I’m returning to New Zealand, what does this mean from a tax perspective?
Tax Alert - August 2020
By Stephen Walker
You may be one of the many 20,000+ Kiwis that have returned to New Zealand after 1 April 2020 (the start of the New Zealand tax year). If so, and you’ve got questions about how you will be taxed in New Zealand, this could be the article for you!
Among a number of repatriation matters that you are having to think about, tax is probably the one that you will put off until it comes time to prepare your first New Zealand tax return which, without a tax agent, will be due on 7 July 2021 and will cover the year to 31 March 2021.
However, there are several questions you will need to consider between now and then, and a number of answers you will need to find before you can prepare your first New Zealand tax return.
How do I work out how I will be taxed in New Zealand?
When trying to determine how you will be taxed in the context of an international move, the general approach is to:
- Determine how New Zealand will tax you;
- Check whether you’re still going to be taxed in another country;
- If so, determine whether a tax treaty (also known as a double tax agreement) will provide any relief from double taxation.
We explain these steps at a high level below. Every person’s situation is slightly different, and we recommend you get specialist advice to confirm the right position you need to take when filing your tax returns. You can refer to our other articles for more information on employment tax considerations if you are working for an overseas employer or the COVID-19 concessionary rules announced by Inland Revenue which could apply to New Zealand’s tax residency tests.
How will New Zealand tax me?
If you are a tax resident of New Zealand, you will be taxed here on your worldwide income, no matter where the income is earned or where the income is paid.
If you are a tax non-resident of New Zealand, you will only be taxed here on income that is sourced in New Zealand.
Remember that the concept of tax residency is not the same as immigration residency. You can be tax resident without being a resident or a permanent resident of New Zealand for immigration purposes, and vice versa.
When will I become a tax resident of New Zealand?
New Zealand has two tax residency tests. You will be considered a tax resident of New Zealand if:
- You are physically present (i.e. both workdays and holiday days count) in New Zealand for more than 183 days in any 12-month period; or
- You have a permanent place of abode in New Zealand, commonly referred to as a PPOA.
You will be a tax resident from the day you first acquire a New Zealand permanent place of abode or, if you become a tax resident first by meeting the 183 day test, from the first of the 183 days. This is an objective test, and part days are counted as whole days.
The permanent place of abode test is more subjective and the term is not defined within New Zealand tax legislation, although there is some guidance available. Relevant factors include where you usually live, what you consider to be your home, where your social and economic ties are, and, to some extent, your intentions.
If you are unable to determine whether you have a permanent place of abode in New Zealand, we recommend you seek advice from a New Zealand tax specialist.
Once you have become a tax resident of New Zealand, in order to lose New Zealand tax residency, you will need to:
- Be physically absent from New Zealand for more than 325 days in any 12-month period (in other words, spend less than 40 days in a 12-month period back in New Zealand); and
- Not have a New Zealand permanent place of abode.
In this sense, it is easier to gain New Zealand tax residency than it is to lose it due to the application of the day count tests.
What is transitional tax residency and can it apply to me?
New Zealand has a special one-time tax residency category, known as transitional residency. A transitional resident is a first-time tax resident of New Zealand, or a returning resident who has been a tax non-resident for at least 10 years, and who has not been a transitional resident before.
A transitional resident is taxed here on income that is sourced (broadly income that is earned) in New Zealand, as well as worldwide income from employment or personal services. Passive offshore investments can largely be ignored for New Zealand tax purposes if you are a transitional resident.
Transitional residency lasts for up to 48 months, but this can be extended slightly depending upon which of the two tax residency tests above you trigger first.
If you think transitional residency could apply to you, you should seek advice from a New Zealand tax specialist.
How will I be taxed in the overseas country I’ve come from?
To answer this question, you will need specialist tax input from the country you have departed. You can be tax resident in more than one country (dual resident) at the same time, which creates a risk of double tax.
If you are a dual resident, the double tax agreements discussed in step 3 might provide some relief.
If you do not remain tax resident of the overseas country under their rules, it is likely (although should be confirmed by a tax specialist of that country) that you will only be taxed in that country on income that is sourced in that country.
How will a tax treaty apply to my residency position?
If you are a dual tax resident, you may find some relief within the so-called tie-breaker tests in a double tax treaty. Tie-breaker tests are considered in sequential order until a residency outcome is reached. Although all treaties differ slightly, generally they will consider where you have a permanent home, where your economic and personal relations are strongest, where you have an habitual abode, and where you are a national.
If you are a treaty tax resident of New Zealand under the tie-breaker tests, New Zealand has the right to tax you according to New Zealand tax rules. The overseas country may still have a right to tax income sourced in that country, subject to the terms of the treaty.
In that case, or if there is no treaty between New Zealand and the overseas country, if income is taxed in two counties you may get a tax credit against the New Zealand tax liability for tax paid on overseas income, subject to certain limits.
Alternatively, in applying the treaty tests above, if you are a treaty tax resident of the overseas country, then New Zealand will only be able to tax you on New Zealand sourced income, again subject to the terms of the treaty (if there is one).
What should I do next?
Now you’ve got an overview of the rules, you’ve probably got more questions about how to apply those rules to your situation, following your recent move to New Zealand. We recommend that you seek specialist tax advice, which we would be happy to assist with. Please get in touch if you have any questions about your particular circumstances.
August 2020 Tax Alert contents
- I’m returning to New Zealand, what does this mean from a tax perspective?