Sit back and relax – New Zealand’s transitional tax residents regime

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Packing up and moving to another country will often involve multiple decisions needing to be made, some of which can have material consequences for you if you make the wrong choice. The process is often made harder, by the numerous emotions that will usually accompany the shift – leaving family and friends, new cultures and customs to learn, and the ability to navigate the new location upon your arrival there.

One decision, obviously, is what to do with your various investments, particularly if the destination jurisdiction has a less favourable tax regime than the one you presently experience.

If your destination is New Zealand (NZ), and you have not been an NZ tax resident for at least the past ten years, then as the title to this article suggests, you can essentially sit back and relax, wait until all the emotions of the move have passed, and then take time to make some key decisions. The ability to take this approach is all due to NZ’s transitional tax residents regime (TTR) which was first introduced in 2006, essentially as a carrot to attract more skilled talent to NZ.

Under TTR, once you have triggered an NZ tax resident status, essentially for the next 48 months the only foreign sourced income subject to NZ taxation is that which you derive either from employment or from the supply of personal services. So, take for example a case where you need to sell your home. The market is somewhat depressed, so you decide to rent the house out for 18 months hoping the market will improve. During TTR, this foreign-sourced rental income is exempt from NZ taxation. So are dividends from shares held in foreign companies and interest earned from those foreign bank account deposits.

Should you still derive foreign-sourced employment or personal services income post your arrival in NZ, while it may still be exposed to NZ taxation, usually you will receive a credit against the NZ tax payable, for any foreign income taxes you have already paid.

TTR is essentially an opt-out regime, which in other words means that unless you elect for TTR to not apply to you (which you might do, for example, if you wish to claim family assistance benefits in NZ), it automatically applies to you for the four-year period, once you are considered an NZ tax resident. The benefits of TTR can only ever be claimed once, so once the regime has applied to you, if you go away from NZ for more than 10 years and then return, you do not qualify for TTR again.

“TTR is essentially an opt-out regime, which in other words means that unless you elect for TTR to not apply to you, it automatically applies to you for the four-year period”

The obvious question now is, how do you trigger an NZ tax residency status?

NZ tax residency rules contain three specific tests for determining whether or not a natural person may be deemed an NZ tax resident. Two of the tests are black and white – they are based purely on a person’s physical presence in NZ. Under the first test, once you have physically spent more than 183 days in NZ in any rolling 12-month period, you will be considered an NZ tax resident from the first day of that presence. Once deemed an NZ tax resident, you then need to be physically absent from NZ for more than 325 days in any rolling 12-month period (the second test), to become a non-resident again – that status applying from the 1st day of absence.

The third test, however, is more grey and potentially complicates the issue, because the test also takes precedence over the other two tests. Under the third test, if you have established in NZ what is referred to as a permanent place of abode (PPOA), you will be deemed an NZ tax resident from the date you establish your NZ PPOA, and you will retain this status until the date you cease to have an NZ PPOA, regardless of any physical presence in NZ. The PPOA test essentially examines whether you have an NZ abode available to you, and if so, the closeness of your association to that abode (what is the permanency of your connection to the NZ abode). It should be noted that the greyness of the PPOA concept often requires a detailed analysis of the person’s factual scenario to be undertaken, before a proper determination can be made.

Understanding your NZ tax status is important for many reasons, particularly when you appreciate that NZ has a worldwide taxation basis. Once considered to be an NZ tax resident, the Inland Revenue will consider that it has taxing rights over your worldwide income, as opposed to some jurisdictions which tax purely on a territorial basis:

  • It is relevant to determining when your 4-year TTR period may commence;
  • It is relevant for determining upon what date will you be deemed to dispose of all your assets and acquire them back for market value, for the purpose of bringing those assets within the NZ tax base;
  • It is relevant to determining whether the tie-breaker provisions of a relevant double-tax treaty agreement may need to be considered, if you are also considered to have retained a tax residency status in another jurisdiction (you’re therefore a dual tax resident); and,
  • It may be relevant to determining the appropriate rate of tax to be paid on certain types of income deemed to be derived from an NZ source.

If NZ is a destination you or your clients are considering, please do not hesitate to contact me for some guidance surrounding triggering an NZ tax residency status, and the consequent implications or exposures that status could create accordingly.

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