Recently, Inland Revenue released a list of common misunderstandings about the taxation of individuals. The top five items on the list deal with residency and tax credit issues and serve as a reminder of the potential traps for individuals migrating to or from New Zealand, or investing overseas.
IR’s top 5 misunderstood facts about NZ individual taxation
- New Zealand tax residents are taxed not only on the income they earn in New Zealand but also on their worldwide income.
- If you leave the country but maintain a permanent place of abode in New Zealand, you are still a resident for tax purposes.
- Investment (even if deposited in an offshore account or left on a foreign credit card) is taxable in New Zealand even if it is not repatriated to New Zealand.
- The fact that withholding tax may have been deducted on foreign income does not mean that this income is no longer taxable in New Zealand.
- A foreign tax credit maybe available but only if the tax involved is not subsequently refunded (including in a later income year) and is substantially similar to income tax and does not exceed the tax otherwise payable on the underlying income in New Zealand.
New Zealand tax obligations
As this list above suggests, understanding your New Zealand tax obligations starts with knowing whether you are a tax resident of New Zealand. An individual is a New Zealand tax resident if they either are personally present in New Zealand for more than 183 days in total in any 12-month period or have a permanent place of abode in New Zealand.
A permanent place of abode is determined with reference to the extent and strength of the attachments and relationships that the person has established and maintained in New Zealand. This can take into account such things as whether the person has accommodation available to them in New Zealand, where their family lives, whether investments are based in New Zealand, and membership of clubs or organisations.
A New Zealand tax resident must file a New Zealand tax return and declare their worldwide income, even though they may not live in New Zealand. Tax is calculated based on the taxpayer’s worldwide income. A tax credit may be available for any foreign tax paid. A foreign tax credit is generally available when the tax paid in the foreign jurisdiction is similar to New Zealand income tax. Generally, this does not include a capital gains tax payable in a foreign jurisdiction. This can lead to double taxation in some instances.
Inland Revenue also notes the following misconceptions:
- Not all overseas pension payments are tax-free. Certain pensions are fully taxable in New Zealand.
- Special taxing regimes (the controlled foreign company and foreign investment fund rules) apply to gains on certain foreign shareholdings, retirement schemes and life insurance investments.
- Additional disclosures are required in respect of controlled foreign companies and foreign investment funds.
- Allowances that maybe treated as tax-free in other countries (for example, living-away-from-home allowances) are generally fully taxable in New Zealand.
- The temporary tax exemption on foreign income for traditional residents expires after 48 months and there is no entitlement to Working for Families Tax Credits during the period of the exemption.