only to tax and legal issues, but also to investment. For example it may be a good idea to restructure existing offshore trusts or establish new offshore and local trusts if the migrant has substantial wealth earmarked for beneficiaries who will never relocate to New Zealand.
It may be necessary to plan around establishing tax residence, particularly if the migrant has continuing UK work and business commitments; and it is worthwhile to seek advice on one’s investment portfolio mix. For example gains on offshore equity investments may be taxed at lower effective rates than offshore debt investments.
New Zealand’s investment advisory industry is of patchy quality and it is worth carefully evaluating both qualifications and experience; in particular from commission based advisors.
Migrants should not rely solely on advice from government agencies in either country. Tax issues are complex and while officials will try their best, it is not their job and they may not have the expertise to advise on individual circumstances or the rules applying in other countries. Migrants are advised to seek expert advice on international regimes and planning for their circumstances.
Making comparisons
Trying to work out what any individual Brit might pay in tax in New Zealand requires a detailed look at their circumstances. The income tax differences are not as significant for those earning less than the marginal top rate level of €150,000. It is estimated that when the new UK marginal rates kick in, income tax for a person on, say £400,000 will rise from just under 40% to around 45%. Based on current rates in New Zealand, despite the low top-rate threshold, the overall rate would be just below 33%, with the latest changes.
The attractions for living in New Zealand are not primarily financial. But high earning Kiwis are looking forward to lower marginal rates, while enjoying fewer and lower overall taxes – and a wonderful lifestyle.
Sources: PricewaterhouseCoopers, Inland Revenue Department, HM Revenue and Customs, Investment New Zealand, New Zealand Trade and Enterprise, interest.co.nz
| Type of tax |
New Zealand
|
United Kingdom |
| Personal income
(figures in brackets are changed rates from Oct 2010) |
Top rate: 38% from $70,000 (33%)
33% – $48,001 to $70,000 (30%)
21% – $14,001 to $48,000 (17.5%)
12.5% – $0 to $14,000 (10.5%)
No personal allowances but tax credits for lower income families |
Top rate: 50% from £150,000
40% – £37,400 to £150,000
20% – £0 to €£37,400
Personal allowances and allowances for +65s, disabled |
| Tax credits |
Working for families credits for low and middle income earners who are permanent residents |
Child benefit |
| Insurance levies |
Accident compensation: levy paid on car registration. Earners pay 2% up to a maximum of $110,018 in earnings. Employers pay insurance cover based on industry risk |
National insurance (social security): earners pay 11% on income of £5225 to £34840 plus 1% for salaries above that (12% from April 2011). Some pension scheme concessions apply. Employers pay 12.8% of salaries |
| Inheritance |
None |
40% on property above £325,000 |
| Stamp duty |
None |
0.5% on transfer of UK shares and 1 to 4% on transfer of real estate depending on value |
| Capital gains |
Generally not on NZ investments. Does apply to foreign debt and equity investments |
Applies at 18% or 28% for individuals depending on income levels and marginal rates for companies. A !0% rate applies for qualifying entrepreneurs, with a lifetime limit of £5 million |
| Gift duty |
5% on certain gifts above $27,000 rising to 25% plus $5850 on amounts above $72,000 |
Incorporated in inheritance tax regime. For those subject to inheritance tax, annual limit is £3,000 |
| Fringe benefit tax |
Fringe benefit tax is paid by the employer, up to a rate of 61% (but to be reduced to 49.25%) for employer provided cars, low interest loans, medical insurance premiums, foreign superannuation contributions etc. FBT is tax deductible so employer cost is effectively the same as paying cash remuneration. |
Cars taxed on level of CO2 emissions |
| VAT |
GST 12.5% on most things (15% from 1 October 2010) |
VAT 17.5% on some things (20% from January 2011 |
| Taxing of pensions |
Little tax relief on contributions to NZ pension schemes, but pension saving is not compulsory and not taxed on retirement |
Contributions of up to £3600 not taxed to approved schemes. 40% tax kicks in at £255,000. Superannuation scheme saving is compulsory and taxed on retirement |
| Tax on savings |
|
Up to £7200 in approved savings accounts not taxed. Pension savings allowances may be reduced from 2011 (suggestion is from £45,000 to £30,000) |
| Excise tax |
Paid on petrol, tobacco, alcohol – lower than UK |
Similar range, but higher taxes on petrol and also charged on vehicles |
| TV licence fee |
No |
Yes |
