Upcoming Mallesons seminarsAustralian taxpayers and funds who have investments or activities in New Zealand. New Zealand taxpayers and funds who invest into Australia.
What do you need to do?Consider the impact of the new tax treaty on income and gains from the investments and activities in New Zealand (for Australian taxpayers and funds) and Australia (for New Zealand taxpayers and funds).
David Anderson
Solicitor
Ken Lord
Partner
T +61 2 9296 2149
Betsy-Ann Howe
Partner
T +61 2 9296 2408
The Australian and New Zealand governments today announced that the two countries have signed a new tax treaty to replace the existing 1995 treaty and 2005 protocol.
When implemented, the new treaty will bring the withholding tax rules for dividends, interest and royalties paid between New Zealand and Australia into line with recent Australian tax treaty practice. Other key changes will assist Australian managed investment trusts in obtaining tax treaty benefits for their New Zealand income, reduce double taxation on short-term employee secondments and limit time periods for transfer pricing adjustments.
Dividends, interest and royalties
The new treaty will reduce withholding tax rates on certain dividend, interest and royalty income paid between New Zealand and Australia.
In relation to dividends, no withholding tax will be levied where the recipient has held for 12 months at least 80% of the voting power of the company paying the dividend. A 5% withholding tax rate will apply where the recipient holds at least 10% of the voting power. Dividends paid in respect of a portfolio investment by a government body (including a government investment fund such as Australia’s Future Fund) will be exempt from withholding tax.
The new treaty contains an exemption from withholding tax for interest derived by “financial institutions” unrelated to the borrower, as well as for certain government bodies (including government investment funds) and banks performing central banking functions. Unlike other of Australia’s recent tax treaties which contain similar exemptions, the new treaty will preserve the New Zealand 2% “approved issuer levy” in relation to interest arising in New Zealand.
The new treaty will reduce withholding tax for royalties from 10% to 5%. The definition of “royalty” will be changed to exclude amounts derived from the leasing of industrial, commercial or scientific equipment, and to include amounts paid for spectrum licences.
Managed investment trusts
Trusts that are “managed investment trusts” (MITs) for the purposes of Australian tax will be entitled to treaty benefits in respect of income derived from sources in New Zealand to the extent the beneficial owners of the interests in the MIT are Australian individual residents. Further, Australian MITs listed on the ASX and MITs which are beneficially owned to at least 80% by Australian residents will be entitled to the treaty benefits for all their New Zealand sourced income.
Income from real property
The new treaty confirms that income from real property (including profits of an enterprise from agriculture, forestry or fishing) will be taxed on a net basis in the country in which the property is situated. For example, relevant expenses incurred (whether incurred in the country where the property is situated or elsewhere) in deriving rental income are to be allowed as deductions in calculating the income tax payable in the country where the property is situated.
Employment income from short-term secondments
Income derived by an employee resident in one country from short secondments (generally not exceeding 90 days in any 12 months) to the other country will be exempt from tax in the visiting country. Such income would only be taxed in the employee’s country of residence.
Transfer pricing - 7 year limit for adjustments
The new treaty also provides some certainty to taxpayers in relation to transfer pricing adjustments. Broadly, no transfer pricing adjustments will be made after the expiration of seven years after the tax return has been filed for the relevant income year, unless there has been fraud, gross negligence, wilful default or an audit has already been initiated.
Commencement of the new treaty
The new treaty will only come into force once Australia and New Zealand have both completed their domestic legislative requirements and notified each other through the diplomatic channel.
In the case of Australian taxes, the provisions of the new treaty will have effect:
- in respect of withholding tax, on income derived on or after the first day of the second month following the date on which the new treaty enters force
- in respect of fringe benefits tax, fringe benefits provided on or after 1 April next following the date on which the new treaty enters into force, and
- in respect of other Australia tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following the date on which the new treaty enters into force.
In the case of New Zealand taxes, the provisions of the new treaty will have effect:
- in respect of withholding tax, on income derived on or after the first day of the second month following the date on which the new treaty enters force, and
- in respect of other New Zealand taxes, in relation to income, profits or gains of any year of income beginning on or after 1 April next following the date on which the new treaty enters into force.
Click here to read the joint media release of the Australian Minister for Trade, Simon Crean, and the Assistant Treasurer, Senator Nick Sherry, announcing the signing of the new treaty with New Zealand.
For more information please contact the Mallesons Tax Team