As an Australian business eyeing the fertile grounds of New Zealand for expansion, understanding the nuances of Trans-Tasman business structuring is crucial. At DFKOGC, we regularly assist Australian businesses in navigating the tax landscape and ownership structures in New Zealand. Our membership in DFK ANZ — a group of privately owned, specialist accounting firms connected nationally and globally through the DFK network — positions us strongly to undertake this task. This article aims to shed light on crucial issues, repatriation of profits, and common structures. It provides a few examples to help you comprehend the tax, profits and business structures you must be across when conducting business across the Tasman Sea.
Issues to consider for Australian companies doing business in New Zealand
The primary issues faced by Australian businesses in New Zealand encompass the non-recognition of imputation credits overseas, the repatriation of profits, and the ownership structure. The key objectives are to either maximise tax paid in Australia to generate franking credits attached to dividends or to maximise tax credits available to offset the Australian tax liability.
Repatriation of Profits:
Repatriating profits from New Zealand to Australia involves several considerations:
- Dividends: The issue of imputation credits arises here.
- Management Fees: We calculate these on a cost-plus basis, adding a markup of 5% for non-core services, while we benchmark core services.
- Royalties: The rate must be benchmarked with a withholding tax at 5% to the Australian recipient.
- Interest: The rate should be benchmarked. For loans less than NZD 10 million, a rate of 250 basis points above the relevant base indicator is used (safe harbour), with a withholding tax of 10% to the Australian recipient.
- Limited Company: Profits are taxed at 28%, with the challenge of imputation credits not passing through to the ultimate shareholders in Australia. Profits transfer could use Management Fees, Service Fees, Royalties, or Interest.
- Branch: The head office can easily receive transferred profits without imputation credits. The branch pays tax on profits from NZ operations, and the head office is taxed on worldwide operations with a tax credit for NZ tax paid.
- Limited Partnerships: A limited partnership is a legal entity separate from its partners. It has two types of partners – general and limited partners. General partners manage the partnership and are liable for the partnership’s debts and liabilities if the partnership is unable to honour them.
Limited partners must be individuals to be tax effective and individual partners have limited liability to the amount of their investment in the partnership as long as they do not take part in the management of the partnership, otherwise the limited liability can be lost.
This structure works well if you have different ownership proportions and unrelated partners as each limited partner pays tax on the NZ sourced income and then partners can generally obtain a full tax credit in their own tax jurisdiction.
- Unit Trusts: A unit trust is treated as a company in NZ and the unit holders are treated as shareholders, and income and other payments to the unit holders are treated as income to the unit holders. We understand that unit holders need to be individuals, or a “flow through” Trust in Australia so that they can utilise the NZ tax credits.
What might this look like in practice?
Let’s look at a few scenarios.
Individual Ownership: Bill Smyth, an Australian tax resident, aims to repatriate profits back to Australia tax-effectively. As an individual, he would be taxed at NZ marginal tax rates, which could be more tax-effective.
New Zealand Company: Setting up a New Zealand company could result in a tax of 28% on profits. However, the dividends paid to Australian shareholders will not have franking credits.
NZ Branch of an Australian Company: This structure allows for tax on profits at 28% and claims tax paid in NZ to offset Australian tax due, but no franking credits are available for the NZ tax paid.
NZ Look Through Company (LTC): An Australian Trust as a shareholder of LTC could be a viable option. Profits flow through to the Trust, which pays tax in NZ, and the Trust would be taxed in Australia with NZ tax credits to offset the Australian tax liability.
Setting Up a NZ Company:
All New Zealand companies must have at least one director residing in New Zealand or Australia, with specific conditions. Overseas shareholders must obtain an NZ tax number, requiring a fully functional bank account or AML/CFT compliance via a registered organisation like DFKOGC.
Trans-Tasman business structuring requires a meticulous approach to ensure tax efficiency and compliance with the legal frameworks of both Australia and New Zealand. For a more comprehensive overview of doing business in New Zealand, we invite you to review our guide. At DFKOGC, we are ready to provide guidance and support to Australian businesses, ensuring a smooth and profitable venture into the New Zealand market. We encourage you to book a call with one of our partners to discuss your next steps.