New Zealand is widely regarded as a highly desirable destination for migrants as well as for Kiwis returning to start a family or just return to their homeland. As a new migrant or a returning Kiwi, whether you are after a spacious living environment, better education, stable government or the overall Kiwi lifestyle, in order to make the transition as smooth as possible, getting specialist tax advice early is one of the keys.

We highlight some of the common tax issues new migrants or returning Kiwis should be thinking about to assist with tax and personal planning. The first question you should be discussing with your tax advisor is whether or not you qualify as a transitional resident.

What is transitional residence?

To be eligible for the transitional residence status, you must satisfy the following requirements:

(a) Became a tax resident on or after 1 April 2006;

(b) Must not have been a New Zealand resident at any time in the past 10 years prior to becoming a tax resident in New Zealand;

(c) This is a once in a lifetime exemption. The tax exemption cannot be extended or renewed after its expiry date.

This status is invaluable as it essentially provides you with a temporary tax exemption on most overseas income you receive for a period of up to four years.

These rules may appear to be straightforward in theory. However, when you apply them in real life situations, especially when you own various assets around the world and receive income from multiple jurisdictions, you could end up with nasty tax surprises:

1. Misunderstanding on the timing of the exemption

A common misconception is that the start date of the transitional resident period runs from the date the migrant arrived in New Zealand. Therefore, the end date would be intuitively, four years after this date. Unfortunately, these rules are not as simple as that!

The exemption start date refers to the first date a person has become a New Zealand tax resident under two tax residence tests. The two tests are: either you are in the country for 183 days or more in any 12-month period, or you have a permanent place of abode here. The latter test not only looks at whether you have an available dwelling but also a range of factors to work out your tax residency. So, if you had a wrong exemption start date, you would also end up with an incorrect end date, which in turn has an impact on the timing of when you should be declaring worldwide income in your New Zealand tax return.

2. Failure to meet the bright-line criteria

One of the prerequisites to become a transitional tax resident requires that a person must always be a tax non-resident during the ten years prior to becoming a tax resident again. If at any point in time prior to your permanent return, you have triggered any of the two tax residence tests to be treated as a tax resident (often unexpectedly, e.g. due to frequent travels back to the country), not only will you not be able to claim the tax exemption, you will also likely to have some tax to pay.

3. Unexpectedly fallen out of the exemption

You could also end up losing the exemption status before it expires. For instance, when you start claiming Working for Family tax credits from the tax department for your dependent children or if you claim overseas rental losses (although with the newly announced ring-fencing rules this is unlikely in the future). Even if it is not you but your partner who is personally receiving such credits from the government, your transitional resident status could still be terminated. This reiterates the importance of getting early specialist tax advice.

4. Tax exposure after expiry of the exemption

Finally, think about what assets and liabilities you hold offshore and where. Do you have foreign currency bank accounts, bonds, mortgages or the like? If you have a mortgage over an offshore property with an offshore bank, you may be required to deduct non-resident withholding tax from the interest payments. Holding foreign currency bank accounts and bonds also exposes you to foreign currency fluctuations which are subject to another complex tax regime.

Lastly, another common area where there is a lack of planning is around your overseas pensions. Keep in mind that the timing of when you bring the pension into New Zealand will likely trigger a smaller or larger New Zealand tax liability.

We have above only highlighted a few common tax issues that are faced by transitional residents every day. Each person’s tax status should be assessed separately on a case by case basis. Being proactive in seeking specialist tax advice at the early stage of your migration will pave the way to a successful transition to our country. Contact your Bellingham Wallace advisor today to discuss this further.

By Graham Lawrence (Director) and Sharon Chan (Senior Tax Advisor)