Tax Considerations for Returning Kiwis
When returning to New Zealand tax is most likely one of the last things people consider (if they consider it at all). Many Kiwis return home with the best intentions of a relaxing life, only to find they have been caught out by tax implications they were unaware of. Unfortunately, lack of understanding of tax laws is not going to wash with Inland Revenue. Without proper advice in relation to the move back home, there is a risk of being heavily taxed on your world-wide income, or worse still, double taxed. Understanding your tax position and how to move back to New Zealand in a tax efficient manner will also help returning Kiwis to avoid penalty and interest payments which can quickly escalate costs.
Tax Exemption
Returning Kiwis may be aware of the term ‘transitional residency’. This is a period of tax relief for four years after becoming New Zealand tax resident, during which Kiwis can seek professional advice to help them restructure their affairs in a tax efficient manner. During this period, transitional residents are relieved from paying tax in New Zealand on their non-New Zealand sourced passive income. However, personal exertion income (income earned due to work) will be taxable in New Zealand, no matter where the work was undertaken.
Returning Kiwis need to be aware that this relief is only available to those who have been out of New Zealand for at least 10 years, and who have never claimed transitional residency before. Otherwise, a returning Kiwi will be considered a full tax resident upon their return New Zealand.
It is important to note that even if you qualify as a transitional resident, this status is very easily cancelled unintentionally, such as claiming working for families’ tax credits. Once transitional residency has been cancelled, you cannot get it back, even if you didn’t mean to cancel it.
Possible Tax Issues to be Aware of
Returning Kiwis may not be aware of all the ways in which their assets can trigger tax issues and obligations. Advice should be sought in order to structure these assets in a tax efficient manner, as there can be simultaneous obligations both overseas and in New Zealand. Some examples to be aware of include overseas bank accounts, foreign owned property, pensions, and superannuation schemes (whether left overseas or transferred to New Zealand).
Foreign Property
It is not uncommon for returning Kiwis to retain ownership of an overseas property while they sell it, or they might rent it out. This can trigger tax obligations in New Zealand as well as the overseas country. The obvious tax implication is that you will need to return income on the rental. However, it does not end there. There are many other tax obligations such as the requirement to pay tax on the interest paid on the mortgage. There are also complicated tax rules relating to the foreign exchange gains and losses, known as financial arrangement rules. Returning Kiwi’s will need to be aware that the income can be taxable in both New Zealand, and the country the property is in, for many, this will add the burden of having to prepare a tax return. For more information regarding the tax costs of retaining your foreign property, see “The Unknown Tax Cost of Foreign Property”.
Foreign Employers
Returning to New Zealand while still working for an employer based overseas can create tax complications, both for the employee and employer. These are not always considered before the move, and many employers are not aware of the New Zealand tax obligations that can be triggered for their overseas business simply due to an employee working from New Zealand. This arises frequently, and, not just among the super-wealthy or top executives. The world is becoming a much smaller place, and in the current “work from home” environment, many kiwis have returned home prior to the borders closing, but continue to work for their foreign based employer. This is very often overlooked, but the tax implications for both the employer and the employee can be significant.
Many returning Kiwis might think that their foreign income is paid into their foreign bank account, so it has not come to New Zealand. That might be the case, but it is still subject to tax in New Zealand. If the work is undertaken while present in New Zealand, it is more than likely that income will be New Zealand sourced, and subject to tax in New Zealand, regardless of where it is paid, or whether it is repatriated to New Zealand. It is important to note that transitional residency will not provide relief for personal services income.
Double Tax Agreements
Most people are aware that there are double tax agreements which provide relief from double tax. While that might be the case, it does not necessarily provide complete relief against double tax. It is first necessary to see if a double tax agreement may apply. New Zealand has agreements with 40 of our main trading and investment partners.
Unfortunately, if a returning Kiwi has not been living in one of the countries with which we have a double tax agreement, then there is no relief against double tax. This can be of concern when the returning Kiwi has been in a low or no tax jurisdiction (e.g. Saudi Arabia), as full tax will be paid in New Zealand on their worldwide income, and unless a foreign tax credit applies, there will be no relief available.
Backdating of Tax Residency
It is also important to note that New Zealand tax residency can commence prior to the final return to New Zealand. This is not usually a problem if there is a double tax agreement in place. However, if there is no double tax agreement, and the returning kiwi continues to work overseas prior to the final move to New Zealand, they might be obligated to pay tax in New Zealand on that income earned while overseas, but after they commenced New Zealand tax residency.
This often happens when returning kiwis make a visit to New Zealand prior to their move. They might look at property or start to make plans. They then return to their job overseas to wrap things up prior to making their final move. As your tax residency can be backdated to the first day of presence in New Zealand under the “day-count test” it is often the case that the initial trip or holiday is the commencement of their New Zealand tax residency.
To ensure the best experience when returning home, returning kiwis should ensure they make the move with a thorough understanding of their own unique circumstances and how that will affect their tax obligations. Obtaining specialist tax advice as early as possible will take the stress and uncertainty out of this, as well as providing the opportunity to structure things in a tax efficient manner.
The above is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues, please contact Julia Johnston at Saunders & Co.