This article discusses New Zealand’s transitional tax residency, what it is, how it works and its effect on your foreign-sourced income.
New Zealand is tax-friendlier than you would imagine. You can become a tax resident without being a resident of New Zealand for immigration purposes, and vice versa.
At Nomad Capitalist simplify taxation and help our clients to legally reduce their taxes.
As a transitional tax resident, you are temporarily exempt from paying tax on most types of overseas income for four years.
So, the maximum amount of time you can be a transitional resident is 48 months. This term is used interchangeably with four years when describing the transitional tax resident status exemption period.
Individuals rather than countries can apply for this temporary tax exemption.
Temporary tax relief applies to foreign-sourced income apart from foreign employment income and income from the supply of services.
A transitional tax resident is:
- A new migrant or New Zealander returning home
- A New Zealand tax resident who qualified on or after 1 April 2006
- Someone who has not been a New Zealand tax resident at any time in the previous ten years.
You qualify for transitional tax residency and temporary exemption on certain overseas income.
If you do not wish to be a transitional tax resident, you must notify New Zealand’s Inland Revenue (IRD). That is your opt-out from becoming a transitional tax resident.
The tax exemption period for a New Zealand tax resident is a one-off. It can’t be renewed or repeated as a tax resident in New Zealand.
Your transitional tax residency exemption period start date depends on how you qualify as a New Zealand tax resident.
If you qualify as a New Zealand transitional tax resident by living in New Zealand for more than 183 days in any 12 months, your temporary tax exemption period starts on the first of those 183 days. The exemption applies from then.
But if you qualify as a transitional tax resident by establishing a permanent place of abode in New Zealand, your transitional residency exemption period starts on the day you establish that place. Your exemption applies from then.
Permanent Place of Abode is a broad concept that covers not only a home or residence but also connections and ties potential transitional residents have with New Zealand concerning financial, social, and family-based factors.
Material factors that are considered when determining a Permanent Place of Abode include:
- Continuity and duration of your presence in New Zealand
- The nature and use of your dwelling with ownership of the family home are a more robust indicator or an enduring connection
- Intention of returning
- Family and social ties
- Business interests and economic ties
- Personal property with any real estate owned or rented in New Zealand taken into account.
As either the 183-day personal presence test or permanent place of abode test determines your New Zealand tax residency, backdating (authorities consider you a tax resident from the time that you first arrive) can result in the transitional tax residency exemption period being longer than 48 months.
If you or your partner apply for Working for Families Tax Credits, you are no longer a transitional resident and must return your foreign income. The exemption period is over.
Working for Families Tax Credits are tax credits that citizens are eligible for.
These Working for Families Tax Credits assist in the care of dependent children.
While New Zealand tax authorities tax you on New Zealand-sourced income, certain foreign income is exempt during the exemption period.
The exemption applies to the following overseas income earned by you the transitional tax resident during the exemption period:
- Income attributed under New Zealand’s controlled foreign company (CFC) rules
- Income attributed under New Zealand’s foreign investment fund (FIF) rules
- Overseas income subject to non-resident withholding tax or approved issuer levy
- Income arising from the exercise of overseas employee share options
- Accrual income from foreign financial arrangements
- Income from foreign trusts
- Rental income derived offshore
- Foreign interest and foreign dividends
- Royalties from overseas
- Any income you earned from working overseas before arriving in New Zealand
- Gains on sale of overseas property held on revenue account
- Overseas business income unrelated to the performance of services.
Overseas income subject to approved issuer levy and non-resident withholding tax during this exemption period can include foreign mortgages.
There’s foreign income, unlike overseas interest, that remains unaffected for you, the transitional tax resident, during the exemption period. This includes:
- Income derived from overseas employment performed while receiving the exemption
- Business income relating to personal services performed offshore.
Director’s fees or salaries from an overseas company will not qualify for the exemption as they are classified as personal services income.
If you are the recipient of any overseas income that is not exempt, you will need to disclose this on your IR3 tax return.
There is no application form to get transitional resident status; you need to meet the requirements.
Any salary, consultancy fee, management fee, or other income earned from given services will still be taxable income in New Zealand while you’re a transitional tax resident.
Service fees and employment income are not exempt to a transitional resident.
Becoming a New Zealand tax resident may be something other than your main objective. But it might be worth it in the short term because of the rewards offered during the transitional tax exemption period on certain foreign income.
We’re not a tax agent trying to sell you the country because of how it treats accrual income, foreign interest, and rental income derived offshore.
Once you cease to be a transitional resident, you will be taxed as a regular resident on your worldwide income and lose this sort of tax credit because the transitional tax resident exemption period ends.
In the longer term, we are happy to help you become a non-resident taxpayer or tax resident elsewhere.
We can help you with everything from foreign-sourced income to non-resident withholding tax and beyond.