Tax residency: New Zealand transitional residency unpacked
Transitional residency, something all emigrants and returning New Zealanders should take note of, provides temporary tax relief from most types of foreign income for a period of at least 4 years.
The article includes seven questions to work through to determine if you are a transitional resident. The article also provides an overview of the relevant tax relief available to a transitional resident and to the trustees of a trust settled by the transitional resident. You can learn more about what it means to be a tax resident in our Tax Knowledge Bank article.
Are you making use of the temporary tax relief for new and returning tax residents?
New Zealand tax residents, who are not transitional residents, generally pay tax on their worldwide income. Transitional residents are eligible for tax exemption on most types of foreign income for at least four years. This article will help you determine if you meet the qualifying criteria of a transitional resident. We also provide an overview of the tax relief available to transitional residents and to the trustees of trusts settled by transitional residents.
Benefits of being a transitional resident
The temporary tax relief applies to your foreign sourced income other than foreign employment income and income from the supply of services.
As a transitional resident, you are exempted from the controlled foreign income rules and the foreign investment fund rules. The financial arrangement rules also do not apply to your foreign financial arrangements.
While the settlor of a trust is a transitional resident, the trust is a foreign trust. The 12-month period to elect for a foreign trust to become a qualifying trust therefore commences on the date that the settlor ceases to be a transitional resident. While the settlor of a trust is a transitional resident, the trustees are not subject to tax on income derived from a source outside New Zealand.
Other types of exempt income include the gain derived from exercising employee share options that was granted while you were a non-resident, non-resident withholding tax, approver issuer levies, rental income derived offshore, foreign interest, foreign dividends, and more.
Could you be a transitional resident?
The following flowchart includes seven questions you need to ask to determine if you are a transitional resident:
As you work your way through the questions, take note of the following criteria:
Question 1 – Are you a natural person – i.e. are you an individual?
The temporary tax exemption is only available to individuals. It is not available to companies or trusts or any other type of taxpayer.
Question 2 – Are you a New Zealand tax resident?
You become a New Zealand tax resident by being present in New Zealand for more than 183 days in any 12-month period or by acquiring a permanent place of abode in New Zealand. If you become a tax resident by being present in New Zealand for more than 183 days in any 12-month period, you are deemed to be a tax resident from the first day you were present in New Zealand. You can become a New Zealand tax resident without having a permanent place of abode in New Zealand. It is possible to have a permanent place of above in New Zealand (and therefore being a New Zealand tax resident) while also having a permanent place of abode in another country.
Question 3 – Have you been a non-resident for 10 years or more?
The 10-year non-resident period is calculated from the day your New Zealand tax residency ended until the day you satisfied the 183-day rule. Accordingly, the deeming provision whereby your New Zealand tax residency is backdated to the first day in the 183-day period, does not apply when you calculate the period during which you were a non-resident.
Question 4 – Have you previously been a transitional resident?
You can only be a transitional resident once.
Question 5 – Have you chosen not to be a transitional resident?
You can notify Inland Revenue of your decision not to be a transitional resident.
Question 6 – Have you or your partner applied for Working for Families Tax Credits?
If you or your partner apply for Working for Families Tax Credits, you are deemed to have notified Inland Revenue if your decision not to be a transitional resident. This deemed decision is irreversible.
Question 7 – Has the period of transitional residency ended?
Transitional residency commences on the first day of tax residency and ends on the earliest of –
- the day you choose not to be a transitional resident;
- the day before you stop being a New Zealand tax resident; or
- 48 months after the end of the month in which you come become a tax resident, ignoring the 183-day backdating rule.
Contact your local BDO office to discuss your tax residency status and to make sure that you fully utilise any temporary tax relief available to you.
Article by Rozelle van Schaik, Tax Senior Manager, BDO Auckland.