Tax residency and transitional tax resident
Tax is often an important consideration with any financial decision as it impacts the net return (after tax and fees) we receive as investors. But for expats, tax plays an even more important role, as most likely you will have assets in more than one country and need to navigate the complexities of different tax systems and how they interact.
If you are serious about moving to New Zealand (or have already moved), we would recommend engaging with local New Zealand tax adviser at your earliest opportunity. This will help you understand the relevant issues for your particular situation.
New Zealand Tax Resident
In New Zealand, your tax obligations depend on your residency.
- If you are considered ‘tax resident’ in New Zealand, you will be taxed on your worldwide income
- If you are not considered tax resident in New Zealand, you will only be taxed on income earned within New Zealand
You become a New Zealand tax resident when the first of these happens:
- You’ve been in New Zealand for more than 183 days in any 12-month period
- You have a permanent place of abode in New Zealand
When determining the number of days spent in New Zealand, any part days count as full days. Also, the total of 183 doesn’t need to be consecutive and could be met over several visits.
Determining if you have a permanent place of abode is slightly more subjective. Generally, it is somewhere such as a house, where you normally live. But you don’t have to live there all the time and the house could be rented out when you are not living there. It is also dependent on your ‘ties’ to New Zealand, such economic, family and social connections.
Understanding when and how you are treated from a tax residency perspective, is a crucial first step in your overall planning and usually something you should check with a New Zealand tax adviser.
Obligations as a New Zealand tax resident
When you are considered a New Zealand tax resident, you will be required to:
- File Tax Returns. Subject to your situation, you may be required to submit an annual tax return to the Inland Revenue Department (IRD), New Zealand’s tax authority, reporting all sources of income, deductions, and tax credits. New Zealand’s tax year runs from 1 April to 31 March of the following year, so often will not align with the tax year of the country you are leaving.
- Declare Worldwide Income. As a tax resident, you must declare all income earned worldwide on your New Zealand tax return.
- Pay Provisional Tax. If your tax liability exceeds a certain threshold, you may need to pay provisional tax during the tax year in addition to your regular PAYE deductions.
Transitional Tax Resident
The transitional tax resident regime was introduced in 2006 and can exempt individuals who qualify from paying tax in New Zealand on ‘foreign sourced passive income’ for the first four years of being a tax resident.
If you have just moved to New Zealand, you can’t always be sure that your move will be permanent until you’ve lived here for some time.
The transitional tax resident regime therefore provides a valuable window during which time you can assess whether the move is going to be permanent, before restructuring your financial affairs (such foreign property, pensions/retirement accounts and other investment assets) to fit in with New Zealand’s tax system.
To qualify as a transitional tax resident, you must not have been a NZ tax resident at any time in the past 10 years and you must not have qualified for the transitional tax exemption before.
If you qualify, the exemption will apply for 48-months following the month in which you become a NZ tax resident.
Whilst you are transitional tax resident, you will be temporarily exempt from NZ tax on a range of sources, including:
- Rental income derived offshore
- Foreign dividends
- Foreign interest
- Foreign investment fund income that is attributed under NZ’s foreign investment fund (FIF) rules (including foreign superannuation)
- Offshore business income (that is not related to the performance of services)
Please note that if you remain New Zealand tax resident during your transitional tax resident period, you will still be liable to pay New Zealand tax on any earned or employment related income from New Zealand or overseas, and be liable to tax on any New Zealand based investments, such as New Zealand shares, interest on New Zealand cash or bonds, or rent from New Zealand property.
Restructuring your financial affairs
The transitional resident period provides a very useful window during which time you do not necessarily have to restructure all your foreign assets and investments to fit in with New Zealand’s tax system.
However, if you decide to stay in New Zealand longer-term, it is normally advisable to develop a strategy for managing your assets before the transitional tax resident period ends. This can help to minimise any tax leakage, reduce ongoing compliance costs and make your financial affairs easier to manage.
More information and Professional Advice
Seeking professional advice from a tax expert with knowledge of both New Zealand’s tax laws, your home country’s tax regulations and the impact of these agreements, is highly recommended to ensure compliance and ensure you organise your affairs efficiently.
You can find more information on New Zealand’s tax system, including a range of tax guides from New Zealand’s Inland Revenue Service (IRD) www.ird.govt.nz.
Please note that the information contained in this note is general in nature and should not be considered as individual advice. If you would like to discuss your individual situation with an adviser, or have any questions, please contact a member of the Pacific Wealth team.
