07 April 2008

New incentives to encourage investment and innovation, including a cut in the company tax rate and tax credits for research and development (R&D), came into force on 1 April.

The package of business tax reforms enacted by the Government for the 2008/2009 tax year, which runs 1 April 2008-31 March 2009, include:

• A cut in the company tax rate to 30%
• A tax credit of 15% of allowable expenditure for New Zealand businesses conducting R&D.
• An “active income exemption” for New Zealand-controlled foreign companies.
  The drop in the company tax rate brings New Zealand’s headline rate into line with Australia’s. The cut is expected to make New Zealand a more attractive location for generating profits, particularly as it doesn’t have some taxes levied in other jurisdictions, such as payroll tax, capital gains tax, inheritance, wealth and estate taxes.

The R&D tax credit now available to New Zealand businesses is worth 15% of allowable expenditure. To qualify for the credit, a business must control the R&D project, bear the financial and technical risks of it, and own the project results. The R&D must be carried out predominantly in New Zealand.

R&D credits will be paid out in cash to loss-making businesses such as start-ups.
Expenditure eligible for the tax credit includes the cost of employee remuneration, the depreciation of tangible assets used primarily in conducting R&D, overhead costs, and the costs of consumables and payments to entities conducting R&D on behalf of the business. Some activities are ineligible, as they are in other jurisdictions, and some spending is ineligible.

The proposed “active income exemption” for New Zealand-controlled companies based overseas will lower tax and compliance costs, and make it easier for New Zealand firms to expand internationally. The move is in line with world best practice in this area.

Legislation has also been introduced to allow “limited partnerships”, a move aimed at making it easier for New Zealand entities to access investment capital. Limited partnerships are an internationally preferred business structure for foreign private equity and venture capital investments. They offer the advantages of a separate legal status (enabling partners to limit their liability) and “flow-through” tax treatment (allowing investors to be taxed in their own jurisdictions).

Limited partners will not be taxed at the partnership level. Instead each will be taxed individually at their personal marginal rate in proportion to their share of the partnership's income. Limited partners’ tax losses will be restricted to their economic losses in that year. There is provision for limited partners to have a say in how the partnership is run, without being treated as participating in the management of the partnership and thus losing their limited liability status.