Tax relief for dual resident companies imminent

Yesterday, 8 September 2022, New Zealand’s Inland Revenue (IR) reissued the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill (No 2) (Bill) which includes a number of tax changes, the most significant of which are the proposed changes to New Zealand’s dual residency rules. As outlined in our earlier alerts, the GST changes relating to investment management fees charged to managed investment schemes have been removed entirely.

The proposed changes to the dual residency rules are in response to uncertainty in Australia on corporate tax residency, and whether the Australian Taxation Office (ATO) will assert Australian tax residency on New Zealand companies, with a majority of Australian based directors, meaning those companies could potentially become dual tax resident.

Under New Zealand’s tax rules, there are several beneficial tax regimes (including forming consolidated tax groups, sharing of tax losses and the utilisation of imputation credits) which do not ordinarily apply to dual resident companies. The Bill proposes to amend the eligibility requirements of these regimes to ensure New Zealand companies affected by recent changes in the ATO’s views of Australia’s corporate residency tax rules (or similar issues in other jurisdictions) have uninterrupted access to New Zealand’s loss grouping, consolidation and imputation credit regimes.

As outlined in our earlier alerts, the GST changes relating to investment management fees charged investment schemes have been removed entirely.   

Tax residence

Generally, a company incorporated in New Zealand will be considered a New Zealand tax resident. A company could also be New Zealand tax resident if its head office, centre of management, or its directors (in their capacity as directors) exercise control of the company in New Zealand. 

Australian Residency test

After the Bywater High Court decision in Australia, effective from March 2017, the ATO revised its views on when a foreign-incorporated company can be an Australian tax resident by carrying on a business in Australia and having its “centre of management and control” (CMAC) in Australia. Under the ATO’s current interpretation, there is greater risk that New Zealand companies with CMAC based in Australia (e.g., by having a majority of Australian based directors) could potentially become Australian resident, meaning they would be dual residents for New Zealand tax purposes, even though no part of the actual trading or investment operations of the business takes place in Australia. The ATO has a transitional compliance approach where it is not currently applying resources to review the tax residence status of companies in these situations, if specific requirements are satisfied. That transitional approach is currently expected to expire on 31 December 2022.

The 2020-21 Australian Federal Budget, proposed amendments so that a foreign incorporated company would only be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. However, since that announcement, legislation has not been introduced in Australia and the current Government (elected in May 2022) has not specifically endorsed and has otherwise remained silent on the changes. It remains unclear whether the proposed amendments will proceed – i.e., there remains a risk that New Zealand companies with CMAC in Australia (e.g., by having a majority of Australian directors) may become dual residents for tax purposes.

Moving to an online world

Given the current residency rules in Australia, it is prudent for a New Zealand company with a majority of Australian directors to ensure board meetings are physically held in New Zealand. However, with the accelerated adoption of video conferencing software through the COVID-19 pandemic and the increasing focus on environmental, social and governance commitments, this has resulted in more business being done online, with less physical meetings taking place.

The New Zealand Government’s proposed changes indicate they are aware the change in the way in which businesses operate and that traditional tax legislation may no longer be fit for purpose. The proposed amendments to tax residency legislation on both sides of the Tasman are a positive step in addressing the concerns of a multinational business operating in today’s ever-increasingly interconnected world.

Proposed New Zealand tax changes

As noted above, Australia’s shift in its interpretation of its corporate residency rules in 2017 means it is relatively easy for a New Zealand resident company with a majority of Australian resident directors to become dual Australian and New Zealand tax resident. We commonly see New Zealand incorporated companies with Australian resident directors that are a part of multi-national groups or Australian businesses with New Zealand operations.

So what? Under New Zealand’s tax rules, there are several beneficial tax regimes which do not ordinarily apply to dual resident companies. These include the inability to:

• offset tax losses;
• maintain an imputation credit account (ICA);
• form a consolidated group; and
• operate as a Look-through company (LTC).

Tax losses

Broadly, New Zealand tax resident companies can offset tax losses where there is minimum common ownership of 66% between the loss company and profit-making company during the period beginning from the tax year in which the tax loss was incurred until the end of the tax year in which it is offset. For completeness, the loss company’s tax losses will be subject to carry-forward tax rules that require minimum shareholder continuity of 49% or satisfaction of the business continuity test.

An inability for tax losses to be offset because the loss company is dual resident could result in a cash tax cost being incurred by a group of companies.

The Bill currently proposes to remove the requirement that a loss company must be solely tax resident in New Zealand for it to offset its tax losses with other companies.

Imputation credit account

New Zealand companies that are tax resident in New Zealand are required to maintain an ICA. Broadly, a company’s ICA is a record of how much tax they have paid and how much tax the company has passed to its shareholders or that has been refunded to the company.

Without an ICA, a company would be unable to pass the benefits (i.e., imputation credits) of any tax paid to its shareholders. This could result in a greater amount of tax being paid.

The current draft of the Bill proposes that a New Zealand resident company required to maintain an ICA which is then treated as dual resident under the New Zealand-Australia double tax agreement will continue to maintain that ICA. In the absence of this proposed rule, a New Zealand company’s ICA balance would be reduced to zero, or if in a debit balance, be required to pay further income tax.

Group consolidation

New Zealand resident companies that are members of a wholly owned group (i.e., 100% common ownership) can elect to form a consolidated income tax group. The group is effectively treated as a single company, and transfers of assets, dividends, interest, and management fees among members of the group are generally disregarded for tax purposes. New Zealand companies that are dual resident are not eligible to join consolidated income tax groups, which could result in unnecessary compliance costs for groups of companies operating in New Zealand.

The Bill proposes to, once enacted, allow a foreign company (that includes a dual resident) to be eligible to be a member of a consolidated income tax group.

Look-through company

One of the main advantages of a company being an LTC is that the company us "looked-through” for income tax. This means that the shareholders of the LTC become liable for income tax on the LTC's profits, while also being able to offset the LTC's losses against any other income.  

A dual resident company cannot elect to become a LTC. As currently drafted, the Bill does not propose any changes to the LTC regime.

Other contents of the Bill

In addition to the dual residence changes identified above, the Bill includes the following proposals:

• implement the OECD’s information reporting and exchange framework for activities being facilitated by digital platforms in the sharing and gig economy
• adjust the GST and remote services rules to collect GST on accommodation and transportation services provided through electronic marketplaces
• reform the GST apportionment and adjustment rules, including amendments to the CZR rules
• modernise and clarify the rules for employers and payers in relation to cross-border workers, including adjustments to the NRCT rules
• address integrity issues with the application of the domestic dividend exemption and corporate migration rules to dual resident companies
• introduce a fringe benefit tax exemption for public transport, and
• introduce an exemption from the interest limitation rules for build-to-rent assets.

If you are interested in receiving further detail in relation to the above changes or subsequent changes as the Bill progresses, please contact one of our tax team or your regular DLA Piper contact.

*Max Kwan also contributed to this article.