It has been more than ten years since the last reform of the Maori Authority (MA) tax regime, and with more than 1000 MAs operating in New Zealand, they now form an established part of our economic landscape.
The concept of MAs was first introduced in 1939. The rules were originally enacted as a practical way to levy tax on organisations that administered large blocks of farmland owned in common by Maori, and not in private ownership. The MA was obliged to pay tax on the groups’ income on behalf of its members, based on their respective share of the net profit – similar to the tax rules for partnerships.
The original rules were complex and difficult to administer, so they were updated in 1952. The revised rules introduced two separate tax regimes for MAs, dependant on the number of members.
Small MAs with less than 20 members continued to be treated akin to a partnership, with the MA responsible for the collection and payment of tax for each member according to their share of the group’s income.
However, MAs with more than 20 members were treated as distinct entities, with tax levied separately on both the MA and members. The MA itself paid income tax on undistributed income at a flat rate of 20 percent. Members were then required to complete a personal tax return to report distributions received from the MA income, and personally pay tax on that income. A rule existed whereby income distributed to members within four years of being earned was only taxed on the individual members. However, the system imposed double taxation when income already taxed to the MA was subsequently distributed to members after this four-year period.
As well as the double taxation problem, the rules imposed onerous tax compliance on MAs and their members. As a result, in 2001 a process began to update the regime, resulting in the tax laws that exist today.
Modern day MAs can have thousands of members, so it is clear that the original 1939 and 1952 tax rules based on partnerships would be unfeasible today. Trying to determine each member’s share of income would be time consuming, impractical and costly.
Under the current regime, any eligible entity can elect into the MA tax regime irrespective of their legal form. The current system is based on the underlying policy assumption that the tax levied to the MA is a proxy for the tax that is payable by the members. This is facilitated through a mechanism similar to the company imputation model, with a couple of unique differences.
An MA pays tax on its profits at 17.5 percent. Like the imputation credit regime, payment of this tax creates a Maori Authority Credit (“MAC”). The MA can then attach MACs to taxable distributions made to members (shareholders or beneficiaries, depending on the legal form of the MA).
The members can use these MACs to offset their own individual tax liabilities. However, unlike the imputation credit regime, any unused MACs are refunded in cash, instead of carried forward.
The 17.5 percent rate seeks to recognise that assets owned by MAs are still under common ownership by everyday people, a significant number of whom are in this income tax bracket. This is intended to reduce compliance costs by ensuring that most distributions are imputed at the correct ratio, minimising the need for end of year square-ups and avoiding double tax on the distributions. Members who are lower earners, paying tax at the 10.5 percent rate, can claim a refund for excess credits, whilst taxpayers who earn more than $48,000 would have additional tax to pay.
The changing nature of MAs and their diversification from land to other assets, including investment portfolios and equities, has given rise to unique implications. For example, when MAs receive dividends from investments, and imputation credits are attached, they convert to MACs. Depending on the tax profile of the member, the benefit of the imputation credits could give rise to tax refunds. At face value this appears favourable, but perhaps this is more logical that the imputation system that applies to companies. Should imputation credits also be refundable? There is an argument for treating the tax paid by a company as an interim tax paid on behalf of a shareholder. Under this approach, the total incidence of tax determined by the tax profile of the shareholder.
The revised regime has substantially reduced compliance costs for MAs and their members alike, removing the need for most members to complete an income tax return. Furthermore, the regime recognises the evolution of MA asset bases, and reduces tax complexity for MAs with commercial investments and other business operations. Overall, the regime can promote economic and social growth for Maori businesses, yet ensures members pay their fair share of tax, based on their personal circumstances.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.