Tax change to encourage talent to NZ

Foreigners and returning New Zealanders who have been away at least ten years may be given a tax holiday on their overseas income in a measure to assist businesses to attract talented people to work in New Zealand.

The provision would apply only to people who came here to work as employees and only to income earned offshore. Income earned in New Zealand would still be subject to tax.

Revenue Minister Michael Cullen signalled the move today in an address to the Institute of Chartered Accountants National Tax Conference, saying details would be announced within the next few weeks with the release of a discussion document on reducing the tax barriers to international recruitment.

“I tested the proposal with members of the Institute’s London branch on my recent overseas trip and got a very warm reception,” he said.

The proposal expands upon an idea in the Tax Review 2001. The Review recommended exempting for seven years the overseas income of foreign nationals who become residents in New Zealand for tax purposes.

The government has yet to make a decision on how long the exemption should apply for but is considering expanding it to include expatriate New Zealanders returning to take up jobs here.

“It can be difficult for New Zealand to compete on wages with much larger economies to attract the highly skilled to work here. And to the extent that New Zealand businesses have to pay higher salaries to compensate for the New Zealand tax liability of an individual’s offshore investment, the business rather than the individual will be the ultimate beneficiary of the change.”

Other measures canvassed in the speech to reduce the obstacles to international investment included whether the profits from the sale of certain shares should be exempted from New Zealand tax when the investors were exempt from tax in their own jurisdiction.

Dr Cullen said this should assist the flow of venture capital to New Zealand by removing a disincentive for investors who were tax exempt in their own country but became subject to our tax when they sold their New Zealand shares.

“The government is also considering recommendations from the private sector liaison group on research and development to change the depreciation rules to deal with “black hole” R&D expenditure.

“I hope to include in the next taxation bill a provision that will make the cost of failed patent applications and failed resource management consent applications immediately deductible.”

Dr Cullen said that after much thought and consultation, the government had decided not to proceed with the Tax Review’s recommendation of a discounted tax rate for new foreign direct investment.

“Introducing a tax differential on FDI subject to the date of the investment would not be sustainable because it would be too difficult to police the boundaries and the costs of implementation would likely outweigh any benefits.

“But the government remains determined to increase the flow of FDI to New Zealand and will explore options to achieve this through the interdepartmental steering group on promoting New Zealand’s international links and inter-connectedness.

“Given the high level of interest in this particular recommendation, I am making public the officials’ report on which the government’s decision is based,” Dr Cullen said.

The report – “Taxing Inbound Investment” – is available at www.taxpolicy.ird.govt.nz

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