Becoming a transitional tax resident: What you need to know

Becoming a transitional tax resident: What you need to know

If you are moving to New Zealand, or are returning to New Zealand from overseas, then you could quality for the transitional tax resident exemption. We explain what this means and how it impacts your tax obligations.

What is a transitional tax resident?

A transitional tax resident is a migrant or returning New Zealander who is in the process of becoming a New Zealand tax resident. Remember, tax residency is different to the concept of citizenship or your country of permanent residency.

 

After arriving in New Zealand, you may qualify for temporary tax exemption on most foreign-sourced income for a period of up to four years. If you become a New Zealand tax resident without using the transitional tax residency exemption, you would be taxed in New Zealand on all of your worldwide income.

 

To be eligible for this exemption you must:

 

1. meet the requirements to become a New Zealand tax resident;

2. not have been a New Zealand tax resident for the last 10 years;

3. not previously used the transitional tax residency exemption; and,

4. not be receiving any Working for Families Tax Credits*.

 

*Working for Families Tax Credits are tax credits available to assist New Zealand citizens who care for dependent children.

 

To help determine your eligibility and plan your tax obligations, we offer a Transitional Tax Resident Health Check. Some of the factors taken into consideration include whether you:

 

  • have any overseas bank accounts, digital wallets, bonds or credit;
  • have a foreign portfolio with a portfolio manager, bank, bare trustee or nominee;
  • own property situated outside New Zealand;
  • receive income from an overseas business, pension, salary, trust or rental; and,
  • receive income from overseas interest, dividends or royalties.

 

The purpose of our Transitional Tax Resident Health Check is to get the full picture of your overseas income so we can advise you the correct tax treatments for your transitional residency and also help you prepare for tax residency in New Zealand. The Health Check provides you with certainty of your tax obligations and your tax position.

 

That said, it’s worth noting that transitional tax residency will be automatically granted to you if you meet the criteria; if you do not wish to be a transitional tax resident, it’s your responsibility to notify the IRD.

 

Can I lose my transitional tax resident exemption status?

Yes. Unfortunately many transitional tax residents lose their exemption because they try to claim deductions on overseas losses, typically relating to overseas rental properties.

 

What many of them do not realise is that by initiating such a claim terminates their transitional resident exemption status. The same applies if a transitional tax resident claims Working for Family credits. This is why specialist tax advice is so important.

 

Which tax exemption(s) will I qualify for?

If approved as a transitional tax resident, you will qualify for tax exemption on certain foreign income, such as foreign interest and foreign dividends, for four years. Please see the IRD website for a complete list of exempt foreign income.

 

What do I need to do throughout transitional tax residency?

During the four-year exemption, it’s a good idea to make preparations for when you become a permanent New Zealand tax resident.

 

For example, you might want to forward plan moving your overseas pension to New Zealand and budget for it becoming a taxable target once your transitional period finishes.