(NEW ZEALAND) — The Inland Revenue Department is granting eligible new migrants and returning New Zealanders a temporary exemption from New Zealand tax on most foreign-source income after they become tax residents.

The relief applies to transitional tax residents and generally lasts about four years. It can cover overseas interest, dividends, rent and foreign investment fund income, while foreign employment and personal-services income remains taxable.

Eligibility is automatic for people who meet the rules, but the exemption is available only once. Certain decisions, including applying for Working for Families tax credits, can also end it before the full period expires.

Establishing Tax Residency

Tax residency must be established before the exemption applies. Immigration status determines whether a person can stay in New Zealand and what activities they can undertake, while tax residency determines which income New Zealand can tax.

A person becomes a New Zealand tax resident when the first of two events occurs: spending more than 183 days in New Zealand during any 12-month period, or establishing a permanent place of abode in the country. A work visa, resident visa, student visa or visitor status does not decide the tax result by itself.

The 183-day test can backdate the start of tax residency. Parts of days count as whole days, including the day a person arrives or leaves, and the days do not need to be consecutive. Once the threshold is met, residency under that test dates back to the first of the 183 days.

That backdated date can affect filing obligations, New Zealand income and the start of the transitional exemption. Travel records therefore form part of the tax calculation, rather than serving only as immigration documentation.

A permanent place of abode can establish tax residency before a person reaches 183 days. The Inland Revenue Department describes it as a place where someone usually lives in New Zealand, and the home does not need to belong to the taxpayer or remain vacant while the person is away.

Connections to New Zealand can also enter the assessment. Relevant factors include how often a person returns, how long they spend in the country, family and social ties, economic interests, employment or business connections, and whether they intend to return to live there.

Transitional Tax Resident Rules

A transitional tax resident is generally a new migrant or a New Zealander returning home who became a New Zealand tax resident on or after April 1, 2006, and was not a New Zealand tax resident at any time during the previous 10 years.

The rule covers people settling in New Zealand after a long period abroad and returning New Zealanders who have been outside the country’s tax-resident system for at least 10 years. The benefit does not reset each time someone leaves and returns.

The exemption begins on the first day a person becomes a New Zealand tax resident. Its end date is the earlier of four years after the end of the month in which the person qualifies as resident under the 183-day rule or establishes a permanent place of abode.

That calculation means the relief does not necessarily run for four calendar years. The residence trigger and the month in which it occurs determine the precise period, so a taxpayer should record the relevant dates rather than entering a simple four-year period in their files.

Income Covered by the Exemption

Most foreign-source passive income falls within the temporary exemption. Examples include interest from overseas bank accounts, dividends, foreign investment fund income and rent from foreign property.

A migrant might hold foreign deposits, dividend-paying shares, managed funds, rental property or other overseas investments when arriving in New Zealand. During the exemption period, those income types generally do not need to be included in the New Zealand Individual tax return, IR3.

Foreign interest normally requires attention even when the money remains overseas or tax has already been deducted in another country. The temporary exemption removes that reporting requirement for foreign-sourced interest covered by the relief.

Foreign dividends receive similar treatment. A person using the four-year exemption does not need to declare foreign-source dividends or apply the foreign investment fund rules to those holdings during the exemption period.

The Foreign Investment Fund, or FIF, rules can otherwise require taxpayers to calculate income from overseas shares and funds. A person holding shares in a foreign company that is not a controlled foreign company may need to consider those rules, and holdings above NZD 50,000 will probably require a FIF calculation using one of the available methods.

The temporary exemption pauses that obligation for covered foreign-source income. It does not, however, turn every payment from an overseas business or employer into passive investment income.

What Is Not Covered

Foreign employment income and income from providing personal services are excluded. A person living in New Zealand and working remotely for an overseas employer must include that employment income in the IR3, even when the person qualifies for the four-year temporary exemption.

The same issue can arise for consultants, contractors, freelancers and other self-employed migrants. An overseas client or employer does not by itself make salary, fees or business income exempt from New Zealand tax.

New Zealand payroll rules continue to apply to local employment. A worker must provide an employer with an IRD number and tax code using an IR330 form; failing to provide that information results in tax being deducted at a higher rate.

Self-employed people must report their income and claim expenses in the IR3. If the tax owed at the end of the tax year exceeds NZD 5,000, provisional tax may be required during the following tax year.

Foreign superannuation has a separate rule. Lump-sum withdrawals from foreign superannuation funds can qualify for their own four-year exemption, using the same time-period calculation but not the same legal rule as the temporary exemption for most foreign income.

A person who was a non-resident taxpayer when acquiring the right to a foreign superannuation fund may qualify for the separate treatment on a lump-sum withdrawal. Pension accounts, retirement funds and foreign superannuation should therefore be assessed separately from overseas bank accounts, shares and rental property.

When the Exemption Ends

The temporary exemption can end before the four-year period. It ends if the taxpayer applies for Working for Families tax credits, including Best Start payments, or if the taxpayer’s partner applies while being a transitional resident.

That choice can affect migrant families deciding whether to seek Working for Families support. The value of the tax credits must be considered alongside the value of keeping foreign income outside the New Zealand tax return.

The exemption can also end if a person elects to include exempt income in the IR3, confirms to a foreign jurisdiction and the Inland Revenue Department that New Zealand tax has been paid or will be paid on overseas income from a date during the transitional period, or tells the department that they no longer want transitional-resident treatment.

Once the exemption ends or a taxpayer opts out, the decision can affect the remaining period. The relief cannot be used again later because eligible people receive it only once.

Record-Keeping and Examples

Automatic qualification does not eliminate the need for records. Migrants should retain arrival and departure dates, the date New Zealand tax residency began and evidence showing that they were not New Zealand tax residents during the previous 10 years.

Foreign bank statements, dividend records, rental documents, fund and shareholding information, foreign superannuation papers, remote-work contracts and self-employment invoices can help establish whether an income item was covered.

Records relating to Working for Families applications, IRD numbers and tax codes can also matter. The documents may be needed to establish when the exemption started, when it ended and whether a payment came from passive investment, employment or personal services.

A new migrant who lived outside New Zealand for more than 10 years and receives overseas bank interest and foreign share dividends may have those amounts covered after becoming tax resident. A returning New Zealander who spent 12 years abroad and holds foreign shares worth more than NZD 50,000 may avoid applying the FIF rules during the exemption period.

A remote worker faces a different result. Salary from an overseas employer remains reportable in the IR3, as does income from overseas personal services, despite the worker’s transitional-resident status.

The tax treatment therefore turns on more than the country where a bank, employer or client is located. The residence date, the type of income and any decision involving Working for Families can determine how long the relief lasts and which payments must be reported.