Dynamic Business: FIF rules – the context has changed (NZ Herald)

Venture capitalist Rob Coneybeer underscores the connection between talent, innovation and foreign direct investment (FDI).

“While FDI is important, it is the talented individuals who drive innovation – and that innovation is what ultimately attracts investment,” he says.

Using Rocket Lab as an example, Coneybeer illustrates how founder Sir Peter Beck built an internationally renowned company by assembling a highly skilled team, with many recruited from outside New Zealand. Their collective expertise brought in global investment and helped establish New Zealand as a leader in space technology.

Coneybeer, who is managing director and founder of US-based venture capital firm Shasta, underlined the issues at the recent United States Business Summit in Auckland.

A migrant to New Zealand himself, he highlights the country’s natural advantages: political stability, its environment and a reasonable cost of living. He says these factors all make New Zealand an appealing destination for global talent, but the Foreign Investment Fund (FIF) rules turn otherwise enthusiastic innovators and investors away.

“New Zealand can have a great big bucket for foreign direct investment, but if you have this big hole in the bottom that keeps people from engaging and living here, then it’s not worth the effort,” Coneybeer says.

Revenue Minister Simon Watts recently announced a review of the FIF rules as part of Inland Revenue’s tax and social policy work programme. This has been broadly welcomed by both business leaders and policy analysts, who have long argued for reform.

Labour’s finance spokesperson Barbara Edmonds supports the review, acknowledging the FIF rules are outdated. “When the FIF rules were designed, we didn’t have the global mobility of labour that we have now. The context has changed, and people are more able to choose New Zealand as a place to work,” she says.

Edmonds – a former Labour Revenue Minister and IRD tax lawyer – says the potential fiscal loss as a result of any changes will be top of mind for the government, but “there are some elements that could be changed on the edges without it being a potential risk to revenue base”, such as adjusting the $50,000 threshold, which hasn’t changed since the rules came in.

She also points to the transition period as another area that could be considered. It is currently four years but could be extended.

Coneybeer suggests that options should be explored such as allowing individuals to voluntarily opt into a capital gains taxation instead of FIF. He argues that this approach could be revenue-neutral or even revenue-positive.

“If they had the ability to opt into realisation-based taxation on assets in lieu of FIF, then that revenue could come to New Zealand because it is already accounted for with a clear offset against US capital gains tax in the tax treaty,” he says.

Edmonds points out that the FIF rules make up part of a broader discussion on tax reform. She notes growing momentum, citing the International Monetary Fund (IMF), the World Bank, the OECD and senior business leaders who have identified gaps in New Zealand’s revenue base.

“There is an opportunity to look at the FIF rules and how they work, if New Zealand had a capital gains tax,” she says.

Green energy: A competitive edge

Reflecting on what New Zealand could lean on to attract further international investment, Edmonds told the US Business Summit that New Zealand’s renewable energy resources offer a unique competitive edge. She sees it as a foundation for addressing several of New Zealand’s challenges simultaneously: climate resilience, economic growth, and job creation.

She highlights the strategic importance of New Zealand’s clean energy advantage, particularly as companies intensify efforts to decarbonise supply chains. The ability to offer clean, renewable power positions New Zealand as a preferred location for companies looking to align operations with sustainability goals.

“New Zealand has an edge ahead of the world in renewable energy,” she says, noting that climate-related disclosures are requiring companies to track emissions through their supply chains which makes New Zealand’s high proportion of renewable energy a magnet for international businesses.

“More and more international companies, including one I met from the US just a couple of weeks ago, want to come to New Zealand and scale here because of our renewable energy sources,” she adds.

“Our high renewable energy numbers already give us a significant head start,” Edmonds says. But she stresses the importance of continued investment in energy generation, transmission, and storage infrastructure to realise this potential fully.

Foreign investment rules

New Zealand’s FIF rules are increasingly cited as an impediment to attracting global talent and investment to New Zealand. Introduced almost 40 years ago, the rules were designed to prevent wealthy taxpayers from shifting assets to offshore tax havens out of sight of Inland Revenue. However, they’ve not kept pace with modern economic realities.

Under the rules, New Zealand residents with overseas investments are taxed as though those assets generate a 5% return annually, regardless of whether they are liquid or not.

This can result in double taxation, particularly with the US, where New Zealand’s tax agreement fails to offset FIF taxes against US capital gains.

The FIF rules have significant implications for attracting skilled migrants and returning expats. Many reconsider moving to or staying in New Zealand because of the financial penalty these rules impose.