Sit Back and Relax – New Zealand’s transitional tax resident’s regime

Packing up and moving to another country will often involve multiple decisions, some of which can have material consequences if the wrong choice is made. The process is often made harder, by the numerous emotions that will usually accompany the shift, namely leaving family and friends, learning new cultures and customs and navigating the new location upon arrival.

One important decision revolves around what to do with investments, particularly if the destination jurisdiction has a less favourable tax regime. It may be advisable to restructure or sell assets to avoid potentially more onerous taxation consequences, or simply to wait until you are settled in your new country before you take any action.

Anyone intending to move to New Zealand (NZ), who has not been an NZ tax resident for at least the past ten years, can essentially sit back and relax, wait until all the emotions of the move have passed, and then take time to make some key decisions. The ability to take this approach is all due to NZ’s transitional tax resident’s regime (TTR), which was first introduced in 2006, as a carrot to attract more skilled talent to NZ.

Under TTR, the only foreign-sourced income subject to NZ taxation, for the first 48 months, is that derived either from employment or from the supply of personal services. If, for example, you decide to rent your overseas property out until market conditions improve, the foreign-sourced rental income is exempt from NZ taxation. The same is true of dividends from shares held in foreign companies and interest earned from those foreign bank account deposits. Usually, new residents receive a credit against the NZ tax payable, for any foreign income taxes already paid.

TTR is essentially an opt-out regime, which means it automatically applies to new tax residents for a four-year period unless they opt out. The benefits of TTR can only ever be claimed once, so once the regime has applied to you, if you go away from NZ for more than ten years and then return, you do not qualify for TTR again.

How is a New Zealand tax residency status triggered?

New Zealand (NZ) tax residency rules contain three specific tests for determining whether or not a natural person may be deemed an NZ tax resident. Two of the tests are black and white – they are based purely on a person’s physical presence in NZ. Under the first test, once you have physically spent more than 183 days in NZ in any rolling 12-month period, you will be considered an NZ tax resident from the first day of that presence. Once deemed an NZ tax resident, you then need to be physically absent from NZ for more than 325 days in any rolling 12-month period (the second test), to become a non-resident again.

The third test is a grey area, and also takes precedence over the other two tests. Under the third test, if you have established in NZ, what is referred to as a permanent place of abode (PPOA), you will be deemed a NZ tax resident from the date you establish your NZ PPOA, until the date you cease to have an NZ PPOA, regardless of any physical presence in NZ. The PPOA test essentially examines whether you have an NZ abode available to you and if so, the closeness of your association to that abode. This concept requires a detailed analysis of the person’s factual scenario before a proper determination can be made.

NZ tax residency is certainly one of the numerous facets of NZ tax law that Gilligan Shepherd advises on, so if NZ is a destination you or your clients are considering, please do not hesitate to contact us for some guidance.