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New Zealand has never been more attractive as a place to live, thanks to its reputation for avoiding the worst of the COVID-19 pandemic seen overseas.
Since the outbreak, more than 50,000 Kiwis have returned home and some surveys predict between 250,000 and 500,000 could return in the next few years. While the vaccine is likely to reduce those figures significantly, the brain gain trend seems set to continue for some time yet.
While expat New Zealanders bring valuable experience and skills home with them, however, many unwittingly bring a tax headache as well. Across the country, Baker Tilly Staples Rodway has seen increasing numbers of returnees facing double taxation and confusion about how much they actually owe – and to which government. With the end of the financial year fast approaching, and the top personal tax rate rising to 39 per cent from 1 April, 2021, some will be in for a shock.
Ordinarily, returning Kiwis would have spent some time planning in advance and winding up their affairs overseas, but the pressures of COVID mean many are now booking their spot without having done their homework first. That means major implications for people with trusts or companies based overseas, and potential issues for many regular income earners unawares at tax time.
Our transitional residency rules were brought in to encourage migrants with assets overseas. Under the rules, if you haven’t been a New Zealand tax resident for 10 years, you’re considered a transitional resident. That means you won’t be taxed on your overseas income from assets such as rental properties, pensions or shares for the first four years after you arrive in New Zealand.
This was intended to make it easier for highly skilled individuals to more easily move to New Zealand and partially match New Zealand tax treatment for high value migrants to the Australian foreign residents’ exemption. It also made it easier for high-net worth individuals to migrate as they would have more time to plan their move to New Zealand and (in theory) migrate their investments here over time.
Some people have confused the rules, thinking any overseas income is excluded from New Zealand tax. This is not the case. Transitional residency rules only apply to individuals. That means income from companies or trusts isn’t covered and it will be taxed by the Inland Revenue from day one.
Salaries and payments for services performed in New Zealand (regardless of who for) aren’t covered either. New Zealanders and family members still working for overseas employers will also be taxed in New Zealand from the time of arrival – and tax credits they may have earned overseas don’t apply.
We have double tax agreements with many countries to help people avoid paying income tax twice. However, with corporate tax or trusts set up overseas people often have to pay in both countries. When it comes to the US, expats also need to continue filing US tax returns for as long as they retain citizenship. That’s where planning in advance is essential, as it takes time to sort and working backwards on arrival can get expensive.
Many New Zealanders who’ve been out of the country most of their working lives also need to learn how to set up a business all over again, as the system is different here. New Zealand’s provisional tax is unique, and those from tax havens such as the United Arab Emirates, the Channel Islands or Brunei will be in for an especial shock. The advice for these people is – seek advice, to avoid an unpleasant surprise from the taxman.