Doing business in New Zealand. Grant Thornton New Zealand 2011

Transcription

1 Doing business in New Zealand Grant Thornton New Zealand 2011

2 Contents 3 Foreward 4 Country profile 6 Regulatory environment 8 Finance and banking 9 Imports 10 Business entities 12 Labour 15 Financial reporting and audit 18 Tax Doing business in New Zealand 2

3 Foreward If you are planning on doing business in New Zealand, knowledge of the investment environment and information on the legal, accounting and taxation framework are essential to keep you on the right track. New Zealand is a relatively small trading market in world terms. It welcomes foreign investment and is a relatively easy country in which to do business. Nevertheless, it is essential that prospective investors obtain advice concerning regulatory, legal and cultural issues arising from the conduct of business in New Zealand. Grant Thornton has prepared this guide to assist those interested in doing business in New Zealand. It includes legislation in force as of 1 June The guide does not cover the subject exhaustively but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws and regulations of New Zealand and to obtain appropriate accounting and legal advice. If you require any further information, please do not hesitate to contact your nearest Grant Thornton office. Grant Thornton International Grant Thornton International is one of the world s leading organisations of independently owned and managed accounting and consulting firms, providing assurance, tax and specialist advice to privately held businesses and public interest entities. Member firms focus on helping businesses reach their commercial goals by providing practical, customised solutions and identifying and pursuing business opportunities domestically and internationally. They share a commitment to providing the same high quality service to their clients wherever they choose to do business. Grant Thornton International and member firms are not a worldwide partnership. Services are delivered independently by member firms within Grant Thornton International, a non-practicing, international umbrella organisation that does not deliver services in it own name. Grant Thornton in New Zealand Grant Thornton New Zealand Ltd is a major firm of chartered accountants with offices in the three main centres of Auckland, Wellington and Christchurch. As a member firm of Grant Thornton International we are able to combine the knowledge and experience of our local marketplace with the technologies, methodologies and specialist resources of a professional services organisation at the forefront of the global accounting profession. Our policy is to provide a high quality and partner-led service that is tailored to the client s needs wherever the client operates. Our client service teams comprise professionals with the requisite skills to deliver practical and cost effective business solutions. Our range of services includes: Accounting and business advisory Assurance and internal audits Business risk services Corporate finance Recovery and reorganisation Tax compliance and advice Transaction services Wealth management Other specialist services such as litigation support, forensic accounting and independent reports Doing business in New Zealand 3

4 Country profile Geography and population New Zealand is situated in the South Pacific Ocean, approximately 1,500 kilometres east of Australia. It covers an area of 270,000 sq km (similar in size to the British Isles) and comprises two main islands, the North Island and South Island. The landscape is varied and often spectacular, which makes New Zealand a popular tourist destination. New Zealand s population is around 4.4 million, with over three-quarters living in the North Island and about half living in the four largest cities of Auckland, Christchurch, Wellington, and Hamilton. New Zealand is a multi-cultural country, comprising around 68% of people of European descent, 15% Maori (tangata whenua, the indigenous people), 9% Asian and 7% Pacific peoples. This ethnic diversity is projected to increase, with the Asian population in particular increasing to 16% over the next 15 years. Political system New Zealand is a constitutional monarchy with Queen Elizabeth II as its sovereign head of state. New Zealand does not have a constitution that is embodied in a single document or Act of Parliament, but rather the constitutional law is contained in a mixture of legislation, the Treaty of Waitangi, case law and unwritten conventions having their origins in English law. Constitutional power is vested in the Crown, represented by the Governor- General. All legislation that is approved by Parliament must receive Royal Assent from the Governor-General in order to be given legal effect. Legislative power is vested in a parliamentary system with representatives (Members of Parliament) elected every three years to one central government. Since 1996, New Zealand has used the mixed member proportional representation (MMP) voting system. The National Party leads the present minority Government, with support from ACT, United Future, and the Maori Party. Executive power is exercised by the Cabinet, formed by the party that controls the majority of votes in Parliament. Cabinet is led by the Prime Minister (currently John Key), who is traditionally the leader of the governing party or coalition. Legal system The legal system is based upon common law and statute. New Zealand s common law has developed from and is reliant upon English law principles. However, many common law principles have been codified by statute. The court system is hierarchical. Trials are conducted in either the District Court (the lower jurisdiction) or the High Court. Appeals may be made to the Court of Appeal and, with leave, to the Supreme Court. A Disputes Tribunal is available as a lowcost alternative for settling small claims. Language English is one of New Zealand s two official languages, and is universally spoken. The other official language is Maori (Te Reo). Business hours/time zone Normal business hours are 8.30 am to 5.00 pm Monday to Friday. Many retailers are also open on weekends and one or more evenings. Trading is permitted on all days, with the exception of Good Friday, Easter Sunday, Christmas Day and until 1.00 pm on Anzac Day. Certain businesses are exempt from these restrictions. Banking hours are normally 9.00 am to 4.30 pm Monday to Friday. New Zealand s time zone is GMT +12 hours and +18 hours US Eastern Standard Time. Public holidays New Zealand public holidays are as follows: New Year - 1 & 2 January Waitangi Day - 6 February Good Friday Easter Monday Anzac Day - 25 April Queen s Birthday - 1st Monday in June Labour Day - 4th Monday in October Christmas 25 & 26 December Provincial Anniversary Day - varies between provinces Doing business in New Zealand 4

5 Economy New Zealand has a relatively deregulated and open economy. It is consistently ranked as one of the easiest countries in which to do business, one of the least corrupt, and having one of the highest levels of economic freedom. Major industries include agriculture, forestry, fishing, horticulture, manufactured goods and food processing. Major imports include mineral fuels, mechanical and electrical machinery, vehicles, pharmaceuticals, textiles, and plastics. Major exports include dairy products, meat, wood, mineral fuels, machinery, fruit and nuts, wine, fish, wool, horticultural produce, manufactured goods and tourism. Principal trading partners: Exports - Australia - China - USA - Japan - UK - Korea - Southeast Asia Imports - Australia - China - USA - Japan - Germany - Southeast Asia New Zealand is a proponent of free trade and has agreements in place with ASEAN/Australia, China and Malaysia, and is presently negotiating agreements with India, Russia-Belarus-Kazakhstan, and the Gulf Cooperation Council. It also has special trading relationships with Australia (CER), Hong Kong (CEP), Thailand (CEP) and Singapore (CEP), and is a member of the Trans- Pacific Strategic Economic Partnership. Cost of living One of the greatest attractions of New Zealand is the lifestyle it has to offer. Not only do Kiwis seem to enjoy a more relaxed living philosophy but compared with many international countries, the cost of living an enjoyable lifestyle seems to be more obtainable. Auckland and Wellington generally rank highly on international livability measures. The cost of living varies depending on where you choose to live in New Zealand. Auckland is a more expensive city in which to live and it seems that the further south you travel the less expensive the cost of living becomes. Housing may cost more in the main centres than in more rural locations but the average employment wage in the centres is higher to compensate, so living costs tend to balance out wherever you choose to reside. Visas Visitors from many countries do not require a visa for visits to New Zealand of less than three months. Generally, visitors are not allowed to work here. However, visas or work permits are available under various categories for people wishing to work in New Zealand either on a temporary or permanent basis. Australian citizens and permanent residents do not need a work visa to work in New Zealand. Long-term visas are available for migrants bringing valuable skills or qualifications, setting up a business, or making a financial investment in New Zealand. There are also opportunities for family reunification by allowing residents and citizens to sponsor family members for residence. For more information visit: Doing business in New Zealand 5

6 Regulatory environment Restrictions on foreign ownership New Zealand encourages foreign investment; nevertheless, consent is required for certain categories of investment in New Zealand by overseas persons. This process is administered by the Overseas Investment Office (OIO) on behalf of the government. The general categories for which OIO consent is required are investment in: sensitive land business assets worth more than $100 million fishing quota. For these purposes, overseas persons comprise individuals who are not New Zealand citizens and are not ordinarily resident in New Zealand, and companies that are either incorporated outside New Zealand or have 25% or more foreign ownership. For more information visit: Government approvals and registration Most businesses require no Government approval. Overseas companies carrying on business in New Zealand and large New Zealand companies that have 25% or greater foreign ownership must register and file audited accounts with the Registrar of Companies. These accounts are filed on public record. Competition rules The Commerce Commission is New Zealand s primary competition enforcement and regulatory agency. It is an independent Crown entity established by the Commerce Act 1986 and its role is to monitor commercial activity in New Zealand in order to ensure a competitive commercial environment. The Commerce Act 1986 aims to promote competition in New Zealand markets. It prohibits conduct that restricts competition (restrictive trade practices) and the purchase of a business s shares or assets if that purchase is likely to lead to a substantial lessening of competition in that market. Practices specifically prohibited include: arrangements (including price fixing and resale price maintenance) having a purpose or likely effect of lessening market competition taking advantage of a substantial degree of market power to restrict entry to that market, or eliminate or deter other market competitors. The Act also provides for the imposition of control, including pricing control, over goods and services supplied in non-competitive markets. Consumer protection The Fair Trading Act 1986 was developed with the Commerce Act to encourage competition and to protect consumers from misleading and deceptive conduct and unfair trading practices. The Act applies to all aspects of the promotion and sale of goods and services from advertising and pricing to sales techniques and finance agreements. Other consumer protection legislation includes: The Consumer Guarantees Act 1993 This Act sets out minimum guarantees that goods and services must meet when sold in trade. For goods, this includes guarantees as to title, quality and fitness for any particular purpose that the consumer communicates. For services, this includes guarantees as to the exercise of reasonable care and skill, fitness for the particular purpose in respect of which the services are sought, and that services are provided within a reasonable time and at a reasonable price. The Sale of Goods Act 1908 This Act governs rights, obligations and remedies of parties to contracts for the sale of goods and addresses a number of aspects of such contracts that may result in dispute, including the transfer of title and risk, and rights and remedies of the parties in the event of non-performance. The Credit Contracts and Consumer Finance Act 2003 This Act is intended to prevent oppressive lending arrangements and conduct by lenders and requires that lending terms and funding costs are Doing business in New Zealand 6

7 adequately disclosed to borrowers. Import and export controls The import and export of goods may be subject to prohibition and control. Generally, the importation or exportation of weapons, endangered species, live animals, insects, meat, plants vegetables and drugs is prohibited without authorisation and is subject to strict controls. Price controls The Commerce Commission can impose price controls on goods and services where there is a lack of market competition, there is scope for the exercise of substantial market power, and the benefits of price regulation will exceed the costs. Industries subject to specific regulation include electricity lines services, telecommunications, dairy, gas pipelines, airport services, and financial services. Use of land The use of land is closely regulated. The Resource Management Act 1991 governs the use of land, water, minerals, the coastline, air and other physical resources. A number of consents may be required before a particular project can proceed. Local authorities administer controls on development, generally through various regional and district plans. Exchange control There are no exchange controls for the transfer of funds into or out of New Zealand. However, cash of NZ$10,000 or the equivalent in foreign currency being brought into or taken out of New Zealand must be declared. Government incentives There are very few fiscal or financial incentives provided by the government to assist the development of business. The government is nonetheless keen to promote investment into New Zealand and the development and global expansion of New Zealand businesses, and assistance is available in various forms from a number of government agencies, including: The Ministry of Science and Innovation administers a number of initiatives designed to drive the science and innovation sector. These include TechNZ investments, the Technology Development Grant and Technology Transfer Voucher, and PreSeed Funding. For more information visit: New Zealand Trade and Enterprise (NZTE) offers a range of programmes to help businesses develop and succeed globally. For more information visit: The New Zealand Venture Investment Fund invests into venture capital funds and partners with angel investor groups to drive investment into exciting young New Zealand companies with high-growth potential. For more information visit: Investment New Zealand aims to help link high-growth New Zealand businesses and international investors. For more information visit: Doing business in New Zealand 7

8 Finance and banking Banking system New Zealand s central bank is the Reserve Bank of New Zealand. Its prime function is to use monetary policy to control inflation and keep it within a specific target band, currently 1 to 3%. The Reserve Bank implements monetary policy by setting the Official Cash Rate (OCR), which is reviewed eight times a year. The Reserve Bank also has other important functions including the issuing of notes and coins, managing New Zealand s foreign exchange reserves, and the registration and prudential supervision of banks. New Zealand s banking industry is substantially deregulated. This has created a very competitive banking environment; however, it has also led to the situation where about 90% of banking assets are now controlled by Australian-owned banks. There are presently 20 registered banks, the largest include ANZ National Bank, the Bank of New Zealand, ASB Bank, Westpac and Kiwibank. Banks offer the usual full range of lending, cash management and investment services. Foreign currency accounts may be operated in New Zealand. Money laundering rules are strictly enforced and banks require evidence of identity to open an account. No tax identification number is needed, although failure to provide a tax number will result in a higher rate of withholding tax being imposed on interest earned. Capital markets Finance can be raised through New Zealand s capital markets. New Zealand has one authorised stock exchange, the NZX, which operates three securities markets, namely the New Zealand Stock Market (NZSX), the Alternative Market (NZAX), and the Debt Market (NZDX). The NZSX and NZAX are New Zealand s equities markets. The NZSX is the premier market with around 160 listed companies and total market capitalisation of around $59 billion, while the NZAX is a lower cost market designed for small to medium sized, high-growth companies and non-traditional entities such as cooperatives. The NZDX is the market for the trading of debt securities, including corporate and government bonds and fixed income securities. The NZX also launched a derivatives market in 2010, which supports the trading of dairy product futures and options. Other sources of finance Debt and equity can also be raised through the issue of securities directly to the public. Such public offerings are regulated by the Securities Act 1978 and other securities legislation and generally require the issue of a prospectus and investment statement. Raising capital from private equity firms is a further option, although the venture and seed capital markets in New Zealand are very limited by international standards. Aside from trading banks, a range of other financial institutions also exist including finance companies, merchant banks, building societies, credit unions, friendly societies, and insurance companies. They generally provide deposit-taking and lending services but usually to particular niche markets. Financial Markets Authority The Financial Markets Authority (FMA) is a new Crown entity established in 2011 to promote the development of fair, efficient and transparent financial markets, with the objective of restoring investor confidence in the markets. It took over the functions of the Securities Commission and Government Actuary, and consolidated other regulatory functions from the Ministry of Economic Development. The FMA is responsible for overseeing and enforcing securities, financial reporting, and company law as they apply to financial services and securities markets. It also regulates securities exchanges, financial advisers, financial service providers, trustees and auditors. Doing business in New Zealand 8

9 Imports Import restrictions There are a number of restrictions on the goods that may be imported into New Zealand. These restrictions relate primarily to consumer safety issues, as well as illegal substances and firearms. New Zealand tightly monitors imports, especially in relation to food and agricultural produce, in order to prevent the introduction of pests. Other goods are restricted for environmental reasons and because of United Nations sanctions. Customs duties Import licensing no longer exists but there are tariffs in some circumstances, although more than 80% of the total value of imported goods are tariff-free. Tariff rates vary from item to item and also depend on the country of origin, with some countries such as Australia, Canada, Malaysia, Singapore, Thailand, China, and Pacific Forum countries having preferential rates. Generally, import tariffs of 5% apply to textiles and a range of other imported products that are also made in New Zealand, such as processed foods, machinery, steel, and plastic products. Tariffs of 10% apply mainly to clothing, footwear, and carpet. Goods and Services Tax (GST) is payable to Customs in respect of goods imported into New Zealand, and is generally recoverable by GST-registered persons. Doing business in New Zealand 9

10 Business entities Summary Foreign investors may operate in New Zealand through whatever entity they choose The most common entities used by foreign investors are locally incorporated companies or a branch of the foreign entity Subsidiary company Formation Incorporating a company is an on-line process undertaken via the Companies Office website. It is a relatively simple, speedy and low cost procedure. Grant Thornton can arrange this for you. The first step in incorporating a company is to reserve the company s name. Once this is done, an incorporation application is filed containing particulars of company addresses, shares, shareholders and directors. The final step is the lodging of signed director and shareholder consent forms. It is not mandatory to lodge a formal constitution. In the absence of a formal constitution, a company is regulated by the constitutional provisions of the Companies Act A formal constitution may add to or vary those Companies Act provisions and accordingly, that option should be considered having regard to the company s particular circumstances. Management and officers A company incorporated in New Zealand must have at least one shareholder and one director. A director must be an actual person and may also be the sole shareholder. There is no requirement to have a New Zealand resident director or shareholder, nor is there a requirement to appoint a company secretary. Minimum capital/capital maintenance There is no restriction on the size of a company s capital. The shares of companies incorporated in New Zealand do not have a par value. At the time of any issue of shares, the director(s) must be satisfied that the consideration for and terms of issue of the shares are fair, and pass a resolution and sign a certificate to that effect. Filing requirements The Registrar of Companies maintains a file for each company registered in New Zealand. This records addresses, shareholders, directors and certain other information in relation to the company. This information must be updated annually, is available publicly and can be accessed on-line. A large company incorporated in New Zealand that is 25% or more controlled by non-residents must file audited financial statements with the Registrar of Companies. There is no requirement to file the financial statements of an overseas parent company. Generally, the financial statements must be filed within six months of the company s balance date. This may be extended in limited circumstances. Dissolution and insolvency A solvent company may be removed from the company register by a process known as a members voluntary liquidation. This requires the shareholders to appoint a liquidator, generally a suitably qualified accountant, who takes control of the company, discharges its liabilities and distributes the surplus to shareholders. A strike-off mechanism is available whereby the directors or shareholders may simply request the Registrar of Companies to remove the company from the company register. However, such a mechanism should only be employed after obtaining appropriate professional advice due to the issues that arise, including residual exposure to creditors. A company is not allowed to trade while it is insolvent (liabilities exceed assets). The directors of an insolvent company should seek advice from an insolvency practitioner or a lawyer regarding their options. These include: receivership creditors compromise, being a legally binding agreement entered into by all of the company s creditors voluntary administration liquidation. Doing business in New Zealand 10

11 Branch in New Zealand Registration An overseas company must register with the Registrar of Companies within 10 working days of commencing to carry on business in New Zealand. This process, which is undertaken online, involves reserving the company s name and then filing a registration application containing: particulars of its directors and principal place of business in New Zealand evidence of its incorporation and a copy of its constitution details of the person in New Zealand authorised to accept service of documents on its behalf. For Australian companies, most of this information is automatically provided due to information sharing between the Companies Office and ASIC. Filing requirements An overseas company that operates a New Zealand branch must file separate audited financial statements in respect of both the entity itself and the New Zealand branch operations. Other New Zealand trading alternatives Other means of carrying on business in New Zealand include: Individual (sole trader) Trust Partnership or joint venture. In the case of partners or joint venture parties that are companies incorporated overseas, this would ordinarily require registration in the manner previously described. Limited partnership Look-through company (LTC) - (see Look-through companies on page 24) Doing business in New Zealand 11

12 Labour Summary New Zealand has traditionally had a workforce skilled in construction and production but there has been a long-standing shift towards employment in the services sector A state-operated social welfare system provides benefits during sickness, unemployment, disability and retirement and is funded by general taxation New Zealand enforces minimum wage legislation Wages The average weekly earnings for fulltime salary and wage earners is around NZD $1, (as at June 2010). Minimum wage From 1 April 2011, the adult minimum wage rate (before tax) for employees aged 16 or over is $13.00 per hour ($520 for a 40-hour week). The rate applying to new entrants (generally, employees aged 16 and 17 who are new to the workforce) and employees on the training minimum wage, is $10.40 per hour ($416 for a 40- hour week). By law, employers must pay at least the minimum wage - even if an employee is paid by commission or by piece rate. The minimum wage applies to all workers aged 16 years or older, including home workers, casuals, and temporary and part-time workers. Social welfare costs There are no mandatory contributions made by employers or employees to fund social security. New Zealand s comprehensive social welfare benefits are funded through general taxation. Pensions There are no compulsory superannuation savings schemes in New Zealand, although the voluntary KiwiSaver superannuation regime requires a compulsory contribution from employers of 2% of the employee s gross salary or wage where the employee is a registered member of a KiwiSaver scheme. Outside of KiwiSaver, many employers pay pension contributions for their employees. Employer and employee contributions are usually paid into a pension fund the assets of which are kept separate from the assets of the employer. Employer contributions are generally subject to employer superannuation contribution tax (ESCT) at the employee s marginal tax rate. Fringe benefits Non-cash benefits are subject to Fringe Benefit Tax (FBT), which is borne by the employer and not the employee. Examples of benefits subject to FBT include motor vehicles provided by the employer that are available for private use, the provision of private healthcare, loans at concessional rates of interest, and free, subsidised or discounted goods and services. Holidays and leave Holiday pay Under the Holidays Act 2003, employees are entitled to a minimum of four weeks annual leave after the first year of employment. Payment for annual leave is at the employee s average weekly earnings over the 12-month period before the leave is taken. Employees can ask (in writing) to cash-up up to one week of their annual holidays each year. There are also 11 statutory public holidays each year. New Year 1 & 2 January Waitangi Day - 6 February Good Friday Easter Monday Anzac Day - 25 April Queen s Birthday 1st Monday in June Labour Day 4th Monday in October Christmas 25 & 26 December Provincial holiday - varies depending on province Sick leave For most employees, there is a minimum provision of five days paid sick leave after the first six months of continuous employment. An additional five days paid sick leave accrues from Doing business in New Zealand 12

13 that point on, after each subsequent 12-month period. Employment agreements can provide for more generous sick leave provisions. The relevant daily pay must be used to calculate payment for sick leave. It reflects what the employee would have been paid if they had worked on the day in question. Paid parental leave Paid parental leave funded by the Government was introduced in New Zealand in This provides payment for up to 14 weeks leave upon the birth of a child or adoption of a child under 6. Payment is capped at a maximum of NZD $ a week before tax. The payment can be taken by one parent, or shared between two eligible parents. Under the Parental Leave and Employment Protection Act 1987 provision also exists for unpaid leave. For more information visit: Accident compensation The Accident Compensation Act 1982 removed the right to sue in the New Zealand Courts for damages in respect of death or injury by accident in New Zealand. In place of such prior rights, the legislation introduced a comprehensive no-fault accident insurance scheme covering all personal injury by way of accident and occupational disease (see Workplace accident compensation under Other taxes on page 26). The compensation scheme is funded by payroll levies imposed on employers and employees. Healthcare Healthcare is provided on a subsidised basis to most New Zealanders through their general practitioners (GPs). For individuals who are on government benefits or on low incomes they may be eligible for further assistance through a community services card. Entitlement to healthcare does not depend on insurance, although private insurance is available. GPs refer patients to specialists or hospital and patients can choose to go Public or Private. Almost all essential medical services are provided free through the public health system (excluding dentistry and optometry). Treatment after an accident for non-residents is usually free or heavily subsidised. No one can be refused emergency care because they cannot pay, although they may be sent a bill later. Employment protection legislation A number of statutes provide protection to employees. The primary statute is the Employment Relations Act This governs the negotiation, content and enforcement of employment agreements, and contains a number of protections for employees. Objectives of this legislation include: the promotion of good faith dealings and negotiations between employers, and employees and their unions the promotion of collective bargaining and protection of individual choice the promotion of mediation in dispute resolution in preference to judicial intervention observance of the principles underlying International Labour Organisation conventions on freedom of association and the right to organise and bargain collectively. Other legislation governing employment includes the Holidays Act 2003, the Parental Leave and Employment Protection Act 1987, the Minimum Wage Act 1983, the Wages Protection Act 1983, the Equal Pay Act 1972, the Health and Safety in Employment Act 1992, and the Human Rights Act Unions Trade union membership is voluntary. Employees may negotiate individual employment agreements with their employers. Only members of a registered union can be party to a collective employment agreement. The Employment Relations Act 2000 provides unions with workplace access. Doing business in New Zealand 13

14 Personnel limitations - foreigners/ nationals A visa or work permit is required for a person to work in New Zealand unless they are: a New Zealand citizen or holder of a New Zealand resident or permanent resident visa an Australian citizen or Australian permanent resident exempt from the requirement to hold a permit to be in New Zealand. Employers in New Zealand who wish to recruit from overseas must provide evidence that there are no suitable New Zealand applicants for the job. For more information visit: Work visas are available under various categories for people wishing to work in New Zealand either on a temporary basis or permanently. A person may qualify for a temporary work visa if: they have a job offer from a New Zealand employer there is a specific purpose or event for which they need to come to New Zealand to work they are a student or trainee who wants to work here in New Zealand they wish to join a partner in New Zealand and work and if certain other criteria are met. Key employees of a business that wants to relocate its operations to New Zealand may be eligible for a work visa and, later, for residence under the Employees of Relocating Businesses Category. Doing business in New Zealand 14

15 Financial reporting and audit Domestic requirements Presently, all companies registered in New Zealand, whether or not they are incorporated in New Zealand, must prepare financial statements that comply with the requirements of the Companies Act 1993 and the Financial Reporting Act The Financial Reporting Act 1993 requires compliance with generally accepted accounting practice in New Zealand (NZ GAAP). For most companies this necessitates compliance with applicable financial reporting standards (ie accounting standards that have the force of law behind them, which means that if they are breached significant fines and/or imprisonment can result) or, where there is no applicable reporting standard, accounting policies that are appropriate to the entity s circumstances and that have authoritative support within the accounting profession in New Zealand. There is currently a category of companies called exempt companies and their financial reporting requirements are outlined in legislation. They are companies that have total assets and turnover not exceeding NZD $450,000 and NZD $1,000,000 respectively, are not subsidiaries of other companies and have no subsidiaries of their own, and have up to 9 months after balance date within which to complete financial statements. The Government has indicated that it intends to modify the Financial Reporting Act 1993 and remove this type of company. It will be replaced by a reporting regime where these types of companies will no longer be required to produce general purpose financial statements in accordance with NZ GAAP. Accounting standards NZ GAAP differs from US GAAP and International Financial Reporting Standards (IFRS) in a number of respects, including: The Financial Reporting Act 1993 does not permit standards to be overridden where compliance with NZ GAAP would not give a true and fair view. Instead, the applicable standards must always be followed and, if they do not present a true and fair view, then the directors must cite why this is the case and present the financial statements in a way that they believe does present a true and fair view. The auditor then needs to determine whether they concur with the directors point of view or not. Exempt companies may elect to prepare financial statements that are not consistent with NZ GAAP because there is a concessional framework for small companies provided by the Financial Reporting Order 1994 (a regulation stemming from the Financial Reporting Act 1993). Entities that meet the criteria for Differential reporting (see page 17) have the option to exempt themselves from complying with certain financial reporting standards, including the requirement to prepare a statement of cash flows, and segment reporting. New Zealand equivalents of International Financial Reporting Standards (IFRS) NZ GAAP is presently undergoing a transition. Currently, all entities must report under New Zealand equivalents of International Financial Reporting Standards (NZ IFRS) or New Zealand Financial Reporting Standards (FRS). However, going forward, the External Reporting Board (the body that creates applicable financial reporting standards) in April 2011 signalled that public sector entities and not-for profit organisations will from 1 July 2013 onwards be required to report under New Zealand equivalents of International Public Sector Accounting Standards. NZ IFRS is an adaptation of IFRS to provide financial reporting guidance for not only profit oriented entities, but also for entities that operate in the public and not-forprofit sectors. For listed companies, NZ IFRS is now virtually identical to Australian equivalents of IFRS. The difference between these two bodies of standards and those issued directly by the International Accounting Standards Board is that some additional disclosures are required (eg disclosure of audit fees). Doing business in New Zealand 15

16 Companies which satisfy all of the following criteria are permitted to continue to apply the existing New Zealand Financial Reporting Standards (FRS) and, therefore, are not required to apply NZ IFRS until further notice: the company is not an issuer, as defined by the Financial Reporting Act 1993 (Act), in either the current or preceding accounting period the company is not required by section 19 of the Act to file its financial statements with the Registrar of Companies the company is not large, as defined by section 19A of the Act (which also aligns with the size criteria for Differential Reporting - see below). Companies that are required to prepare financial statements in accordance with generally accepted accounting practice in New Zealand (ie companies that are not exempt ) and meet the above criteria will continue to have a choice between two sets of accounting standards, the existing FRS and NZ IFRS. Audit requirements The financial statements of all companies must be audited, except where shareholders unanimously resolve that no auditor be appointed. That exception does not apply to: subsidiaries of foreign companies (if there is a New Zealand holding company, and then subsidiaries below that, then only the parent and consolidated financial statements of the New Zealand holding company need be audited) companies controlled by overseas persons who hold more than 25% of the voting shares, whether directly or indirectly held entities that raise funds from the public or are listed on New Zealand s stock exchange ( issuers) branches of foreign companies. On the New Zealand Companies Office website ( nz/companies/learn-about/updatingcompany-details/financial-reporting) there is a Financial Reporting Calculator which allows one to independently check whether or not there is a need for an audit. Doing business in New Zealand 16

17 Differential reporting An entity qualifies for Differential Reporting exemptions (ie it is a qualifying entity) when the entity does not have public accountability and: at balance date, all of its owners are members of the entity s governing body the entity is not large. A company is considered large where it exceeds any two of the following thresholds: total income of $20 million total assets of $10 million 50 employees From 2012 onward the criteria for determining large will be increased. The External Reporting Board, an entity put in place as a result of the Financial Reporting Act 1993, is responsible for determining what the size criteria should be. It should be noted that the Differential Reporting regime that sits behind NZ IFRS is likely to be replaced with a Reduced Disclosure Regime (RDR) similar to that currently in place in Australia. The fundamental difference between the two regimes is that RDR only reduces disclosure; it does not modify any of the recognition and measurement principles present in IFRS. Differential Reporting is largely based on IFRS, but it does provide some alternative methods for recognising assets, liabilities, revenue and expenses to reduce compliance costs. Filing requirements All issuers and foreign owned companies as detailed above are required to file their audited financial statements with the Ministry of Economic Development (Companies Office) within 20 working days of completion. All companies required to file financial statements must complete these within five months of balance date. Penalties for non-compliance The Financial Reporting Act 1993 provides for substantial penalties for the Company and each of its Directors for non-compliance with: applicable financial reporting standards (NZ GAAP) filing requirements with the Companies Office. Doing business in New Zealand 17

18 Tax Summary The principles summarised in this general outline are relevant to New Zealand tax residents generally and to non-residents who derive income from New Zealand. The criteria for determining tax residence are outlined in the sections dealing with companies (see Residence criteria: companies on page 22) and individuals (see Residence criteria: individuals on page 25). Residence and source New Zealand taxes: residents on world-wide income non-residents on income that is derived from New Zealand. Calculation of taxable income Income tax is calculated in respect of gross income less allowable deductions. Taxable income may differ from accounting income as a result of both permanent and temporary differences in the basis of income recognition and matching of expenses. For example, temporary differences can arise due to differences in tax and accounting depreciation rates, or the time at which income from certain financial arrangements is recognised, and the non-deductibility for income tax purposes of general accruals and provisions. New Zealand has not enacted capital gains tax legislation as such, although some capital receipts may be taxable in certain circumstances (including profits from certain real property disposals and profits arising from the disposal of financial instruments). Expenses of a revenue nature that are incurred in deriving gross income or conducting a business are generally deductible in calculating taxable income. There are exceptions to this general rule. Examples include certain entertainment expenditure that is limited to 50% deductibility and the denial of tax deductions to employees in respect of employment-related expenditure (although such expenditure may be reimbursed by employers free of tax). Tax depreciation Depreciation in respect of capital assets (including buildings and other improvements but not land) that decline in value when used is deductible at rates determined by the New Zealand Inland Revenue. Tax depreciation is generally calculated on a straight line or diminishing value basis at the taxpayer s option. Certain intangible property (excluding goodwill) is depreciable on a straight line basis over the term of its legal life. From the start of the 2011/12 income year, no depreciation can be claimed on buildings which have an estimated useful life of 50 years or greater. Asset purchases costing $500 or less, subject to certain criteria, can generally be expensed at the time of acquisition as opposed to being capitalised and depreciated. Gains on the disposal of depreciable assets are taxable to the extent of any excess of the sale price over tax writtendown value. However, any gain in excess of original cost is generally not taxable. Loss carry forward Taxpayers may carry forward net tax losses arising in any year to subsequent years for offset against future income. Special loss carry forward rules apply to companies (Use of losses on page 23). Treatment of foreign income Foreign income earned directly Foreign income of New Zealand residents that is earned directly from overseas is generally taxed in accordance with the principles applicable to the calculation of taxable income and at the tax rate applicable to the taxpayer concerned. Foreign taxes paid in respect of that income may be credited against the New Zealand tax liability, but only to the extent of the New Zealand tax payable in respect of that income. Foreign income may be taxable irrespective of whether the income in question is remitted to New Zealand. For example, income arising from foreign bank accounts is taxable even though it may be capitalised or reinvested. Foreign income derived by an individual may not be subject to New Zealand tax if the person is considered a transitional resident of New Zealand Doing business in New Zealand 18

19 (see Transitional resident on page 25). Attributed foreign income New Zealand s international tax regime taxes residents holding interests in overseas entities (including companies, investment funds, superannuation funds, and certain life insurance policies), in respect of their effective proportionate interests in the underlying income of such entities or funds. For these purposes, New Zealand recognises two categories of foreign investment: Controlled Foreign Companies (CFC) Foreign Investment Funds (FIF) CFC rules A CFC is a foreign company, including a unit trust, in which: five or fewer New Zealand residents hold an aggregate interest exceeding 50% a single New Zealand resident holds an interest of 40% or more and a non-resident does not hold an equivalent or greater interest. The CFC rules were substantially revised with effect from income years starting on or after 1 July Under the new rules, a person with an income interest in a CFC of greater than 10% is not required to attribute CFC income or losses if one of the following exemptions applies: the active income test is met (essentially, less than 5% of the CFC s total income is passive income) the CFC is resident in Australia and meets certain other criteria. If the above exemptions do not apply, then only the CFC s passive income is attributed and subject to tax. FIF rules The FIF rules apply to interests in: foreign companies and unit trusts that are not CFCs foreign superannuation schemes (schemes established outside New Zealand) life insurance policies issued by foreign insurers that are not offered or entered into in NZ. Various methods are available to calculate FIF income. The default method for less than 10% interests is the fair dividend rate (FDR) method, which taxes 5% of the opening market value of the interest at the start of the tax year. There are specific exclusions from the FIF rules for: interests of 10% or more in a CFC, which are subject to the CFC rules interests of 10% or more in a grey list company interests in certain Australian listed companies interests held by individuals where the total cost of all such overseas interests does not exceed NZD $50,000 interests in certain superannuation schemes where no contributions are made whilst resident interests held by transitional residents. A Tax Bill is presently before Parliament, which proposes to extend the active income exemption applying to CFCs to investors holding nonportfolio interests (10% or greater) in FIFs. Legislation changes As a result of the changes to the CFC rules from 1 July 2009, the following rules were repealed: Exemption for CFC and FIF interests held in the grey list jurisdictions Conduit tax rules Foreign dividend payment rules Rules treating attributed repatriations from CFCs as dividends Income of overseas trusts New Zealand resident settlors of overseas trusts may be taxable in respect of income that is not distributed by the trusts. Tax year end The New Zealand tax year ends on 31 March and the standard balance date for tax purposes coincides with that date. An alternative balance date can be obtained in limited circumstances, including the alignment of the balance Doing business in New Zealand 19

20 date with that of an overseas parent company or to a recognised industry balance date. An alternative tax balance date cannot be obtained merely because such a date coincides with the anniversary of the commencement of business. Annual tax return and assessment New Zealand operates a self-assessment regime whereby taxpayers file an annual tax return and self assess the tax liability for the year. In preparing the return, the taxpayer calculates the amount of any tax payment outstanding (see terminal tax) after credits in respect of taxes deducted at source, provisional tax and foreign taxes paid. The taxpayer also calculates any provisional tax obligations in respect of the subsequent tax year. The filing date for a company s tax return is 7 July following balance date for taxpayers with balance dates from 1 October to 31 March. Taxpayers with balance dates from 1 April to 30 September must file returns by the 7th day of the 4th month following balance date. For example, a 30 June balance date taxpayer must file its return by the following 7 October. In all cases, this may be extended to 31 March following the normal due date where the taxpayer has an automatic extension of time by virtue of being on the Inland Revenue agency listing with a recognised tax agent (such as a Chartered Accountant). Special rules apply where a company s financial statements are for a period of more than 12 months. Tax payment obligations and timing Taxes deducted at source In general, there are five broad categories of income that are taxed at source: Non-resident passive income, being dividends, interest and royalties derived from New Zealand by non-residents and that are subject to non-resident withholding tax (NRWT) (see page 21) Resident passive income, being dividends and interest that is derived by residents and subject to resident withholding tax (RWT) Income from employment (salaries, wages and taxable allowances) that is subject to pay as you earn (PAYE) deductions (see page 25) Income from the performance of various specified personal services, including sales commissions, directors fees, entertainment fees and labour only contracts, that is subject to withholding tax Income from work undertaken in New Zealand by non-residents that is subject to non-resident contractors withholding tax (NRCWT) The obligation to deduct is imposed on the payer who must account to Inland Revenue for the tax deducted. Terminal tax Annual tax liabilities in excess of provisional tax paid and taxes deducted at source (PAYE, RWT, NRCWT and other withholding taxes) give rise to terminal tax obligations. The due date for payment of terminal tax is dependent on the taxpayer s balance date and whether they file their own returns or use a tax agent (eg external accountant) who has an extension of time arrangement with Inland Revenue. For taxpayers with the standard balance date of 31 March, terminal tax is due by: 7 February of the following calendar year, if the taxpayer is not linked to a tax agent or does not have an extension of time 7 April of the following calendar year, if the taxpayer is linked to a tax agent and has an extension of time to file the relevant tax return. Provisional tax Provisional tax is not a separate tax but a way of paying income tax progressively as the income is received through the year. Generally, three instalments of provisional tax are paid (two during the year and the final instalment shortly after year end), based either on an uplift of the prior year tax liability or a forecast of the current year tax liability. The amount of provisional tax paid is then deducted from the final tax liability for the year as determined in the tax return. Provisional tax is payable if the prior year tax liability exceeds $2,500. Where provisional tax is underpaid Doing business in New Zealand 20