Navigating the Waters of New Zealand's Tax System: What Every Migrant Needs to Know
Thinking about all the new experiences and possibilities that come with moving or returning to New Zealand is exhilarating. While this can be an exciting prospect, it is important to consider the potential tax implications that come with it. In this article, we cover the key points you need to know from a New Zealand tax perspective to help you make a smooth transition.
One crucial aspect to keep in mind is your transitional residency status and its impact on your tax obligations.
As a New Zealand tax resident, you're generally required to pay taxes on your worldwide income. However, if you qualify for transitional residency, you may be able to take advantage of a temporary tax exemption that can help you save money on taxes. This exemption means that most of your foreign-sourced income will be exempt from New Zealand tax for up to the first four years of your residency, except for income earned from personal services or employment (whether earned in New Zealand or offshore).
When are you Eligible for Transitional Residency Tax Exemption?
To be eligible for the transitional tax residency, you must meet ALL of the following criteria:
Become a New Zealand tax resident (either by virtue of the 183 day count test or Permanent Place of Abode test); and
Have not been a New Zealand tax resident for the last 10 years; and
Have not previously used the transitional tax residency exemption; and
Have not elected out of the exemption either by notifying IRD or by applying for Working for Families Tax Credits.
It's worth noting that transitional tax residency will be automatically granted to you if you meet the above criteria. However, if you do not wish to be a transitional tax resident, it's your responsibility to notify IRD.
Do you know your Start Date and End Date of Exemption?
The tax exemption begins from the first day you become a domestic tax resident of New Zealand, whichever of the following tests is met earlier:
You establish a ‘Permanent Place of Abode’ (“PPOA”)in New Zealand; or
You are present in New Zealand for more than 183 days in any 12-month rolling period.
This exemption expires on the earliest of:
The day you nominate not to be a transitional resident; or
The day before you cease to be a New Zealand tax resident; or
The end of the 48th month after the month in which you come become a tax resident, ignoring the 183-day.
What income is not subject to New Zealand Tax?
For the period you are a transitional resident, most of your foreign sourced income is exempt from New Zealand tax except for:
Amounts derived in connection with employment or services performed while you are a transitional resident; and
Income from a supply of services.
This means that assets and investments offshore(including foreign investment income) sit outside the New Zealand tax base for the period of the transitional tax residence.
Beware of Losing Transitional Residency Tax Exemption!
It's important to be aware of the potential risks of losing your Transitional Residency Exemption when moving to New Zealand.
We have seen cases where many transitional tax residents relocating to New Zealand lose their exemption due to a lack of understanding of the New Zealand tax rules, or unknowingly doing something which causes them to lose their transitional tax residency status.
For instance, if you claim deductions for overseas losses, usually relating to overseas rental properties, you could inadvertently opt out of the transitional resident exemption. The same applies if you claim Working for Family credits.
Opting out of the transitional residency exemption is an irrevocable decision that could have wider tax implications for you. If you find yourself in this unfortunate situation, seeking advice from a tax specialist is essential.
That being said, in some cases where your tax affairs are relatively simple and all of your assets are already in New Zealand, opting out of the transitional residence exemption might be a sensible decision. It's important to consider multiple factors before making such a choice.
Inland revenue-Exchange of information
To promote tax transparency and compliance both domestically and internationally, the Inland Revenue collects a wealth of information from foreign tax authorities through their extensive exchange of information programmes.
To ensure tax compliance, Inland Revenue have recently released some updated resources including a foreign income guide that provides an overview of how international tax rules apply to offshore assets and income sources.
Top 10 Tax Misconceptions for Individuals
To help individuals understand international tax compliance, the IRD has compiled a list of commonly misunderstood tax facts:
1.Your tax residency status in New Zealand is different from your immigration status.
2.In general, New Zealand tax residents pay income tax on their worldwide income while-non-residents pay on income from New Zealand.
3.Your worldwide income can include foreign income even if you have not repatriated it to New Zealand or you have paid tax on it in the other country or the income is exempt in the other country.
4.Some rules in New Zealand may tax capital gains and may do so even though the gain has not been realised. Examples include the foreign investment fund and financial arrangement rules.
5.New tax residents and former tax residents returning after 10 years may qualify for a temporary tax exemption on most, but not all, forms of foreign income.
6.New Zealand will usually give a credit for tax paid to another country,capped at the amount of tax payable here on the foreign income.
7. Inland Revenue advise you to consult a tax agent knowledgeable in international tax if you’re not sure how the law applies to your situation as some of the rules can be complex.
8.If New Zealand has a double tax agreement with another country, it may affect how your income is taxed.
9.There are shortfall penalties for not declaring income but they can be reduced by up to 100% if you make a voluntary disclosure.
10.Inland Revenue exchanges financial information about taxpayers annually with many other countries and matches it to tax returns.
The Advisory Group Tax Resident Health Check
Becoming a tax resident in New Zealand can be a complex process, but it doesn't have to be overwhelming. Fortunately, eligible taxpayers can take advantage of the 48-month period exemption to prepare for complex tax returns or transfer investments to New Zealand.
To help with this process and plan your future tax obligations in New Zealand, The Advisory Group offers a Tax Resident Health Check which provides a comprehensive overview of your overseas income and assists in determining whether opting out of transitional residency is the best choice for you. Our review also ensures the local tax jurisdiction you are coming from is taken into account.
This should give you greater certainty about your tax obligations and position. It's a proactive approach that will save you time, money, and stress in the long run!
Please get in touch if you have any questions about your particular circumstances.