Transitional Tax Residency Rule

on Monday 6 March 2023 / by Gracy Qian

Have you made the move to New Zealand and not sure how the New Zealand tax laws apply to your overseas financial assets and investments? Check out this brief guide.

Transitional tax residency rule

I get asked quite often by migrants regarding how New Zealand tax laws apply to their overseas financial assets and investments. Most of them tend to retain these assets when they move to New Zealand to live. There is a tax relief for new migrants or New Zealanders returning to the country after an absence of at least ten years (‘Transitional Residents’). The exemption applies to people becoming resident in New Zealand on or after 1 April 2006.

In general, New Zealand tax residents pay tax on their New Zealand and worldwide income. However, Transitional Residents are eligible for a tax exemption on most types of foreign income for four years. The exemption is only available to a taxpayer once in a lifetime, and it applies automatically to new residents without formal application. A Transitional Resident may however elect out of the provisions at any time during the four-year exemption period. If they choose to opt out, they cannot get the exemption again.

The exemption start date depends on how you qualify as a New Zealand tax resident:

· If you qualify by living here for more than 183 days in any 12-month period, your exemption is backdated to the first of those 183 days.

· If you qualify by establishing a place where you habitually live in New Zealand. Your exemption starts on the day you establish that place.

The exemption period ends on the earlier date of:

· 4 years after the end of the month in which you have been in New Zealand for more than 183 days in any 12-month period.

· 4 years after the end of the month you established a permanent place of abode in New Zealand.

Also the exemption will end earlier if:

· you opt out of it

· you or your partner apply for Working for Families Tax Credits

· you become a non-resident taxpayer

Under the transitional tax residency rule, most foreign sourced income is exempted, which covers foreign business income not related to the performance of services by the transitional residents, foreign interest and dividend income, rental and pension income derived from overseas, income from foreign-sourced royalties, as well as income attributed under the New Zealand CFC and FIF tax rules. However, foreign-sourced employment income and foreign-sourced income relating to services are not part of the exemption and will be taxed in New Zealand.

I would recommend migrants seek professional advice as early as possible even before their arrival in New Zealand so they understand how New Zealand tax laws apply to their financial positions and discuss with their accountants regarding best structure for their affairs after their move.

If you need assistance, contact Ingham Mora today and schedule a consultation with Gracy Qian. Let our experienced Tauranga accountant guide you through the complexities of New Zealand tax laws and ensure a smooth financial transition on your journey to New Zealand.