PKF Francis Aickin Limited, Far North, New Zealand
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04 Aug 2016
Recently I attended a course presented by a couple of the IRD’s principal advisors on international tax. They highlighted the need to fully understand how the tax residency rules apply to each individual case and the implications they have on the taxation liablities on future income.
NZ domestic tax law states when an individual becomes a NZ tax resident. Tax residency determines whether an individual is taxable on their worldwide income or only NZ sourced income. The two main residency tests are presence in NZ for 183 days in any 12 month period or having a permanent place of abode in NZ. It is possible that a person may be classed as a tax resident of another country as well as NZ. For example, they may have been in NZ for a period in excess of 183 days but have a permanent place of abode and closer economic and family ties with a foreign country. To determine which country has prime taxing rights, reference is made to the Double Tax Agreement (DTA) with the relevant foreign country.
Although a foreign country may have prime taxing rights, and the person is only liable in NZ for tax on their NZ sourced income, if the 183 day test has been breached, they are technically classed as a NZ tax resident. “So what”, you may say – it doesn’t affect the tax payable. Maybe not now, but it may affect future exemptions and exposure of overseas income to NZ tax in the future.
New migrants and some returning New Zealanders may qualify for a special status called transitional residency. This provides exemption from tax on overseas sourced passive income (e.g. interest, dividends, rents) for a period of 48 months from the date they become a NZ tax resident (e.g. after expiry of 183 days presence in NZ). However this status is only available once in a lifetime.
So say a UK tax resident came to NZ on a year’s working holiday, but retained a permanent home & family in UK and then 2 years later emigrated to NZ. During his year in NZ, he became a NZ tax resident as he exceeded the 183 day test. The clock starts ticking for the 4 year transitional status immediately he becomes a NZ tax resident (at the expiration of the 183 days). It ceases when he becomes a non resident (out of NZ for a period of 325 days in any 12 month period.) However, because he can only have the transitional exemption once and it ceased when he became a non resident, when he returns to NZ 2 years later, the transitional exemption is not available, and he is immediately taxable on his worldwide income. If he has substantial overseas investments or super funds to transfer to NZ, it would be wise to ensure that he does not become a non resident (extra visits to NZ needed), thus the exemption will be available for a short period once he finally emigrates.
Also be aware that it is possible to accidently opt out of the transitional tax exemption through returning overseas passive income in your return (e.g. claiming overseas rental losses) or claiming working for families. Each case has to be evaluated on its effect.
It is important that your tax advisor is fully aware of your personal circumstances so they can advise you appropriately. If you know people who are thinking of moving to NZ, suggest that they get NZ tax advice first, to ensure they have no nasty surprises.
In my next article I will be covering overseas superannuation fund withdrawals/transfers and other foreign income treatment.
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