Are you thinking about returning home to New Zealand in the near future? Perhaps you’re not a Kiwi (i.e. a New Zealander) but are considering starting a new adventure down under. Whatever your motivation for moving to Aotearoa, there are some key tax considerations to think about before making the move.
Background information: Tax residency, capital gains tax and more
New Zealand’s tax system is based on residence and source. A tax resident is liable on their worldwide income and a non-resident is taxed on New Zealand-sourced income. Determining your tax residence is critically important to determining the basis of taxation.
New Zealand has a comprehensive income tax regime, however, there is no capital gains tax, gift duty, death taxes or stamp duty in New Zealand.
Understanding individual income tax rates in New Zealand
In New Zealand, personal income tax is applied on a progressive basis, with rates increasing as income increases. Below is the tax rate applied at each income bracket:
|
Taxable income (Up to 31 July 2024) |
Taxable income (On/after 1 August 2024) |
Tax rate |
|
$0 - $14,000 |
$0 - $15,600 |
10.5% |
|
$14,001 - $48,000 |
$15,601 - $53,500 |
17.5% |
|
$48,001 - $70,000 |
$53,501 - $78,100 |
30% |
|
$70,001 - $180,000 |
$78,101 - $180,000 |
33% |
|
>$180,000 |
>$180,000 |
39% |
How to determine the commencement date of your New Zealand tax residency
It’s important to understand when your New Zealand tax residency starts. This is determined by meeting either the day-count test or the permanent place of abode test. Tax residence commences from the earlier of the first test that is satisfied.
The day-count test is the 183-day rule, where an individual becomes a tax resident if they have been physically present in New Zealand for more than 183 days in any 12-month period. The second test is having a permanent place of abode in New Zealand, which refers to a place (in New Zealand) where the individual lives, and where they have enduring family, social and economic connections to New Zealand.
A common mistake is to think tax residency does not commence until you migrate to New Zealand on a permanent basis. However, residence commences under the day-count test from the first day present in New Zealand that counts towards the 183 days within the rolling 12-month period.
For example, you may visit New Zealand with your family to decide if you’d like to live in New Zealand, visit schools or evaluate accommodation options. You then return to your home country, wait for another 3-6 months, and then move to New Zealand permanently. Under the 183 days test, the commencement date of your New Zealand residency may be the first day you visited New Zealand, not the day you moved to New Zealand.
If you are also a tax resident in another country, you may be able to apply tie-breaker provisions in a double tax agreement (DTA) that New Zealand has with the other country to determine the sole place of tax residency.
Read more in Inland Revenue’s guide to New Zealand tax residency here.
Transitional residency exemption: Who qualifies?
As an incentive to attract talent and encourage citizens to return, the New Zealand Government introduced the transitional residency exemption, where those who qualify can be temporarily exempt from paying tax on most types of overseas income.
Qualifying individuals include those who have not been tax residents in New Zealand for the ten years prior to their return, as well as those who have never been New Zealand tax residents. Those who qualify for transitional residency, and have not opted out of the regime, will not have to pay New Zealand tax on foreign-sourced passive income for four years. The exceptions are employment income and personal services income, which will continue to be subject to New Zealand tax regardless of where that income is sourced. All New Zealand-sourced income is subject to New Zealand tax.
Spotlight on foreign superannuation taxation
If you have an interest in a foreign superannuation scheme when you become a New Zealand resident, you will generally be taxed when an amount is withdrawn from the foreign superannuation scheme, either as a lump sum or in the form of a pension or annuity.
The following applies to foreign superannuation schemes you joined while you were a non-resident:
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Funds are taxed on withdrawal from the scheme. On lump sum withdrawals, the amount subject to tax increases proportionally with the length of time from when an individual establishes or re-establishes tax residency in New Zealand.
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There is an exemption for the first four years of the person becoming a New Zealand tax resident. Certain exclusions apply to Australian superannuation schemes.
Pensions or annuities that a New Zealand tax resident receives are subject to New Zealand tax, however relief may be available under a DTA that New Zealand has with the country of origin. In most instances, taxing right is granted to the country in which you are tax resident.
The taxation of foreign superannuation can be complicated and will be dependent on the nature of the scheme. If you have foreign superannuation and are considering moving to New Zealand, you should obtain specific tax advice.
Shares held in foreign companies: Foreign Investment Fund and Controlled Foreign Companies tax rules
If you hold shares in foreign companies, you will need to comply with the relevant taxation rules. The tax treatment of such investments is governed by Foreign Investment Fund (FIF) and the Controlled Foreign Companies (CFC) rules, designed to prevent the deferral of tax or the avoidance of tax obligations through offshore investments.
For shareholdings of less than 10% in the foreign company, the interest is categorised as a FIF. Under the FIF regime, a person’s taxable income is typically calculated as 5% of the market value of the shares at the start of the income year. Under this method, known as the Fair Dividend Rate (FDR) method, the 5% FDR return is taxable income and any actual dividends received are not taxed.
For an individual who holds more than 10% shareholding or control interest in a foreign company, different rules apply depending on whether the business is active or non-active.
Certain exemptions are available for individuals with less than $50,000 investments in foreign companies as well as investments in Australian companies. Tax credits may also be available with respect to foreign tax paid on distributions made by the foreign companies.
How tax works on investment properties located in foreign jurisdictions
Many returning Kiwis and new migrants retain overseas properties as rentals, but it’s important to be aware of tax rules around this.
Rental income derived by a New Zealand tax resident will be subject to New Zealand tax. To the extent that tax has been paid in the foreign jurisdiction, tax credits may be available.
Residential rental deduction ring-fencing rules may curtail the use of excess tax losses resulting from residential rental investments.
With respect to gain on disposal of investment properties, New Zealand does not have capital gains tax however it does have extensive land taxing provision which may deem a gain on disposal to be a taxable gain.
Tax guidance for New Zealand-based employees of overseas employers
Many New Zealand residents work for international companies, but this comes with tax complexities.
An individual may be seconded to work in New Zealand for an offshore company or choose to work remotely from New Zealand for an offshore employer. Depending on the nature of the individual’s work and the length of time they work remotely in New Zealand, their presence in New Zealand may trigger New Zealand tax risks for their offshore employer, such as permanent establishment and employment tax obligations.
The individual will likely be required to pay New Zealand tax on their employment income. The employer may also be withholding tax on salary and wages paid to the individual irrespective of whether tax is continued to be paid overseas by the employer.
If you’re considering working for an overseas employer from New Zealand, engage with your employer early in the process to resolve the risk of double taxation and obtain tax advice as needed.
Rules for taxing trusts
Trusts are taxed differently in New Zealand compared to the rest of the world. New Zealand will seek to tax income derived and distributions made by a trust if a settlor of the trust migrates to New Zealand (even if trustees remain offshore). Where another country seeks to tax the same trust on a different basis (for example, based on the residency status of the trustee), this can become a double tax situation and may require advice from an adviser.
Further support
Whether you’re just starting to think about moving to New Zealand or have already arrived and want guidance on your tax matters, BDO can help. Reach out to your local BDO adviser or learn more about our Global Tax Immigration Services here.