Proposed Tax Changes to Employee Share Schemes and Thin Capitalisation funded in Budget 2025

Yesterday, Finance Minister Nicola Willis announced Budget 2025 sets aside $75 million over the next four years for tax changes to encourage foreign investment in New Zealand infrastructure and make it easier for startups to attract and retain high quality staff.

The Budget sets aside $10 million to cover deferring tax liabilities on some employee share schemes to help startups and unlisted companies. Currently, cashflow issues arise if the tax bill for employee share scheme income arrives when employees are unable to realise the value of their shares. The changes will allow tax to be deferred until a liquidity event occurs, such as the sale of the shares.

New Zealand’s thin capitalisation rules limit the amount of tax-deductible debt that foreign investors can put into New Zealand investments. The purpose of these rules is to prevent income being shifted offshore and to protect New Zealand’s tax base. There is a risk that the rules may be deterring investment, particularly in capital-intensive infrastructure projects that are typically funded by large amounts of debt.
The Budget sets aside $65 million for changes to the thin capitalisation rules, pending the outcome of consultation on the details.

The IRD public consultation document on the potential changes to the thin capitalisation rules, also released yesterday, can be found here.

Minister Willis also referenced work already under way on potential changes to modernise and reduce compliance costs associated with fringe benefit tax, adjustments to the foreign investment fund rules for new residents and other rules to make New Zealand a more attractive destination for migrants and digital nomads.