New Zealand economy 2022: trends, policies, legislation

This article was current at the time of publication.

Residential property interest limitation

New Zealand tax practitioners preparing returns for the current financial year will need to take account of the phasing out of interest deductibility on loans used to acquire a residential investment property.

The legislation is contained in a Supplementary Order Paper to the Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill, currently before the Finance and Expenditure Select Committee.

The Inland Revenue Department (IRD) has issued commentary on the proposed changes, including the timetable for phasing out interest deductibility.

In the first stage, deductibility for certain types of investment property acquired before 27 March 2021 drops to 75 per cent for interest claimable from 1 October 2021 to 31 March 2023. 

Taxation

Practitioners will know that the new top income tax rate introduced by the 2020 Taxation Bill from 1 April 2021 is 39 per cent. 

Taxpayers with taxable income over NZ$180,000 during the current financial year will be assessed at the new rate when filing their March year returns.

However, Angus Ogilvie FCPA, Director of Generate Accounting, says some clients who have set up automatic deductions of Residents Withholding Tax (RWT) won’t have adjusted them and will face bills for additional tax on their savings and investments on current year returns.

New reporting regime for domestic trusts

The IRD is considering feedback from its consultation on new disclosure rules for domestic trusts.

From the 2021–22 income year trustees will have to prepare financial statements and provide extra information with their income tax returns.

Officials have been consulting on the minimum requirements for these statements. According to Ogilvie, consultation so far has significantly lifted the threshold at which trusts will be required to report.

“Originally, a threshold of $2 million of assets was proposed, which in some cases would represent just the family home. But common sense prevailed – it’s now likely only 25 per cent of trusts will be caught. The frustration is that the matter is still not resolved,” he says.

Emissions reporting

Corporate lawyers surveyed in January by BusinessDesk cited the government’s “ambitious” emissions reduction program as a likely announcement.

Under the newly passed Financial Sector (Climate-related Disclosures and Other Matters) Act, the External Reporting Board (XRB) now has a mandate to issue reporting standards as part of a climate-related disclosures framework, as well as guidance on ESG (also known as socially responsible investing) matters.

It has issued an initial consultation document and sought submissions. 

Once the XRB issues its first standard – expected in December 2022 – it will be mandatory for NZX-listed companies with a market capitalisation of NZ$60 million or more, large licensed insurers, registered banks, credit unions, building societies and investment schemes managing assets more than NZ$1 billion.

There is a three-year transitional period before these CREs (Climate Reporting Entities) must obtain external assurance of their greenhouse gas emissions statements.

XRB CEO April Mackenzie says the standard-setter has employed several technical experts and overlaid that with XRB’s expertise in assurance, standards development and corporate reporting.

According to Mackenzie, XRB was given the task “as we know a lot about developing standards for corporate reporting”.

“We have an understanding of materiality, leaving material information out and the risks of ‘greenwashing’.”

XRB also has the mandate to issue non-binding guidelines on impact reporting and ESG reporting. An example Mackenzie cites is water quality, should the government decide to extend the regime.

The Financial Markets Authority will be responsible for enforcing compliance and expects to release initial guidance “in the latter part of 2022”.

Companies (Directors Duties) Amendment Bill

The Companies (Directors Duties) Amendment Bill – currently before a select committee – seeks to amend the requirement of the Companies Act s131 for directors to act in the best interest of the company.

While this has long been a pillar of the “shareholder primacy” doctrine – meaning directors should act to maximise shareholder wealth – the Bill adds other factors boards may take into account such as environmental impacts, good corporate ethics, Te Tiriti, being a good employer and the interests of the wider community.

Commentators have said the Bill, when enacted, will only give legislative support to governance policies that already have wide adherence.

Ogilvie believes small-to-medium enterprise boards are unlikely to turn their minds to it, but directors of larger businesses “should be giving it some serious thought”.

Law firm Russell McVeagh insists the law change “should not substantively change the current legal position for directors or the ability of companies to focus on [socially responsible] outcomes. 

“Companies can, and already do use purposes or stakeholder clauses in constitutions to include social good objectives.”

Omicron – practitioner issues

As New Zealand continues to assess the potential ravages of the Omicron Covid variant, Ogilvie has provided clients with a lot of advice on how to manage the risks it may pose to their businesses.

“If a member of your staff gets Covid, they could be off for two or three weeks,” he notes. “One way to manage that is not to have all staff in the office at the same time.”

General economy

Regarding the general economy, lawyers surveyed by BusinessDesk expect ongoing rationalisation of the hard-hit tourism, hospitality and retail sectors.

Further, strong mergers and acquisitions activity in 2021, driven by cashed-up overseas investors, is likely to taper off this year, curtailed by rising inflation and interest rates, growing valuation mismatches and “deal saturation”.