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When you expand into New Zealand, what tax implications do you face?
Expand Into New Zealand
You need to look at GST and income tax as well as customs duty when you expand into New Zealand. But what this exactly means, Mike Reddy of NZTax.com.au will tell you in this episode
Here is what we learned but please listen in as Mike explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Expand into New Zealand
When you expand into New Zealand, you have three issues to sort out tax-wise:
1 – GST
2 – Income tax
3 – Customs Duty
The answer to all this depends on how you operate in NZ. If you operate through a NZ company, then that company is a resident person and hence resident rules apply.
If you operate through your Australian entity, then non-resident rules apply unless you have a permanent establishment (‘PE’) in NZ. But PE is a concept for income tax only. So we only worry about PEs when we talk about income tax.
Let’s assume you don’t have a company or other entity in New Zealand, but operate through your Australian entity.
1 – GST
Let’s assume the goods first come to Australia from your overseas supplier and you then send them on to New Zealand. So you first need to charge with Australian GST and then with New Zealand GST.
Australia Import GST and GST-free Export
You pay 10% AU import GST which you claim back in your AU BAS. The shipment to New Zealand is GST-free as an export. So in Australia your GST is nil.
New Zealand Import GST
Now the goods arrive in NZ.
If the package is below NZD 1,000 and your total sales are below NZD 60,000, then NZ Customs won’t charge you GST at the border.
However, if the value of the shipment is over NZD 1,000, NZ customs will hold the shipment back and charge 15% NZ GST.
If you sell more than NZD 60,000 in NZ, you have a taxable activity and need to register for GST and then all your imports are subject to 15% NZ import GST.
And if you sell via a platform like Shopify or Amazon, the platform will take care of the NZ GST.
New Zealand Input Tax Credit
The question is now whether you can claim any of the GST back you paid at the NZ border. That depends on whether you make a taxable supply in NZ. And that depends on where the goods are at the time of sale unless you sell through a platform like Shopify.
If the goods were outside of NZ at the time of sale, then your supply takes place outside of NZ and hence is not taxable in NZ per s 8 (2) NZ GST Act.
That means you can’t claim the import GST back as a GST input tax credit. But it also means that you don’t need to charge GST to your customers.
Section 8 NZ GST Act 1985 about Taxable Supply
Sorry to do this to you, but let’s quickly look at the actual law, ie. section 8 of the NZ Good and Services Tax Act 1985*.
*We have deleted or shortened some parts to make it easier to read. And we have also taken out references to distantly taxable goods since we will cover those further down. Highlights in bold were made by us.
“(1) [GST] shall be charged in accordance with the provisions of this Act at the rate of 15% on the supply (but not including an exempt supply) in New Zealand of goods and services…by a registered person in the course or furtherance of a taxable activity carried on by that person, by reference to the value of that supply.
(2)… goods and services shall be deemed to be supplied in New Zealand if the supplier is resident in New Zealand, and shall be deemed to be supplied outside New Zealand if the supplier is a non-resident.….
(3) Despite subsection (2), goods and services are treated as being supplied in New Zealand if the supplier is a non-resident and—
(a) the goods are in New Zealand at the time of the supply …; or…
(b) the services are physically performed in New Zealand by a person who is in New Zealand at the time the services are performed;….
(4 ) Despite subsection (3), if a supplier who is a non-resident supplies goods and services, to which subsection (3)(a) or (b) would apply but for this subsection, to a registered person for the purposes of carrying on the registered person’s taxable activity, the goods and services are treated as being supplied outside New Zealand unless the supplier and the recipient of the supply agree that this subsection will not apply to the supply.
Taxable Supply or Not
So in summary, if a product is in Australia at the time you sell it to an NZ customer, the sale counts as being outside of New Zealand and hence is not a taxable supply. That means you don’t need to charge GST, but it also means that you don’t get credit for the GST you paid at the border. But you can treat it as a taxable supply under s8 (4) if you sell to a registered business in NZ.
If a product is in NZ at the time of sale, it is a taxable supply. Hence you can claim the import GST but also need to charge GST.
Distantly Taxable Goods
Distantly taxable goods are imported goods with an estimated customs value of NZD 1,000 or less (excluding GST). So the good is outside NZ at the time of supply and is delivered to a NZ address. In that case NZ Customs won’t charge import GST, unless you choose to treat it as a taxable supply, provided at least 50% of your supplies are made to end-consumers.
Here is how this is worded in s8 NZ GST Act – but be warned. It is worded in a really confusing way.
Section 8 NZ GST Act 1985 about Distantly Taxable Goods
Section 8 NZ GST Act 1985:
“(3) Despite subsection (2), goods and services are treated as being supplied in New Zealand if the supplier is a non-resident and—
(ab) the goods are distantly taxable goods to which subsection (4E) does not apply;…
(4E) Despite subsection (3), if a non-resident is the supplier of distantly taxable goods, to which subsection (3)(ab) would apply but for this subsection, to a registered person for the purposes of carrying on the registered person’s taxable activity, the goods are treated as being supplied outside New Zealand, except if subsection (4F) applies to the supply.
(4F) Subsection (4E) does not apply to treat goods as being supplied outside New Zealand if—
(a) the non-resident supplier chooses that this subsection applies to the supply of the goods; and
(b) at the time of the election, the non-resident supplier reasonably expects that more than 50% of the value of the supplies made by the non-resident supplier to persons in New Zealand during the period of 12 months from the election will be made to persons who are not registered persons; and
(c) the value of the supply is less than or equal to $1,000.”
Income Tax
In Australia, you pay tax on your worldwide income (assuming you are a tax resident of Australia) and so any profits you make in NZ are taxable in Australia.
But how much tax you actually pay depends on what you are doing in NZ and also how you are structured in NZ and Australia. And so there are four scenarios:
Scenario # 1 – You have no presence in NZ
You have no employees, no warehouse, no office, no company, no trust, nothing – and so you pay no income tax in NZ. All taxing rights are in Australia.
Scenario # 2 – New Zealand Entity
The next scenario is at the opposite side of the spectrum – You have a NZ entity in NZ, and so that NZ entity will pay NZ income tax in NZ like anybody else in NZ.
When this NZ entity distributes profits to Australia, they arrive in Australia as NANE or as foreign income with foreign income tax offsets attached, depending on whether the NZ entity is a company, trust or partnership. So all well until here, apart from any withholding tax.
The problem really only starts in Australia, when you have an Australian company that now distributes those profits and of course those profits don’t have franking credits attached, since they arrived as NANE or with foreign income tax offsets. So that is when you have tax leakage.
But you might be able to avoid this by using trusts in NZ and Australia, or you just don’t distribute the NZ profits but use them to grow the business in NZ and/or in Australia.
Scenario # 3 – Permanent Establishment
And now the third scenario is in the middle. You have no legal entity in NZ but a presence – be it employees, a warehouse, an office or something else – then you have a so-called permanent establishment, either a real physical establishment like an office or a warehouse – or just a deemed one thanks to employees or dependent contractors. But whether it is real or deemed doesn’t really matter, this permanent establishment does pay tax in NZ.
And just by the way, not everything triggers a permanent establishment. You can have 3PL services in NZ and you can have independent contractors there without triggering a PE.
So the NZ permanent establishment pays NZ tax. And then the Australian company gets an offset for the tax paid in NZ. But as before you have tax leakage upon distribution of unfranked NZ profits to Australian shareholders. However, if you trade through an Australian trust or as an individual, then you could claim the NZ tax as a foreign income tax offset without tax leakage.
Scenario # 4 – TR 2018/5
You have a New Zealand company but this New Zealand company is actually an Australian tax resident. And you get NZ to agree that there is no New Zealand tax residency. This would actually be an ideal outcome because it means you only pay Australian tax and hence get full franking credits.
And this scenario was a viable option after Bywater and after TR 2018/5, when everything focused on the location of central management and control, meaning the location of the company directors and key decision makers.
However, this is about to change. The Board of Taxation reviewed the issue and published its recommendations around the Central management and control test in July last year. And the 20/21 budget on the 6 October 2020 already included these recommendations.
And what those changes basically mean is that the Central management and control test now requires a significant economic connection to Australia, meaning the core commercial activities must be in Australia and of course the central management and control as well, so the core commercial activities must be in Australia before this company would be an Australian tax resident.
So with those changes it will no longer be enough to only have the Australian directories, meaning your central management and control, in Australia if your core commercial activities are in New Zealand. And so the fourth scenario won’t really work anymore going forward.
3 – Customs Duty
If you import from Australia, you usually don’t pay customs duty. If the goods come from a different country, you might or might not, depending on the treaties between NZ and that other country.
Bank Account
There are two things that trigger the need for a New Zealand bank account.
The first one is your customers. As soon as your NZ customers are no longer happy to pay by credit card or transfer money to Australia, you need an NZ account.
The second reason is GST. To register for GST, you need an IRD number. And you only get an IRD number, if you have a fully functional bank account in New Zealand.
As soon as you need a bank account in NZ, you face New Zealand’s anti-money laundering legislation.
How To Open A New Zealand Bank Account
It is tricky for a small non-resident business to open up a New Zealand bank account. And that is, even if you are a longtime customer of an Australian bank with a subsidiary bank in NZ.
Australian banks with banks in NZ are ANZ, Westpac, NAB and Commonwealth Bank. NAB owns Bank of New Zealand. And Commonwealth Bank owns ASB, a long time ago known as Aucklands Saving Bank, but now just ASB.
So even if you bank with one of those, it is still difficult. However, if you have a designated banker, then those bankers seem to be able to speed things up in NZ. So ask your personal banker to help, if you have one.
So this was a short summary but please listen in since Mike Reddy explains all this much better than we ever could.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 23 April 2023
Tax Talks spoke to Mike Reddy - Chartered Accountant and Registered Tax Agent at NZ Tax Accountants Pty Ltd - for more details.
