Income Tax – Core Concepts & Rules

Government Revenue & Income Tax Importance

  • Govt. revenue 2024: 167 bn; tax component 119.9 bn (≈72 ext{%}).

  • Income tax preferred because it is measurable and seen as fair (ability‐to‐pay principle).

Individual & Company Tax Rates

From 1 Apr 2025 (per annum):

• 0–15,600 10.5%

• 15,601–53,500 17.5%

• 53,501–78,100 30%

• 78,101–180,000 33%

• 180,001+ 39%

2024–25 transitional table applies mid-year cuts (multiple brackets).

Companies: flat 28%.

Income Tax Act 2007 Structure (15 Parts)

A – Purpose/defs;

B – Core (impose tax, calc liability, avoid, DTAs);

C – Income;

D – Deductions; E – Timing; F – Recharacterisation; G – Avoidance; H – Entity rules; I – Losses; L/M – Credits; O – ICA; R – Collection; Y – Definitions; Z – Transition.

Core Provisions (Part B)

Key section BB 1 imposes tax on taxable income at annual rates, payable to Crown per ITA & TAA 1994.

Tax Residence

Effect:

• Resident ⇒ taxed on worldwide income.

• Non-resident ⇒ taxed only on NZ-sourced.

Individuals (s YD 1): resident if permanent place of abode in NZ, or >183 days presence in any 12-month period, or serving NZ govt. Cease when >325 days absent and no PPoA.

Companies (s YD 2): resident if incorporated in NZ, or head office, centre of management, or director control in NZ.

Double Tax Agreements (DTAs)

Treaties override domestic law (s BH 1). Objectives: relieve double taxation, allocate taxing rights (residence, real property, business profits, dividends etc.), reduce withholding rates, exchange info. NZ has 41 DTAs.

Income Categories

Assessable income = income that is neither exempt, excluded, nor non-resident foreign-sourced (s BD 1(5)).

Income sources: ordinary concepts + specific Part C inclusions (e.g. employment CE 1, business CB 1, interest CC 4, rent CC 1, dividends CD 1 etc.).

Ordinary-concept tests: must “come in”, be convertible to money’s worth, usually periodic, quality in recipient’s hands; capital receipts, gifts etc. usually not income.

Exempt Income (subpart CW – selected)

Charities CW 41/42, NZ super CF 1(1)(e), scholarships CW 36, certain dividends CW 9, transitional resident foreign income CW 27 (4-yr window for new/returning residents).

Excluded Income & Foreign-Sourced

Excluded (subpart CX): GST outputs/refunds CX 1, fringe benefits CX 3 etc.

Non-resident foreign-sourced income is not assessable.

Financial Arrangement Rules (subpart EW)

Purpose: spread income/expenditure on loans & similar over term on accrual basis and capture FX gains/losses.

1 Identify financial arrangement (loan/credit).

2 Check excepted arrangements (e.g. shares, short-term trade credit, small overdrafts).

3 Rules apply to NZ residents (and non-residents via NZ fixed place).

4 Cash-basis person (income+expenditure ≤100,000 OR value ≤1 m; accrual–cash diff ≤40,000) may ignore spreading methods.

5 Otherwise use spreading method: IFRS (mandatory if reporting under IFRS), yield-to-maturity (default), straight-line (if total arrangements ≤1.85 m), or market valuation (dealers).

6 Trigger events (maturity, disposal, emigration, remission) require Base Price Adjustment: BPA=consideration-income+expenditure+amount remitted. Positive ⇒ income; negative ⇒ deduction.

Land Sale Taxation (CB 6–CB 14)

Income arises when:

  1. Land acquired with purpose/intent of sale (CB 6).

  2. Bright-line test: residential land sold within 2 yrs of acquisition (was 10/5 pre-2024); excludes main home, inheritance, relationship property (CB 6A).

  3. Land acquired for business of dealing, developing, or building (CB 7).

  4. Dealers, developers, builders dispose within 10 yrs (CB 9–CB 11).

  5. Development/subdivision begun within 10 yrs (CB 12) or major development anytime (CB 13).

  6. ≥20% of gain due to rezoning etc. within 10 yrs (CB 14).

    Exclusions: residential, business premises, farmland, investment land (various).

    Corresponding deductions: DB 23/27/28.

Associated Persons (Land Rules)

Association broadens taxable scope to related parties. Key tests (Part YB):

• Company ↔ company: ≥50% common voting/market value interest (YB 2).

• Company ↔ person: ≥25% interest (YB 3).

• Relatives: spouses/partners & minor children (YB 4).

• Trustee ↔ settlor (YB 8); trustees of trusts with common settlor (YB 7).

• Trustee ↔ person holding power to appoint/remove (YB 11).

• Partnership ↔ partner (YB 12).

• Tripartite test links A–B when both associated with C (YB 14).

End of quick-review notes for Module 1.