Over 50,000 Kiwis expats have returned home since the beginning of the outbreak. This is estimated to increase to between 250,000 and 500,000 in the next few years. With the introduction of the COVID vaccine, the numbers might decrease, but the trend is likely to continue for some time.
Some expats may inadvertently bring back some tax headaches along with their return, especially where they still own overseas assets/properties and foreign investment vehicles. We have seen an increasing number of returnees facing double taxation and being confused with how much tax they actually owe and to which government. With the lapse of the 2021 financial year and the top personal tax rate rising to 39% from 1 April 2021, some may be in for a tax bill surprise.
Returning New Zealanders will normally spend some time preparing ahead of time and wrapping up their affairs before arriving back in New Zealand (NZ). However, due to the stresses and pressures caused by COVID, many have skipped their planning exercise. Consequently, taxpayers who own trusts or businesses abroad may face significant tax consequences, and potential issues may arise for many regular income earners.
Transitional residency rules
Transitional residency rules were effective from 1 April 2006 to attract new migrants and expats to move to NZ. The rules made it easier for high net worth individuals to migrate as they would have more time to plan their move to NZ and potentially migrate their investments here over time.
Broadly, under the rules, if you haven’t been an NZ tax resident for the last 10 years prior to becoming an NZ tax resident, you are likely to be considered a transitional resident. This means foreign income is exempted from NZ income tax for four years since becoming an NZ tax resident.
The two types of income that are carved out from this rule are foreign personal services income and foreign employment income. This means these incomes are still subject to income tax from the first day of gaining NZ tax residency.
Some taxpayers are confused with the rules, thinking any overseas income is exempted from NZ tax. That is not the case. Transitional residency rules only apply to individuals, meaning that income from companies or trusts is not covered. They will still be taxed in NZ from the first day of gaining their NZ tax residency.
NZ has around 40 double tax agreements (DTA) with its main trading and investment partners, including United States, United Kingdom, Hong Kong, China, Canada and Australia. One of the key objectives of the DTA is to eliminate double taxation on cross-border transactions for taxpayers.
However, with companies or trusts set up overseas, taxpayers may have to pay tax in both countries. Especially for US expats, they need to continue filing US income tax returns for as long as they retain US citizenship. Hence, planning in advance is essential as it takes time to sort and to work backwards on arrival can be an expensive exercise.
Setting up a business
Many New Zealanders who have spent most of their working life abroad will have to learn how to start a business from scratch as the tax system may be quite different here. For instance, there are provisional tax rules in NZ, whereas taxpayers from some tax haven countries like the United Arab Emirates, Channel Island or Brunei may not be familiar with paying provisional tax. Hence, we suggest expats and migrants seek international tax advice to minimise the risks of tax surprises.
Need help with your taxes or want to know more about the New Zealand Tax System?
NZ International Tax & Property Advisors is a one-stop Chartered Accountant firm providing international tax, property tax & consulting, accounting and training services to locals, migrants/expats and businesses. Their A-team has over ten years of experience in specialising in cross border tax for migrants and expats, taxation on land transactions, IRD disputes and resolutions and small and medium business tax.
Connect with Connie to discuss New Zealand tax matters and ways to navigate the NZ tax system.