Re-establishing New Zealand residence
For individuals who only intend to be in New Zealand for a short time, to sit out the global rolling lockdowns with the benefit of close family and New Zealand’s great outdoors nearby, the potential of inadvertently triggering tax residence needs to be considered. Residence in New Zealand is broadly based on two tests, one of which applies a threshold for the number of days spent in New Zealand in any 12-month period, (183 days). For individuals who are returning permanently to New Zealand, if their last visit was less than six months ago (e.g. over Christmas), there is a risk that they may have inadvertently triggered residency at that earlier time. New Zealanders who intended to return temporarily but who are grounded here indefinitely due to extended lockdown and closed borders, are also at high risk of exceeding the days count threshold in New Zealand and becoming a tax resident.
Key tax considerations
Some of the tax issues which can arise when you are treated as a New Zealand tax resident are set out below:
- Tax on foreign employment income:
We are aware of several Kiwis who returned to New Zealand just before the borders officially shut, and who are still working for their foreign employers, but in an extra remote working from home arrangement.
Exceeding the 183 days count threshold can mean that these individuals are taxable in New Zealand on their employment income. The obligations for income tax in New Zealand could apply in these situations regardless of the location of the foreign employer.
- Unexpected tax and administration obligations for foreign employers:
Having an employee who is a tax resident in New Zealand can also have implications for the foreign employer. The obligation to pay New Zealand pay as you earn income tax (PAYE) is based on where an employee is tax resident and physically present.
Other corporate tax risks can also arise as a result of an employee’s extended presence here. As such, it is important the offshore employer is made aware of individual’s presence in New Zealand so that the risks can be appropriately assessed by the business.
- Triggering transitional residence early:
Kiwis returning to New Zealand often do so with careful forethought to manage the timing of when New Zealand tax residency starts. This is because tax residents are taxed on their worldwide income; while non-residents are taxed only on their New Zealand-sourced income.
Some lucky individuals may be able to take advantage of a special tax concession known as transitional residence. This is available to first time New Zealand residents and those who have been out of New Zealand for more than 10 years, and who have not had the benefit of transitional residence status previously.
For individuals who are treated as transitionally resident, all their offshore investments and assets will be exempt from the New Zealand tax base for a limited period. This gives people time to think about how to structure affairs and manage the impact of New Zealand taxation.
If an individual is returning to New Zealand temporarily before a permanent return in a few years’ time, they may end up using up their transitional residence status before they get the benefit of it.
The status is available for up to four years but ceases to be available once an individual becomes non-resident again.
- Offshore investments:
For returning Kiwis who don’t have the benefit of transitional residence, it will be important to consider the tax treatment in New Zealand of offshore investments including foreign shares and bank accounts.
Foreign investments including foreign superannuation are subject to distinct tax regimes in New Zealand, which can result in actual tax payable on unrealised gains.
Many foreign shares are taxed based on a fixed percentage of the market value of those shares at the beginning of each tax year (1 April). Foreign exchange gains and losses can equally have a significant impact.
Take the example of Bridget, an expat Kiwi who purchased a house with a mortgage while she was living in London. Having returned to live in New Zealand, she rented the property out, but after a few years, decided to sell the property. Because the New Zealand dollar had strengthened against the pound over the time since she became resident in New Zealand, she made a taxable gain on the mortgage even though in New Zealand dollar terms she made a capital loss on the disposal of the property.
Finally, if you have an existing offshore business that you intend to keep operating after you return to New Zealand, you will need specific advice on the complex tax implications involved.