Many unsuspecting, well-intentioned migrants arrive in New Zealand, work hard to build a new life, have PAYE deducted from their income, only to find out via Inland Revenue audit that they have significant amounts of additional tax to pay. It doesn’t stop there, Inland Revenue then adds penalties and interest to that tax, and the amount can quickly escalate.
Every tax regime is slightly different. It is common for migrants to move to (or leave) New Zealand without thinking about their tax affairs. This can be a costly, and stressful mistake. Simple things, like having a foreign denominated interest bearing bank account can trigger New Zealand tax obligations. Foreign superannuation schemes can trigger additional tax whether they are left in the originating country, or transferred to New Zealand. Renting the prior family home will trigger additional New Zealand tax obligations, the list goes on.
So what is tax residency?
New Zealand has two domestic tax residency tests. One is based on your days present in New Zealand and is called the day-count test. The other is a determination of whether you have a permanent place of abode. You only need to satisfy one test to become a New Zealand tax resident. The day-count test is very simple, if you are present in New Zealand for more than 183 days in a rolling 12-month period then you will be New Zealand tax resident under domestic laws. Tax residence is then backdated to the first day of those 183 days. We commonly see this miscalculated based on calendar years or financial years. It is important to note that this is a rolling 12-month period, and this has caught many people out that have thought they had remained under the threshold. There is a different test in order to cease being tax resident under the day-count test and that is to be outside of New Zealand for more then 325 days in a rolling 12-month period.
A permanent place of abode is much more complex as it is not defined in legislation. It is considered in detail in caselaw as well as the Commissioner’s Interpretation Statement which is 83 pages long. If a person has a permanent place of abode in New Zealand they will be New Zealand tax resident regardless of whether they meet the day-count test. In its very simplest terms, a permanent place of abode could be a home in New Zealand. However, it is not as simple as looking at whether you determine it to be a home but rather whether it meets the criteria set out in caselaw as well as professional judgment in order to determine whether you have a permanent place of abode. It is important to note that you do not need to own a property for it to constitute a permanent place of abode. You can also have a permanent place of abode in New Zealand even if you have a permanent place of abode elsewhere in the world.
Transitional Tax Residency
New Zealand does offer a “gift” by way of transitional tax residency. Transitional tax residency is an exemption for foreign passive income for a period of four or so years. This offers a significant period of time to restructure your affairs into a tax efficient manor. The common issues I see with the transitional tax residency is the incorrect calculation of that period which means any structuring might not actually benefit from the exemption.
Many people have heard of transitional residency, or the “four year exemption”. Don’t let this lure you into a false sense of security. Even when it is calculated correctly, this covers foreign passive income, but what about the software developer who still works for their home country employer? Or the professional who travels overseas to complete their work and is paid in that country (into their foreign denominated bank account). The world is becoming a much smaller place, and business is no longer confined to be a 9-5 desk job. People are finding themselves working from any location in the world, and employers are offering that flexibility. This can lead to significant adverse or unknown tax implications for both the employee, and the foreign based employer. The foreign based employer mightn’t even have considered that allowing such flexible working arrangements could trigger New Zealand tax. You can read about some of the tax risks of remote working in this article. I am constantly seeing these types of clients who had no idea they were creating adverse tax implications for themselves or their employer. This is not confined to only the wealthy, or top executives, it is across the board.
Studying or Not Working in New Zealand?
I am also seeing the people that move to New Zealand and don’t earn New Zealand income, maybe they are studying. Well they don’t have a job, so they don’t pay tax in New Zealand - right? They don’t have an IRD number, so they aren’t a tax resident - right? Wrong. If they are living in New Zealand, they are likely to have become New Zealand tax resident. That means they have tax obligations and are liable to pay tax in New Zealand on their world-wide income (subject to any relief provided by an applicable double tax treaty). All that money sitting in offshore investments earning interest for them to live off while in New Zealand, that is taxable in New Zealand. It mightn’t even be taxable in the home country, but that doesn’t mean it is not subject to tax in New Zealand.
International Tax is a Minefield!
Don’t wait for Inland Revenue to find you, seek specialist international tax advice upfront. Early tax advice provides many opportunities to ensure tax efficient structures are in place, and all tax obligations are met. It also allows individuals and corporates to consider world-wide assets and determine the tax consequences, which allows for correct and timely tax returns, avoiding any additional penalties and interest which can accumulate on unpaid or underpaid tax.
I work closely immigration advisors, lawyers, bankers, investment advisors, accountants and other professionals to ensure migrants and their employers (where necessary) are fully informed and structured correctly from the time they enter New Zealand, to ensure there are no nasty surprises when Inland Revenue start digging.
This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact us.
This article was accurate at the time of publishing.
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