Are you a new or returning New Zealander expecting a baby? – then the Best Start credit may not be a good start for you
Tax Alert - October 2022
By Kirsty Hallett & Charlotte Monis
Many parents joke that their child represents a tax break, but there is some truth behind it! The New Zealand government has created a range of credits and support payments, collectively known as Working for Families Tax Credits (WfFTC) to help alleviate some of the financial burdens of raising a child.
The WfFTC regime is broad and encompasses a number of entitlements for a range of family situations, including the Family tax credit, In-work tax credit, Minimum family tax credit and the Best Start tax credit.
The criteria to qualify for Working for Families is simple. You must have a dependent child in your care under the age of 18 (or 19 if they are still studying), be the principal caregiver over the age of 16, and be a New Zealand resident and tax resident. However, applicants for WfFTC who are new or returning New Zealanders must be aware that by choosing to receive WfFTC, they will be deemed to have elected out of the transitional tax residence exemption which could have broader tax implications for themselves and their spouses.
What is transitional residency and can it apply to me?
If you are new or a returning New Zealander (who has been away for 10 years or more), you are automatically entitled to transitional resident status (provided you have not previously benefited from the exemption).
As a transitional resident, you only have to pay tax in New Zealand on your New Zealand-sourced income and any income you receive that relates to the provision of your services (whether in New Zealand or offshore). This means that assets and investments offshore sit outside the New Zealand tax base for the period of the transitional tax residence. Generally, the transitional tax residence exemption lasts for a period of 48 months, however, it can be extended in some limited situations depending on when a permanent place of abode is acquired in New Zealand. Depending on what assets and investments are owned in other jurisdictions, transitional residence is a significant benefit. Having these assets outside of the New Zealand tax base saves the need to calculate and pay tax in multiple jurisdictions and claim foreign tax credits. Having a 48-month period allows taxpayers to either get ready for complex tax returns or to transfer investments to New Zealand.
Individuals do have the option to elect out of the transitional tax residence rules, should they choose, and can do so by ensuring they comply with the New Zealand tax rules as they apply to a full New Zealand tax resident.
There are also certain actions that an individual (or their spouse) may take that can deem them to have elected out of the transitional tax residence exemption, the main action being to elect to receive WfFTC. An application for Working for Families payments, either by the individual or their spouse, will mean that they can no longer be a transitional resident and are subject to tax as a full New Zealand tax resident from the date they commence receiving WfFTCs. This election is irrevocable.
Best Start tax credits – applicant beware!
While most of the WfFTC entitlements require an individual to consciously apply for the payments, recent changes to Inland Revenue’s computer system mean it is possible to apply for the Best Start tax credit (a weekly payment of $65 for families supporting a newborn baby that is not income tested until the baby turns 1) as part of the process of registering the birth of a child.
Specifically, upon the birth of a child, the SmartStart website allows parents to register the birth of the child and as they work through the online registration process there is a section that allows the parent to elect to apply for Best Start Payments (administered by Inland Revenue).
This section of the application states, “If you are a New Zealand resident, you can get Best Start payments until your baby turns one, no matter what you earn”. The only indication that this payment is part of the WfFTC regime or notification to transitional tax residents of the consequences of selecting yes is found in the fine print description of what Best Start payments are. We expect many are unlikely to read the fine print whilst also dealing with a newborn.
What should I do next?
If you have found yourself in the unfortunate situation of having elected to receive the Best Start tax credits without realising the implications for your transitional tax residence, it is important that you seek specialist tax advice to understand the implications for your filing obligations in New Zealand.
Further, if you are a transitional tax resident and are expecting a child, before applying for Best Start tax credits (or any other Working for Families tax credit) we recommend that you seek specialist tax advice to see if opting out of transitional residence is the best option for you – if your tax affairs are simple and all assets are already in New Zealand, claiming the WfFTC may make sense.
If any of these situations apply to you, please contact your usual Deloitte advisor.
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