beware the hidden traps of the financial arrangements regime.
Recently, we’ve been discussing Inland Revenue’s increasingly aggressive, in our view, activities in dealing with crypto asset investors. You may recall that one tax agent has reported that clients with unfiled but not yet due 2025 tax returns received warning letters from Inland Revenue in effect saying, ‘You may not have yet filed your return, but we know you’ve got crypto-asset income, and we expect to see it in your return.’
To add to this increased activity, Inland Revenue has adopted the international Crypto Asset Reporting Framework, or CARF from 1st April. This is an extension of the Organisation for Economic Cooperation and Development’s Common Reporting Standard on the Automatic Exchange of Information (AEOI).
Reporting crypto asset service providers
From 1st April CARF will apply to what are termed New Zealand-based ‘Reporting Crypto Asset Service Providers’. These are basically any individual or entity who are carrying out the exchange or conversion of crypto assets on behalf of users as a business. This includes acting as a counterparty, intermediary or provide a trading platform. It does not include an individual entity who is only holding wallets or is trading crypto assets on their own benefit.
These Reporting Crypto Assets Service Providers must collect and report specified information about their users and transactions. This is then reported each year to Inland Revenue each 30th June. The first reporting date will be 30th June 2027 covering the period from 1st April 2026 to 31st March 2027. That information will then be shared with other jurisdictions as happens currently with AEOI.
The unknown network of information sharing
Inland Revenue obviously will also use what data it receives through CARF and the AEOI to match with New Zealand resident taxpayers. CARF is another example of something many appear unaware of, which is the massive amount of information that Inland Revenue gathers and has access to, and how it also shares that information with other jurisdictions. Those jurisdictions will in turn also be sharing similar types of information with Inland Revenue.
Inland Revenue is being very aggressive in the crypto-asset space. Its basic position regarding crypto-assets appears to be that all crypto is trading income and will be taxed accordingly although circumstances will vary. The one thing all crypto-asset investors should be aware of is that it is more likely than not, that Inland Revenue has data relating to your transactions. So pleading ignorance of the rules is not going to work.
More on the financial arrangements regime
Moving on, we’ve greeted with some relief the recent back-dated increase in thresholds for about the financial arrangements regime. The change should hopefully mean a lot of taxpayers are now what’s termed “cash basis holders”, so they’re not potentially subject to exchange rate fluctuations and therefore being taxed on unrealised income when the cash flows don’t match.
The issue with the financial arrangements regime is that it is extremely broad which an interesting new Inland Revenue Technical Decision Summary TDS 26/03 illustrates. The taxpayer in question applied for a private ruling in relation to the potential application of the financial arrangements regime to a transaction relating to the sale and purchase of land.
The arrangement in question was for the sale and purchase of land. The sales were structured as a staged subdivision with settlement and payment for each lot occurring in eight stages over eight years. The sale and purchase agreement included what’s known as a lowest price clause, under which the agreed price for the purchase of each subdivision was the lowest price for tax purposes under section EW 32(3) of the Income Tax Act 2007.
Does deemed interest income arise with a staged subdivision?
The issue TDS 26/03 considered was whether the consideration payable under the sale and purchase agreement was in fact the lowest price, and whether there was any financial arrangement income in the form of deemed interest under the agreement. In other words, the price component have included an interest component because eight payments would be received over a period of eight years. In such a context, it’s not hard to see why the persons putting this arrangement together were a bit concerned about potentially being caught under the financial arrangements regime.
Inland Revenue did indeed conclude the agreement was a financial arrangement which is hardly surprising given the eight-year period proposed. What about the lowest price clause, which basically said this is the price we would have paid at market value. This argument was accepted by Inland Revenue’s Tax Counsel Office. Yes, the sale and purchase agreement was a financial arrangement, but the value of the land was the purchase price as agreed, and therefore there was no financial arrangement income or loss for the purposes of the financial arrangement regime.
A good result for the taxpayer and a useful example about how the financial arrangements regime contains plenty of traps for the unwary.
And now in sports news…
Finally, this week, you may have forgotten, the Football World Cup to be held in Canada, Mexico and the United States is coming up. The All Whites have qualified for the first time since 2010 and their first opponent is Iran with the match to be played in Inglewood, California on 16th June. President Trump’s view is that Iran should not be there, but FIFA hasn’t really responded to this, so potentially the match may be moved to Canada or Mexico or even cancelled.
The All Whites versus the Internal Revenue Service?
Anyway, it has emerged in the last week or so that the venue is potentially the least of the problems for both Iran and the All Whites. This is because FIFA has failed to reach agreement with the United States Internal Revenue Service (the IRS), about a tax exemption relating to payments made to players and officials attending the World Cup.
Quite apart from their appearance fees, players and officials receive a daily living allowance or per diem. This was US$850 at the 2022 World Cup but because of the increase in the number of teams to 48 it has been reduced to US$600 (about NZ$1000) per day, for this year. I’ve been told there are literally huge bags of cash carried around as the daily disbursements are made to officials and players.
According to the Guardian report, no blanket exemption has been agreed with the IRS, and therefore those teams playing in the United States may be subject to federal, state, and city taxes on their tournament earnings and per diems.
When Qatari held the World Cup in 2022, it granted exemptions to all 32 attendees. As things stand Carlo Ancelotti, head coach of the Brazilian team, potentially could be taxed on his earnings in both Brazil and the US. The double tax agreement might give some relief and there should be a foreign tax credit available for any US taxes paid, but in summary it’s a bit of a mess.
But what about the double tax agreements?
There are a number of participating countries which will have double tax agreements with the United States. These typically include a whole range of clauses dealing with the issue of which country gets taxing rights in this scenario. The Guardian reports 18 countries have signed a formal double tax agreement with the United States, which would exempt their delegation from paying the federal taxes on the matter. Most of those are in Europe, but Australia, Egypt, Morocco, and South Africa are all reported as having a relevant double tax agreement.
New Zealand has a double tax agreement with the United States, but it is over 40 years old. I’m therefore not entirely sure that the agreement may cover the treatment of sporting participants. It’s therefore possible the All Whites players and officials will be subject to US federal taxes on their earnings and the daily living expenses I mentioned earlier.
A win-win for Iran and the All Whites?
You can be sure that the Iranians do not have a double tax agreement with the Americans. It will be interesting to see how this plays out. It might be that both the All Whites and Iran would be very happy to have the match moved outside the United States, not necessarily because of geopolitical matters, but simply because they get to keep more of their earnings.
And on that note, that’s all for this week. I’m Terry Baucher and thank you for listening. Please send me your feedback and requests for topics or guests. Until next time, kia pai to rā. Have a great day.
The Government’s “targeted, timely and temporary” fuel relief package does as I thought it would, make use of the Working for Families tax system, but not to the extent that I had hoped. The proposal is to increase the In-Work Tax Credit (IWTC) by $50 a week. That will last for up to 12 months or sooner if until 91 octane falls below $3 a litre for four consecutive weeks.
The package will benefit 143,000 working families with children who will get receive the full $50 a week, with another 14,000 additional families getting a reduced payment, thanks to the impact of the abatement thresholds. First payments will be made on 7th April if people receive IWTC and Working for Families weekly, or 14th April if they’re paid fortnightly. The package is expected to cost $373 million if it runs for a full year will be counted against the Government’s operating balance for Budget 2026, which is coming up next month on 28th of May.
Whether it’s why broad enough is obviously a concern because prices are racing up particularly that of diesel which at my local Gull petrol station has risen 30 cents per litre this month alone to overtake 91 Octane petrol. There’s a lot of pressure on families out there.
The Lord giveth…and taketh
The start of the new tax year on 1st April also means a number of other changes took effect, some of which will take funds away from families. One of the more noticeable changes will be the increase in KiwiSaver contribution rates, which rise from 3% to 3.5% for both employers and employees. This happens automatically unless the employee applies for a temporary reduction to stay at 3% which can be for between 3 and 12 months. An employer is not required to increase their contributions if an employee requests a temporary reduction. According to an ASB survey perhaps 15% of employees planned to request a temporary pause on the increase to 3.5%.
ACC rates have also increased with the earner’s levy rising from 1.67% to 1.75% per $100 earned up to the maximum of $156,641 per annum. The minimum wage increases from $23.50 an hour to $23.95 an hour. But Best Start payments for babies born after 1st April will now be subject to abatement on annual family income over $79,000.
In my last podcast prior to the announcement of the fuel relief package, I suggested one option could be to increase abatement thresholds. It so happens the abatement threshold for Working for Families was increased, with effect from 1st April, from $42,700 to $44,900, the first increase since June 2018. However, in keeping with the theme of giving with one hand and taking with the other, the abatement rate also increased from 27 cents per dollar to 27.5 cents per dollar.
Relief package highlights abatement issue
The $44,900 income threshold is for a FAMILY’s income. Also keep in mind that someone working 40 hours at the new minimum wage of $23.95 per hour, has a total annual income of $49,816, which is nearly $5,000 above the new threshold.
The Government’s package here highlights an issue we’ve raised repeatedly now for several years about the interaction between low abatement thresholds leading to high effective marginal tax rates for persons on average and sometimes below average income.
The Government finds itself, giving with one hand, and then taking with the other. And the taking bit isn’t always noticed by the general public. The announcement of a $50 boost will go down well for those 143,000 families that are going to get it, very welcome indeed. But there’s the other 14,000 families who won’t be getting the full benefit, and a whole group that never got anything at all but still have increased transport costs.
The Working for Families abatement threshold is far too low which results in clawing back family income at a time when families need every cent possible, because this fuel shock is going to feed through to transport costs, obviously, and from there into the price of food.
An incredibly complicated system in need of reform
Over the past 30-odd years New Zealand has developed an incredibly complicated system of benefits where we’re giving with one hand, clawing back with another hand, and not looking at the overall impact of what we’re trying to achieve. I understand the question of abatement thresholds and its impact was actually discussed at the recent International Fiscal Association conference and my thanks to Robyn Walker of Deloitte for raising the issue for discussion.
But this is something I’m going to continue to raise. It would good to be hopeful we might see something in the coming Budget, but I wouldn’t hold out much hope for that because if something in this area was under serious consideration, it might have been included as part of this temporary package. But clearly, that’s not likely to happen, particularly since the threshold has just been increased.
Changes to thin capitalisation
The necessary legislation for the fuel relief package was included in the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Bill we’ve been discussing in the past couple of podcasts. A number of other late amendments were also included in the Bill prior to it finally passing into law. A major change was in relation to the thin capitalisation regime in relation to infrastructure projects.
By way of background, overseas investors can choose to fund their New Zealand investments with equity or debt. If the investment is made via equity there’s no deduction available. However, if the investment is debt funded a deduction is normally available for any interest payable on the debt. Consequently, from a tax perspective debt financing is obviously preferable.
Back in 1995, New Zealand introduced some thin capitalisation (or thin cap) rules, which basically said for foreign-controlled home subsidiaries, the amount of tax-deductible debt would be limited to 60% of the net debt asset ratio for the New Zealand entity. (There’s some fluctuation allowed to this threshold depending on the worldwide group tax percentage for the total group of companies).
Thin cap rules are very common worldwide as a counter to excessive interest deductions, but it’s been recognised they can be a potential hindrance on infrastructure projects.
A targeted exemption
I understand discussions have been going on for some time with interested parties with suggestions that New Zealand follows Australia in introducing a specific thin cap exemption for infrastructure. The Government has therefore
“Agreed to a targeted exemption to the thin capitalisation rules specifically for infrastructure investment (including new infrastructure projects as well as existing infrastructure businesses), that aims to mitigate a potential impediment to foreign investments in New Zealand’s infrastructure under the existing rules.”
Under the amendment effective from the start of the 2026-27 tax year, any entity now electing into it will be able to deduct interest expenses on its full amount of debt, without a thin capitalisation adjustment so long as the debt is applied to the eligible infrastructure entity’s business or project, is from a genuine third party and does not have any equity-like features. The lender must only have recourse to the assets and income of the entity. Furthermore, the New Zealand entity still has to be capable of supporting the debt on a standalone basis without any further support from its investors.
This is a step forward and ties in with the Government’s overall plan to develop infrastructure and assist infrastructure projects. There’s been some discussion about the revenue loss risk on such an initiative, but equally we’re experiencing the risk of not building enough infrastructure in the first place. So maybe accepting there may be a risk around tax seepage is the right way forward.
Tax change for the New Zealand Superannuation Fund
The Bill also enables the New Zealand Superannuation Fund to pay its tax payments annually rather than through the provisional tax regime, as it currently does. This is designed to help its cash flow because as the country’s largest investor and taxpayer, it locks up a lot of capital in provisional tax payments, which if it gets wrong, can have quite severe use of money interest implications.
Using tax pooling to collect tax debt – another band-aid solution?
One other interesting change is a pilot extending the time limit to use tax pooling to satisfy income tax debt for the 2022-23 and 2023-24 income years. At present if you have not paid your tax in full for those years use of money interest (8.97% from 16th January this year) will be charged.
The proposal is to allow payments to be made using tax pooling (which has a lower effective interest rate) for those outstanding years until 1st of October 2027. This option is not allowable if the applicant has been bankrupted or is the subject of recovery proceedings for unpaid tax. The debtor must be up to date with their income tax and GST returns and with your GST and PAYE payments. (Inland Revenue does have some discretion to allow tax pooling if it considers it’s a one-off scenario, and it has accepted an application for financial relief under the Tax Administration Act).
This is an interesting idea to try, which could help with the over $9 billion of tax debt currently outstanding. However, I think it’s another example of perhaps putting a patch on or a Band-Aid on instead of rethinking the whole issue. At the moment late payment penalties AND use of money interest apply to late paid tax. In my view it should be either late payment penalties or use of money interest, but the combination of the two is a double whammy, which I don’t think is particularly effective and just aggravates clients.
Use of money interest is a vital tool, and I have no issues with it. We could argue that the rate is very high, but then it has to be because the Government doesn’t want to be treated as a banker of last resort. Nevertheless, I think reviewing the whole issue of late payment penalties, use of money interest, and how much of a factor they are with companies and individuals defaulting on their tax, would be a worthwhile exercise.
Inland Revenue myIR accounts under cyber-attack
Finally, Inland Revenue is always on the watch out for cyber security risks and so it’s introduced two-step verification when people are accessing their My IR accounts. This is to counter attempts by cyber criminals to hack into people’s My IR accounts.
Last month Inland Revenue noticed a significant increase in malicious attempts to log on with over 500,000 attempts made.
Unfortunately, around 300 MyIR accounts, which did not have two-step verification set up, were accessed. Inland Revenue has closed these accounts and they’re also monitoring another 900 accounts where a correct password was entered, but the two-factor authentication prevented access.
Always be alert that your My IR account contains highly sensitive data. This includes, dates of birth, addresses, details of your bank account, and your earnings. It’s good to know that Inland Revenue is watching closing. Sometimes two-step verification can seem like a pain in the backside, but it’s a vital tool. And with over 500,000 attempts to hack in one month, there’s a serious issue that Inland Revenue has to guard against.
And on that note, that’s all for this week. I’m Terry Baucher and thank you for listening. Please send me your feedback and requests for topics of guests. Until next time, kia pai tō rā. Have a great day.
(This is an amalgamated transcript of the 23rd March and 3rd April podcast episodes. It has been edited for brevity and clarity).
controversial Inland Revenue proposals for shareholder loans hit a major roadblock
The Finance and Expenditure Select Committee has reported back on the Taxation (Annual Rates for 2025-2026, Compliance, Simplification and Remedial Matters) Bill. This Bill contained measures in relation to changing the tax treatment of non-resident visitors who are working remotely while visiting New Zealand, introducing the new Revenue Account Method for calculating foreign investment fund income, plus the usual host of other amendments tidying up various issues.
The amendments to the tax treatment of New Zealand visitors are designed to encourage people to work here remotely without triggering too many adverse tax effects. One change proposed relates to disregarding the activities of a non-resident visitor present in New Zealand when determining whether a company is tax resident in New Zealand.
Watties, Heinz, tax and a Lions legend
This is a long-standing point and with Watties being in the news for all the wrong reasons, I recall an interesting point raised way back in the 1990s when Watties was acquired by Heinz, the international food manufacturing giant. Apparently, Tony O’Reilly, the former British Lion and then chairman of Heinz, was in the country at the time the deal was being finalised. Did this mean Heinz had a permanent establishment in New Zealand because key decision makers were here?
Tony O’Reilly in action against the All Blacks in 1959
That was a somewhat mischievous question. But it is an example of where key personnel being in a country may trigger unintended and adverse tax consequences. The Bill tidies up a number of issues relating to this as well as clarifying the treatment of remote working by non-residents.
No major changes to the Revenue Account Method proposal
When the bill was introduced, much fanfare was made of the proposed Foreign Investment Fund (FIF) Revenue Account Method. This allowed an eligible person’s FIFs to be taxed on a realised gains basis with a discount of 30% applied to the gain resulting in an highest effective tax rate of 27.3% (i.e. 70% of 39%).
This was seen as disappointingly high so many submissions on the Bill requested a higher discount to reduce the effective tax rate. These have all been knocked back on the basis that the maximum rate of 27.3% is broadly comparable to the 28% payable under the PIE regime.
But there are some minor mostly technical changes. For example, losses arising under the Revenue Account Method were initially to be ring-fenced and only available against future gains. Any such losses will now be available to offset against dividends from the same interests. So that’s a bit of a win.
And there is the ability also to allow taxpayers to sometimes use other method calculations which are required at present rather than and not lose their eligibility to apply the revenue account method to other interests. In other words, you can sort of split treatment on that. So generally, the rules are a progression, but I think you can read when you get into reading the fine printing, you sort of see the technical minutiae and issues that pop up because of the complexity involved.
There was an interesting, there’s also a proposal for essentially there’s a realisation tax on migration, and a point has now been clarified that If this happens, the calculation of any tax payable, because someone has used the revenue account method and then migrated out of New Zealand, they would use the market value of the interest at the time the person departs New Zealand, not the market value received when the interest is subsequently disposed of.
Quick example, a person leaves New Zealand when the market value of one of these interests is say, $500,000, subsequently sells it and realises the market value of $1,000,000. Any New Zealand tax payable will be based on the 500,000 being the market value at the time they left.
Don’t look the parents are squabbling…
There was a nice little spat between the various parties on the committee over the proposal to repeal the Section 17GB of the Tax Administration Act 1994, which allows the Commissioner to collect information for the purpose relating to the development of policy for the improvement of the tax system. This was the measure introduced under the last Labour government, which was then used as the basis for finding the information for Inland Revenue’s controversial 2023 High Wealth Individual Review. Unsurprisingly Labour and the Greens opposed its repeal as did 202 submissions (including for the record Baucher Consulting, and the Chartered Accountants of Australia and New Zealand). Eight submissions supported the repeal.
Information sharing risks?
Labour was also opposed to the provision expanding the ability to allow Inland Revenue to share information about individual taxpayers with other government agencies more easily by way of Ministerial agreement. The Labour Party MPs made this very valid point,
“While Inland Revenue has strict rules about which employees may access information about individual taxpayers and it polices those rules rigorously, the same protocol may not apply in other agencies.”
Indeed, Inland Revenue, to the best of my recollection, has never had issues where someone has emailed out a spreadsheet full of confidential details which we’ve seen both the Ministry of Social Development and ACC to name a couple of culprits do. The Labour Party also noted “This is a significant change to the rules that protect the privacy of taxpayers’ information. We note the Office of the Privacy Commissioner has concerns about these proposals.” Despite this the provision is to go into effect.
Financial arrangements – three welcome surprises
A big and welcome surprise relates to changes to the financial arrangements regime. Under the financial arrangements regime if certain thresholds are exceeded taxpayers must calculate income and expenditure on an accrual, or unrealised, basis rather than on a cash, or receipts, basis. These thresholds had not been increased since 1999, and the bill proposed to double them.
The regime also has a deferral threshold which means income and expenditure must be calculated on an accrual basis (unrealised) if the difference between calculating income on a cash (receipts) basis and the accrual basis exceeded $40,000 at any point. This applied regardless of whether a taxpayer’s total financial arrangements were under the $1 million threshold. Unsurprisingly, this deferral threshold frequently tripped up taxpayers (I even once saw advice from a Big Four firm which had overlooked its impact). I was one of several submissions recommending repeal of this threshold.
Inland Revenue has accepted our submission noting the deferral threshold
“…imposes a high compliance burden, requiring taxpayers to calculate income and expenditure on an accrual basis to compare it with a cash basis result and ensure that the difference is below a threshold. This is the same compliance burden that being a cash basis person is intended to avoid.”
This is an excellent result.
But wait, it gets better
Under the Bill the increased thresholds were due to take effect from the start of the 2026-27 income year (1st April for most people). Adopting the principle of you don’t ask, you don’t get, I also submitted the threshold changes should be effective as of the start of current tax year (i.e. 1st April 2025). This would reduce compliance costs for the taxpayers, one of the key objectives of the Bill.
To my great surprise and delight, that was accepted as well, which is another excellent result.
But wait, there’s more…
KPMG made a very sensible submission that foreign currency loans used as mortgages over property should be removed from the financial arrangements rules and calculations. Exchange rate fluctuations can mean the deferral threshold is breached making any unrealised foreign exchange gains taxable. This once happened to one of my clients resulting in a tax bill of over $100,000.
Although Inland Revenue did not accept KPMG’s submission in full, it proposed instead “limiting the effect of foreign exchange fluctuations for the absolute value threshold”. This would be achieved by testing the absolute value threshold (now $2 million) is tested using the principal amount converted at a set date, for example, the first day of the financial arrangement, and ignoring subsequent foreign exchange fluctuations. If the principal amount changes for non-foreign exchange rate, reasons i.e. increases or decreases in borrowing, the financial arrangement should be reassessed for the threshold.
A bit late for my client perhaps but still a good result. The three change are also good examples of the Generic Tax Policy Process in action resulting in sensible law changes.
Controversial shareholder loan proposal halted
Moving on, late last year, Inland Revenue dropped what I described as a bombshell, with a consultation proposal for significant changes to the treatment of shareholder loans. Inland Revenue proposed that shareholder loans above a certain threshold would instead be treated as dividends, similar to the treatment for Australian and UK taxation purposes.
These proposals have hit a major roadblock with opposition from Winston Peters and New Zealand First together with the ACT Party. The end result is that the proposals as put forward in December will not be proceeding. Instead, Inland Revenue will continue to review the issue of the treatment of outstanding shareholder loans when a company goes into liquidation owing tax.
The proposals were quite controversial but the same time there was something of a tacit acceptance that yes, perhaps something needed to change. Simultaneously, there were concerns that Inland Revenue was perhaps muddling two issues. One of the issues was that companies that went under often sometimes owed substantial sums by shareholders, and in some cases, this meant Inland Revenue was missing out because funds were paid to shareholders instead.
John Cantin, former guest of the podcast, and also the independent advisor to the Finance and Expenditure Committee on the current tax bill has made public his submission to Inland Revenue on the shareholder loan proposals. His view is that more information is needed on the interaction between outstanding shareholder loans and company failures and the composition of the tax debt of such companies. If it is mostly GST and PAYE? Then yes, maybe that is something to be considered. He also thought there was merit in looking at changing the tax treatment of what happens on liquidation.
The upshot is we’ll be going back for round two of consultation. It’ll be interesting to see what comes out of this. Like John I think changes around what happens when a company is put into liquidation are sensible and also around keeping records of what we call available capital distribution amounts and available subscribed capital.
Property flippers – what about the tax impact?
And finally, an interesting story from RNZ about a complaint to the Real Estate Authority about a rise in so-called ‘property flippers’ making six-figure returns from unwitting vendors. Property data firm Cotality has noted a rise in significant rise in what’s called contemporaneous sales, with the number happening last year was almost double the total for 2024.
In a contemporaneous settlement, a property flipper makes a purchase offer with a long settlement period and then finds another buyer to purchase the property on the same day the property flipper has to settle their purchase. If it all goes to plan the property flipper makes a quick gain.
According to iFindProperty co-founder Maree Tassell who has complained to the Real Estate Authority about the practice:
“It’s quite common that there are some deals out there where people are making over $100,000-plus on contemporaneous settlements, getting a property under contract. The poor old vendor, and even often the vendor’s agents will think ‘oh this is a real purchaser’. …It’s quite deceptive to the vendors and quite deceptive sometimes to the agents.”
Although tax isn’t actually discussed in this story, these transactions would be considered a taxable trading activity even if they are not specifically within the bright-line test rules. It’s the sort of activity Inland Revenue should be watching with great interest. Property flippers should therefore beware, you may be making a quick buck, but Inland Revenue will be tracking these transactions. If you are not declaring the income, then you could find yourself with a big please explain somewhere down the line.
And on that note, that’s all for this week. I’m Terry Baucher and thank you for listening. Please send me your feedback and requests for topics or guests. Until next time, kia pai to rā. Have a great day.
We’re racing towards the end of the current tax year. And naturally, at this time of year, tax advisors will be planning ahead and considering what elections we might need to make before 31st March, whether to bring forward taxable income into this year or, if we can, defer taxable income into a later tax year because we are aware that in that new year a lower tax rate will apply.
Right now, I’m discussing these timing options with a number of clients who are thinking about transferring or withdrawing funds from their UK pension schemes. Such transfers/withdrawals are taxable under the foreign superannuation scheme transfer provisions in Section CF3 of the Income Tax Act 2007.
Long-term followers will know that I am not a fan of this regime, but it’s now been in place since 2013. One of my major criticisms with the regime is that it triggers a tax liability for the transferor, even though that person may not be able to access the funds in the scheme to pay the tax. This wasn’t really grasped by most of the industry until after the reforms were put in place.
The Scheme Pays solution
Subsequently, there’s been a long period of consultation between industry specialists and Inland Revenue, and then between Inland Revenue and HM Revenue and Customs (HMRC) to find an answer to this issue. Fortunately, and finally, that answer has now been found and will become effective from 1st April. It’s known as the ‘Scheme Pays’ option, under which the transferring scheme, the receiving scheme (which for UK purposes is known as a qualifying recognised overseas pension scheme or QROPS) will pay the tax on behalf of the transferor, the transfer scheme withdrawal tax.
The benefit of the Scheme Pays option is twofold. Firstly, the tax may be paid from the funds that are transferred. The problem that had existed previously was that HMRC could have treated a withdrawal to pay the tax as an ‘unauthorised withdrawal’ for UK tax purposes, which could come with a 55% tax charge on it. Working through a solution which was mutually acceptable to HMRC and Inland Revenue took some time.
Secondly because a QROPS is a portfolio investment entity the tax rate payable is capped at 28%. The option that now becomes available for people considering a transfer into a QROPS is If they do so, they will pay tax at 28%, which if they’re a higher rate taxpayer – 39% – is a very attractive option.
When to transfer?
The issue now under consideration is whether a person transfers a scheme before 1st April, be taxed at the usual personal tax rates and is therefore responsible for meeting the tax personally. Alternatively, defer the transfer until on or after 1st April and into a QROPS. The deferral will increase the amount of taxable income, but the trade-off is a flat 28% tax charge. There are some clients where that’s an extremely attractive option, and we’re talking about saving tens of thousands of dollars as a result.
There is an argument, in my view, that the tax rate for all transfers like this should have been 28% or linked to the top prescribed investor rate all along, because basically part of the rationale for this regime is countering people getting a benefit from investing offshore.
The transfer scheme withdrawal tax
The individual making the transfer is still liable for determining the taxable amount of the transfer. For example, if it’s $100,000, the receiving QROPS will withhold 28% or $28,000 from the amount transferred and pay it to Inland Revenue. The transferring taxpayer has got 10 working days from the point at which the funds reach the scheme to ask the scheme to pay the tax (‘Transfer Scheme Withdrawal Tax’) on your behalf.
The taxpayer can calculate the taxable amount using either the ‘Schedule Method’, or the ‘Formula method’ if it is available. For many people who are transferring defined benefit schemes, such as UK teachers’ pensions or UK police pensions, they must use the Schedule Method.
It may have taken a long time to resolve but the Scheme Pays option is a good alternative. As I said, it has the potential to save thousands of dollars for some taxpayers. So if you’re considering transferring your UK pension you should get in touch with your local tax advisor.
Changes to banking taxation ahead?
Moving on, in my last podcast I mentioned in passing that the Minister of Finance had made comments about a potential banking review. Subsequently there’s been a couple of stories in the New Zealand Herald and Business Desk on this matter, in particular, Inland Revenue are preparing a consultation document entitled Changes to Tax Rules for Foreign-Owned New Zealand Banking Groups.
the document outlines a series of technical proposals aimed at improving the integrity of the tax system. Apparently, the changes would affect offshore banks that have branches in New Zealand (about 6% of the banking sector by assets according to 2024 figures) rather than locally incorporated banks with which the vast bulk of Kiwi households and businesses engage. While the proposed changes could see banks pay a bit more tax, they aren’t aimed at generating material amounts of additional tax revenue for the Crown.
Although it’s interesting to see this issue under consultation, it represents one of the group of technical issues that Inland Revenue is always mulling over particularly because being the banking sector, there’s possibly quite some large sums involved.
A banking levy surprise in the Budget?
Dileepa Fonseka in Business Desk wondered, whether in fact, there might be some form of banking levy introduced as part of the budget on 28th May. He considered whether such a levy could possibly be tied to the recently established Depositor Compensation Scheme (DCS).
Dileepa notes that in Europe, 17 countries and the United Kingdom have introduced bank levies or financial stability contributions in the years following the Global Financial Crisis. Many were levied on the liabilities banks carry rather than profits and are designed to ensure financial stability and to cover the cost of insuring bank deposits.
It’s possible anything which taxes banks more might be a bit of a vote winner, even if, as experts note, there’s a chance that such levies might ultimately be passed through to customers. Dileepa also makes an interesting comparison with a similar levy which was a surprise sprung by Scott Morrison in 2017 when he was the Australian Treasurer (Finance Minister).
It’s interesting to see the stories circulating in this space. We’ll get more details on the Inland Revenue consultation when it is publicly released, and we’ll discuss it then. Meantime, as I said in the first podcast of the year, we could expect to see a bit of electioneering around a potential bank levy.
Foreign Investment Funds and transitional residents
Finally, this week, there’s an interesting Inland Revenue Technical Decision Summary, TDS 26/01, regarding the opening value of foreign investment funds. It relates to a transitional resident, a person who has either not previously been resident in New Zealand or has been non-resident for at least ten years. Transitional residents generally are eligible for a 48-month exemption from New Zealand income tax on their overseas investment income. But what happens when that exemption period expires?
The taxpayer in the TDS also requested a 31st December balance date, which had been approved by Commissioner. In other words, without saying so specifically, this client is probably an American who must file US tax returns to 31st December. And as the TDS notes, a 31st March balance date means there are high compliance costs because the person has to calculate income for US tax purposes to 31st December and then for our purposes to 31st March.
The taxpayer’s last day of his transitional residence exemption period was actually 31st December 2024. He requested a change of balance date for his tax year from 31st March to 31st December to align with his US filing period. Inland Revenue agreed to the request which means that balance date could be used for calculating hi FIF income. Which is good because that is very handy for many American clients, because of the dual reporting they have to do.
But the other point is that the TDS agreed the opening value for each FIF interest for the purposes of the income year ending 31st December 2025 would be nil, not the value as of 31st December 2024. That means that when applying the fair dividend rate, which is 5% of the opening value and any quick sales adjustments, the opening value would be NIL. Therefore, for the year to 31st December 2025, only the quick sales adjustment calculation will apply in relation to the FIF interests acquired and disposed of during that tax year.
This is an interesting little summary. It confirms a point that some of us had thought was the case, that clients required to file American tax returns could switch to a 31st December year end to help ease compliance. The taxpayer still has to request a change but this TDS indicates Inland Revenue should accept the request.
Still on foreign investment funds, we should hear this week about the final form of the proposed change, allowing taxpayers required to file US tax returns to adopt a quasi-capital gains tax or “revenue account” approach to their foreign investment fund interests, i.e. being taxed on a realisation basis. The Finance and Expenditure Committee is due to report back on 10th March on the Bill and we’ll bring you that news next week.
And on that note, that’s all for this week, I’m Terry Baucher and thank you for listening. Please send me your feedback and requests for topics or guests. Until next time, kia pai to rā. Have a great day.
Welcome to 2026. It’s early in the year, but the main drivers for the tax year seem already set. With $9.3 billion of tax interest and penalties outstanding as of 30th June 2025 Inland Revenue’s crackdown on debt will continue. It will also ramp up its investigation activities, with holders of crypto-assets under particular scrutiny.
Inland Revenue is working hard to get the overdue tax debt down. However, the economy isn’t in great shape, with a recent story pointing out that liquidations have been the highest since the global financial crisis in 2008-2010. The construction sector in particular is struggling.
If you are behind with tax debt contact Inland Revenue
I cannot stress this enough, if you are in trouble with your tax debt, the first and best thing you should do, is to approach Inland Revenue. So long as you are realistic and open with, you will probably find it is prepared to work with you on an instalment plan. And in some cases where the debt is relatively small, say under $20,000, you can set up your own instalment plan, or your tax agent can help you do it.
The key thing is you have got to make the initial approach because Inland Revenue’s attitude hardens if it feels that a tax debtor is not making realistic attempts to address the scenario.
The 80:20 rule in reverse
An interesting feature about the composition of tax debt is that although the bulk of tax is paid by the very largest companies in the form of PAYE, GST, and company income tax, the majority of tax debt comes from SMEs, micro-businesses and individuals. As of 30th June 2025, over 527,000 taxpayers owed tax. For many of those small businesses, the owners are under enormous stress and it’s difficult to address the issue of tax debt. Perhaps surprisingly, my experience has been that many clients are relieved when they eventually do contact Inland Revenue as it’s often not as bad as feared and a plan is now in place.
Don’t expect the Election to change anything
We can also expect to see Inland Revenue ramping up activities. I would not be surprised if this year’s Budget has more funds for investigation and debt collection activities on top of the $35 million per annum boost it received in last year’s Budget. And by the way, this will be something that will remain the same even if there’s a change in government after the Election. Inland Revenue will still be expected to crank up its enforcement activities.
Cryptoasset investors targeted
On investigations, I’m hearing noises that transfer pricing reviews are increasing, but a key focus area is cryptoassets. Inland Revenue noted in its last annual report that it had several cases going through its dispute process, which involved “tens of millions of dollars”. It seems to be taking a fairly aggressive approach.
A client has shown me a letter where Inland Revenue have said, “if you do not make a voluntary disclosure or contact me directly, I will assume that you have deliberately failed to correctly declare your cryptoasset income.”
The tone of this letter was really quite surprising to me. Generally speaking, when Inland Revenue is considering investigations and audits, it is never as aggressive as that. More often the questions/letters that come in are along the lines of “Are you sure about that? Maybe you might want to check and come back to us.” Whatever Inland Revenue’s tone cryptoasset investors and traders should expect enquiries.
Wrapping, bridging, lending, borrowing and staking cryptoassets
Still on crypto, Inland Revenue has released a 30 pages issues paper for discussion setting out its view on the income tax treatment of wrapping, bridging, lending, borrowing, and staking cryptoassets, or decentralised finance (DeFi) transactions.
The basic position Inland Revenue has adopted with crypto is that it is property, and therefore the general rules apply that the disposals of crypto will be taxable if they were acquired for a main purpose of disposal or as part of a profit-making activity.
The paper refers to increases in crypto arising from DeFi transactions as “rewards”. Inland Revenue’s view is these are money’s worth and usually taxable when received. The analogy would be these rewards are like a dividend or an interest payment and should therefore be taxed. Submissions on the paper are open until 12th March.
Expect some crypto related court decisions
Last November I discussed the Technical Discussion Summary TDS 25/23 on the taxation of cryptoassets. As previously noted, Inland Revenue is currently involved with several similar cases involving “tens of millions of tax” so I expect some cases to appear in the courts this year perhaps either before the Taxation Review Authority, or the High Court.
As an aside it’s worth noting one of the interesting (and I don’t think it’s entirely healthy to be frank) issues with our tax system at present is that we don’t actually get an awful lot of tax cases coming through, partly because the dispute process is designed to try and resolve most issues before they get to court.
But I do wonder if it’s gone too far the other way. Supreme Court Justice Susan Glazebrook has publicly remarked on the decline in tax cases in the courts. Is that entirely healthy, given that tax is a fairly litigious topic? It is a little surprising when you step back and reflect that we don’t see many tax cases coming through. That said, I expect we will see some crypto related cases this year.
International tax – America goes its own way
Moving on, the year has been quite frantic with international developments. One of the features of the new second Trump administration is its withdrawal from many international agreements, and it has also made it very clear that it will view unfavourably what it regards as discriminatory tax practices.
As a result, the international two-pillar agreement that the OECD/G20 been working on for close to a decade now has hit a big speed bump, with the Americans making it very clear they don’t believe or consider that its multinationals (we’re talking particularly the tech companies) should be subject to those rules.
Now the end result of that is that there’s been a development called the side-by-side package which the OECD released in early January. l It’s convoluted as always with international tax, but at the moment, there’s only one country that qualifies for the side-by-side system, and you’ll not be surprised to hear that’s the United States. Basically, the idea is to allow Pillar Two to continue to coexist with the American tax regime and in theory deliver comparable minimum tax outcomes. In theory everyone is still progressing towards the 15% minimum corporate income tax rate globally.
Incidentally, the Pillar Two rules were effective for 2025 from a New Zealand perspective which means some multinationals may be subject to these rules. As I mentioned earlier, there’s been reports coming out from the Big Four that more transfer pricing reviews are happening. Anyway, we’ll keep our eyes on what’s going on in the global tax space. We expect to see more developments in that area. And it’d be interesting to see how Inland Revenue approaches its audit work in relation in this space.
“What’s in a name? That which we call a rose by any other name would smell as sweet”
Finally, it’s an election year and tax seems set to play a major part of the debate this year. So far Labour has proposed a capital gains tax on residential properties (excluding the family home) and commercial properties.
Meanwhile, echoing Juliet’s question in Romeo and Juliet, a sharp debate broke out last week, in relation to the Government’s gas levy to help pay for the proposed LNG facility in New Plymouth. Is it a tax or “just” a levy? We can expect to see more of this verbal jousting in the months ahead of the election.
Last week, the Finance Minister Nicola Willis was one of the speakers at a two-day economic forum at Waikato University. Interestingly, she brought up the question of tax policy, which is often a matter that’s debated at tax conferences although usually it’s the Revenue Minister discussing the topic.
The Finance Minister hasn’t exactly gone outside her lane because tax is a key part of her portfolio, but it is unusual to see her discuss it publicly.
She noted “tax policy certainty needs to span successive governments.” And that’s very true. The issue she was driving was a hope that Labour would support the Investment Boost package that was renounced as part of last year’s budget.
Investment Boost is an interesting initiative, one of what we call accelerated depreciation, which the OECD suggests we should be doing if we want to boost productivity. It’s an interesting mix of reactions to it, mostly positive.
I’ve had clients who are in the business financing sector report that it hasn’t had the booster effect that they were expecting.
So anyway, the Finance Minister was saying she hopes that Labour in the interests of consistent tax policy would keep Investment Boost. That remains to be seen. It’s an election year and to possibly; to borrow a rugby phrase, she’s getting her retaliation in first.
A bank taxation review?
In her speech the Finance Minister also raised the question of whether the four main big Australian-owned banks are paying enough tax. This seems a classic example of Bettridge’s law of headlines, that is, any headline that ends in a question mark can be answered by the word no. There’s a great deal of commentary around how much tax is paid by the big four banks and whether it is appropriate. They seem to have higher margins than their Australian parents and a higher margin compared with many other countries.
Australian introduced its Major Bank Levy in 2017 and there has been a long-running bank levy in the UK. Infamously, as the Green Party pointed out, Margaret Thatcher introduced a bank levy on excessive profits in the early 1980s. Anyway what the Finance Minister has apparently put on the radar is some form of review of the tax treatment or what’s happening with the tax and the big four banks. It will be interesting to see what comes out of the review.
Budget date announced
Finally, this year’s Budget will be on Thursday 28th May, a little later than I anticipated. We’ve been told it won’t be a “lolly scramble”, but being an election year, I expect we may see some surprise announcements.
Meanwhile the main themes for the year are set, more Inland Revenue debt recovery and investigation activity, an international tax picture in flux and finally because of the forthcoming election we’re going to be hearing a lot about tax. Whatever eventuates we will keep you up to date with developments.
And on that note, that’s all for this week, I’m Terry Baucher and thank you for listening. Please send me your feedback and requests for topics or guests. Until next time, kia pai to rā. Have a great day.
