The foreign connection, by Dale Adamson

The basic rule is that a NZ tax resident is taxed on their worldwide income. For a non-tax resident, only their income sourced in NZ is subject to NZ income tax.

Thus, tax residency tests are the key to NZ tax obligations. Note that tax residency is not the same as residence for immigration purposes.

The two main tax residency tests are:

• presence in NZ for 183 days in any 12 month period (“day count test”), including day of arrival and departure and/or
• having a permanent place of abode (“PPOA”) in NZ. This is a place to live on a permanent basis and can be owned or rented. However it also includes more subjective tests such as long term residency intentions; family and economic ties with NZ; and visiting history.

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.  However this status is only available once in a lifetime.

For example, a UK tax resident came to NZ on a 1 year working holiday, but retained a permanent home & family in the UK. 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.  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 two years later, the transitional exemption is not available, and he is immediately taxable on his worldwide income. This could potentially include the total value of an overseas superannuation fund transferred to NZ.

Also be aware that  it is possible to accidently opt out of the transitional tax exemption by 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 overall 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.