Who is — and isn’t — a tax resident?

New Zealand’s domestic tax law establishes when an individual becomes a tax resident. Tax residency determines whether an individual is taxable on their worldwide income or only New Zealand-sourced income. The two main residency tests are presence in New Zealand for 183 days in any 12-month period, or having a permanent place of abode here.

It is possible that a person may be classed as a tax resident of another country as well. For example, they may have been in New Zealand for more than 183 days but have a permanent place of abode and closer economic and family ties with a foreign country. To determine which country has prime taxing rights, reference is made to the Double Tax Agreement (DTA) with the relevant foreign country.

Although a foreign country may have prime taxing rights, and the person is only liable for tax here on their New Zealandsourced income, if the 183-day test has been breached they are technically classed as a tax resident. So what? It doesn’t affect the tax payable. Maybe not now, but it may affect exemptions and exposure of overseas income to New Zealand tax in the future.

New migrants and some returning New Zealanders may qualify for a special status, transitional residency. This provides exemption from tax on overseas-sourced passive income ( interest, dividends, rents) for a period of 48 months from the date they become a New Zealand tax resident (after 183 days in New Zealand). However, this status is only available once in a lifetime.

Say, for example, a UK tax resident came here on a year’s working holiday, but retained a permanent home and family in the UK, then two years later immigrated to New Zealand. During his year here he became a tax resident, as he exceeded the 183-day test. The clock starts ticking for the four-year transitional status immediately he becomes a tax resident (at the expiration of the 183 days). It ceases when he becomes a nonresident (out of New Zealand for 325 days in any 12-month period.)

However, because he can only have the transitional exemption once, and it ceased when he became a non resident, when he returns two years later the transitional exemption is not available, and he is immediately taxable on his worldwide income.

If he has substantial overseas investments or super funds to transfer to New Zealand, it would be wise to ensure that he does not become a non-resident (extra visits needed), thus the exemption will be available for a short period once he finally immigrates.

Also be aware that it is possible to accidently opt out of the transitional tax exemption through returning overseas passive income in your return (claiming overseas rental losses) or claiming Working for Families. Each case has to be evaluated on its overall effect.

It is important that your tax advisor is fully aware of your personal circumstances so they can advise you appropriately. If you know people who are thinking of moving to New Zealand, suggest that they get New Zealand tax advice first, to ensure they have no nasty surprises.

In my next article I will cover overseas superannuation fund withdrawals/transfers and other foreign income treatment.