The government is proposing changes to the foreign investment rules to encourage investment in New Zealand. Photo: 123RF
Changes are being proposed to a tax regime that has often been criticised for being unfair in the way it targets investment capital gains, even when they aren't realised.
The government has announced it is proposing changes to the foreign investment fund (FIF) rules, to encourage investment in New Zealand.
The proposed changes include the addition of a new method to calculate a person's taxable income under the FIF regime.
Robyn Walker, a tax partner at Deloitte, said the current settings caused problems for many migrants.
In general, when people own shares in overseas companies, they face an annual tax bill based on 5 percent of the value of the shares at the start of the income year.
"These rules were essentially brought in to reflect the fact that a lot of companies overseas don't pay a lot of dividends," Walker said.
Deloitte tax partner Robyn Walker. Photo: Supplied / Deloitte
"People were getting share price appreciation and not being taxed on capital gains. But they didn't have a dividend [that was taxed] so there was a concern that there wasn't enough tax, or it created a bias to invest overseas rather than invest in New Zealand companies that pay more dividends."
But she said it could particularly be a problem for people with unlisted shares, or shares that were restricted in some way.
"If you're not actually receiving any income then you don't have any cashflow to pay the tax that arises under these methods."
There was a four-year period where migrants to New Zealand do not have the same tax obligations but she said people were coming to the end of that and realising that if they did not leave the country, they could have an "astronomical" tax bill and no cash on hand to pay it.
There were also issues of people paying double tax, she said. The United States' tax rules particularly were an uncomfortable fit with the New Zealand regime and people could end up being taxed twice.
"If they do sell their shares they are taxed according to US capital gains tax rules and the way New Zealand would have been taxing didn't give them a tax credit because we're taxing something different."
The new system would mean that people were taxed on a realisation basis, she said, which would help with cashflow and should help smooth the interaction with overseas tax obligations.
The changes would apply to people who became tax residents on or after 1 April last year.
Revenue Minister Simon Watts said new migrants could opt for a realisation basis when they had investments that were not easily disposable and were acquired before coming to New Zealand.
Revenue Minister Simon Watts. Photo: RNZ / Samuel Rillstone
"For migrants who risk being double taxed due to their continuing citizenship tax obligations, this method can apply to all their FIF interests.
"We want to act swiftly to remove barriers for highly skilled migrants to stay in New Zealand and invest in the growth of our economy, so the proposals will be included in the next taxation Bill, likely to be introduced around August.
"This is an important step and one which the private sector has been calling for, but we need to consider whether more can be done. We are looking more closely at the FIF rules and related international tax settings not only to encourage migration to New Zealand, but also to encourage our own residents to stay and invest in New Zealand.
"The government will also be looking at how the rules impact New Zealand residents and will have more to say later in 2025," Watts said.
Walker said that could help a lot of people who arrived here during the pandemic and were approaching the end of their transitional periods.
"A lot of people will say this doesn't go far enough," Walker said.
She said it was positive that the government had indicated it would look at how the rules affected New Zealand residents through the rest of this year.
One aspect that could deserve attention was the $50,000 investment threshold to be captured by the regime, she said. "That $50,00 has been there for 20 years, will they potentially look at increasing that to take the headache away from ordinary, everyday New Zealanders who are looking to have a diversified share portfolio?"
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