Many people mistakenly believe that the Double Tax Agreement in place between Australia and New Zealand protects business from being taxed twice.
Unfortunately, and without proper planning, that just isn’t the case.
Problem 1: Management Fees
Many start their tax planning by charging management fees to the New Zealand entity, reducing its profit and therefore any tax that is payable in New Zealand.
That’s a basic 101 strategy and it is turning into a nightmare for a number of Australian businesses.
Because the management fee is an international transaction, Inland Revenue are looking at how these fees are being charged. They are concerned about the “profit shifting” which is resulting in a reduction of tax collected.
That isn’t really a surprise because, for many businesses, that is the whole idea!
But when it comes to charging management fees in a different jurisdiction (such as an Australian company charging a New Zealand one) there are specific requirements that have to be met and certain compliance measures that have to be undertaken.
Naturally we are working through these exact issues all of the time and when we prepare your tax returns we make sure we review this area to ensure everything is up to scratch.
Problem 2: Double tax
New Zealand income tax is charged on the profit the New Zealand entity makes. When the New Zealand company is a subsidiary of an Australian company, that Australian company claims any tax paid to Inland Revenue as a foreign tax credit (as it is entitled to do).
Unfortunately you cannot carry imputation credits across the Tasman.
That means that when the profits are ultimately distributed to the shareholders (that’s the whole idea of doing business, right?) the shareholders can’t claim the imputation/franking credits that arose from the income tax that was paid in New Zealand, against the profits that have been transferred to them.
By the way, the situation is no different when the New Zealand company is owned by the individual owners outright if they are Australian tax residents.
Therefore the business owners end up on paying tax (again) on the profit that is allocated to them, even if the allocation was simply a journal entry in the books.
For a number of Australian tax residents, that can mean paying tax between the two countries at an effective rate of 60 to 70%!
This is the way the rules are being applied by the ATO. We are hearing from Australian businesses who are being hammered with significant amounts of penalties going back several years brought about through an ATO audit where the treatment of trans-Tasman transactions has been done incorrectly.
There is a legitimate way around this providing special applications and registrations are made in New Zealand. It is why we offer to structure companies so that you can legitimately operate a New Zealand company without paying any income tax there. This eliminates, in all but a very few cases, the incidence of double-tax.
And you wont get pinged by Inland Revenue for applying management fees incorrectly either!
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.