Understanding tax residency
Tax residency is a cornerstone of New Zealand’s tax system and something all new and returning New Zealanders should be aware of.
Tax residents are liable for tax on their worldwide income, while non-residents are taxed only on New Zealand-sourced income.
New Zealand tax residency is determined when the first of these occurs:
- Having a permanent place of abode in New Zealand.
- Spending 183 days or more in the country within any 12-month period.
While it’s important to be thinking about tax residency when considering a move to New Zealand, Iain Craig, BDO National Tax Leader, says there are some exceptions.
“The good news is that you don't necessarily need to have that all sorted out before you arrive. New migrants and returning New Zealanders who have been out of the country for more than ten years are entitled to a transitional exemption period of 48 months, which can be extended depending on the facts and circumstances.”
During the exemption period, New Zealand-sourced income will be taxed, however foreign passive income - including stocks and shares, investments and pension plans - will not be taxed. Foreign personal services income will be subject to New Zealand tax. This gives new migrants and returning New Zealanders the chance to establish themselves before committing to living in Aotearoa permanently.
Key changes to investor immigration settings
New Zealand’s investor immigration rules have evolved in recent times, with some settings relaxed to make it easier for investors to migrate to New Zealand or make it their second home. The Government is working to position New Zealand as an even more desirable place to live, invest and thrive.
Proposed changes to the foreign investment fund
The Foreign Investment Fund (FIF) regime is another key consideration for people looking to live in New Zealand.
The FIF regime calculates taxable income from offshore equities by way of a deemed income calculation rather than on actual dividends received. The most common method of calculating income is by using the fair dividend rate method which calculates FIF income at 5% of the opening market value of the shares at the start of each income year. This can result in taxable income which is calculated on an unrealised basis (based on market value of the shares) and may not bear any relation to actual dividends received.
The Government has identified the FIF regime as a potential hurdle for new migrants who have equity interests in overseas companies who do not pay regular annual cash dividends (e.g. Tech start-ups). The Government is proposing a new revenue account method to be made available for new migrants to New Zealand. The changes proposed are:
- Investors can choose to be taxed on a realisation basis under the revenue account method. The revenue account method calculates FIF income as actual dividends received and 70% of any capital gain made when the shares are sold. This method is available with respect to FIF investments in unlisted entities acquired before becoming New Zealand tax resident.
- Migrants to New Zealand who continue to be taxed on a citizenship basis can also elect to apply the revenue account method to all FIF investments (including listed shares).
- This method is available to individuals who gained full New Zealand tax residency status (i.e. no longer a transitional resident) on or after 1 April 2024.
- Legislation is expected to be released later this year. You can read more about the proposed changes in this fact sheet.
It is anticipated that returning New Zealanders may also qualify for the revenue account method. However, eligibility will require a minimum period of non-residency. The Government has yet to announce the specific duration required to meet this criterion. |
Trust and pensions: Planning ahead
Migrants with foreign trusts must determine whether they need to elect into New Zealand’s complying trust regime, as non-complying trusts can lead to a 45% tax rate on distributions.
Pensions can be another problem area when moving to New Zealand. These are now taxed on a cash basis when they’re paid out in a lump sum. Calculating the taxable portion requires careful planning and financial advice. Relief may be available if paid out while the individual is a transitional resident.
How BDO can help
When moving to New Zealand, it’s essential to factor in all financial considerations, especially when it comes to tax.
“The transitional exemption period gives migrants time to make informed decisions,” says Iain. “But it’s important to seek expert guidance early.”
If you’re thinking about moving to New Zealand or have already arrived and want guidance on your tax matters, BDO can help. Reach out to your local BDO adviser or learn more about our Global Tax Immigration Services here.
Explore our full range of tax services here and watch more insights in our Taxflix series, covering topics from property and land sales to trustee tax.
