Understanding New Zealand tax residency can be challenging, and we often hear a lot of the same inaccuracies over again. In this article, we debunk some common myths surrounding New Zealand tax residency.
Tax residency is connected to immigration status
It is a common misconception that tax residency is connected to immigration or visa status. We are often approached by clients who are about to get their residency or permanent residency visa and say “we now need to think about the tax”. However, this is incorrect - you can be a tax resident without having a visa for New Zealand, and even while you are an illegal immigrant. Visa status is not relevant in any way to tax residency.
Tax residency is based on the date we moved to New Zealand
A number of clients approach us for tax advice and say we became New Zealand tax resident on X date, being the date they moved to New Zealand. It is frequent that when we review their tax residency status, they actually became New Zealand tax resident much sooner due to taking an earlier trip to New Zealand. It is important to note that tax residency can be backdated. Under the day-count test you become New Zealand tax resident on your 184th day of presence in New Zealand in a rolling 12-month period. As this is a rolling 12-month period, the start date is very commonly incorrectly calculated due to the lack of consideration for time spent in New Zealand prior to moving here. These earlier trips can cause the day-count test to backdate, which means people become tax resident prior to the date that they move to New Zealand.
I am closer to another country than New Zealand
We are often told by clients that they feel personally connected to their home country more than New Zealand and therefore they do not consider themselves New Zealand tax resident. This is not the way the New Zealand tax residency tests work under domestic law. In fact, guidance provides that it is possible for someone to be tax resident in more than one country, and there is no requirement to look at whether the ties are closer to New Zealand than another country under domestic law
Transitional tax residency can be taken later
A number of people later realise that they became tax resident at an earlier period to the date in which they moved to New Zealand, in a period where they may not have had any income that needed to be returned in New Zealand, so they did not receive the full tax benefits from the transitional tax residency regime. In that situation, clients generally say “we didn’t use the transitional tax residency period so we will use it later”. However, this is not possible. When you become a New Zealand tax resident for the first time you may benefit from the temporary tax exemption, known as transitional tax residency. This is a one-off exemption and cannot be delayed to be used at a later date. Once you become New Zealand tax resident, if you then cease to be New Zealand tax resident, then your transitional tax residency ends at that time. If you did not use the full benefit of the transitional tax residency period, then that is lost - you cannot regain it or use the balance at a later date.
There is a double tax agreement, so I won't file or pay double tax
It is a common misconception that a double tax agreement will relieve someone from having to file and/or pay taxes in both countries. This is incorrect, a double tax agreement can provide relief in certain circumstances. However, it is unusual that someone with a broad asset base spread across two countries would end up only filing and paying tax in one country. For example, if someone has a rental property in their home country, they will generally have an obligation to file and return tax in their home country and then file and return tax in New Zealand (based on New Zealand tax law which can provide for different deductions). It is common that there will be additional tax to pay in New Zealand in these circumstances. Take for example a country such as England that has a tax-free threshold. They may not have to pay any tax in England in relation to their rental property due to the tax-free threshold but, in New Zealand they live and work here and therefore they have income from their job and then have to pay tax on the rental (recalculated to New Zealand dollars) at their marginal tax rate which could be as high as 39%. Because no tax is paid in England due to the tax-free threshold, there is no foreign tax credit to apply.
Further, it is important to point out that the double tax agreements do not cover all forms of tax. For example, New Zealand does not have a capital gains tax, and therefore double tax agreements do not apply to capital gains tax which means the capital gains that may still be required to be paid in the home country will not have a foreign tax credit to apply because New Zealand does not tax such a gain.
Summary
The myths discussed above emphasise the need to recognise that tax residency functions separately from immigration status, and that timing can greatly influence tax obligations. Further, misunderstandings related to transitional tax residency and double tax agreements can result in unforeseen financial consequences. By seeking expert tax advice regarding your New Zealand tax residency status, you equip yourself with the necessary knowledge to make informed decisions that suit your situation, ensure compliance with New Zealand tax laws, and allow you to consider structuring to mitigate double taxes.
This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax matters please contact us.
This article was accurate at the time of publishing.
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