Don’t get caught with a NZ tax bill while you are living overseas.
Are you leaving NZ permanently, or going on an extended overseas trip? Make sure you know your tax obligations and how to ensure you break your tax residency in New Zealand so you are not welcomed back to New Zealand with a large tax bill.
It is almost a rite of passage for Kiwis to go on their OE at some stage. It is common knowledge that you need to ensure that you have your visas sorted, and that your assets are stored while you are away, and even that your property is rented out – but most people do not consider their tax position. All New Zealand tax residents are subject to tax in New Zealand on their world-wide income. To cease to be a New Zealand tax resident you must be absent from New Zealand for at least 325 days in any rolling 12-month period, and you also have to cease to have a permanent place of abode in New Zealand. The first is a simple calculation, but the second is a highly complex area of law. Legislation does not define what constitutes a permanent place of abode. It is therefore, necessary to look to case law, weigh up all of the factors and apply professional judgment.
If you retain your home and rent it out, keep your personal belongings in storage, and are only absent from New Zealand for a short period of time, then you will likely remain a New Zealand tax resident. This means you are required to pay tax in New Zealand on any income earned anywhere in the world. This can be income from your work, interest on bank accounts, dividends on shares, and any other income. If you pay the equivalent of income tax on this same income elsewhere, a foreign tax credit will be available for any correctly deducted tax. If you are paying tax in a lower tax jurisdiction (such as the Middle East or even Australia) you will end up paying additional tax in New Zealand.
A common example of how this might occur is as follows: a person might decide to relocate with their employer to another office elsewhere in the world, so they pack up with their spouse and children for three years. Their family home is owned by their family trust, which rents the house to students from February to November each year. All of their furniture is placed into storage to ensure the house is available to be rented. They retain their New Zealand investment (such as their bank accounts, Kiwisaver, etc.) and maintain their professional and sporting associations while they are overseas. They return at Christmas for a holiday, and stay in their family trust’s house as it is vacant at this time of year. In this example, Inland Revenue has stated that they will remain New Zealand tax resident during this period of absence from New Zealand due to having a permanent place of abode. If they go to a country that New Zealand does not have a double tax treaty with (such as Saudi Arabia), they will be required to pay tax in New Zealand on all of their income. This includes the pay they receive in their new country (even if it is not subject to tax in that country) and all income from their investments, wherever in the world those investments are located. If they go to a country which does have a double tax treaty, the tie breaker provisions of that particular treaty will need to be applied to determine which country they will be relieved from paying tax (if any).
It is important to consider any assets that you may acquire while working overseas such as pensions, as well as any redundancy or severance type pays. These can all be subject to tax in New Zealand and personalised advice should be sought from an international tax expert.
If you are considering a permanent move overseas you may think it is more simple, and in most cases it will be. However, if you are going to keep some assets in New Zealand you should be aware of your ongoing New Zealand tax obligations, and also be aware of how they will be treated in your new home country. Any income sourced in New Zealand is generally taxable in New Zealand regardless of where you might be tax resident. This means there are people that are required to file “non-resident” tax returns in New Zealand. A common example is for a rental property in New Zealand, or a share portfolio. This will likely form part of your taxable income in your new home country too, and be taxed subject to that country’s tax rules. For example, there may be a capital gains regime in that other country which will capture the capital gain on the sale of a New Zealand property. It is also important to remember that Inland Revenue has the benefit of hindsight. If you have intended to be overseas reasonably permanently, and then do not enjoy it and decide to return to New Zealand, Inland Revenue will base their assessment on what has actually occurred. This means it is vital to continue to monitor your plans and assess how any changes to your plans could affect any previous tax advice received.
If you are thinking of heading overseas, whether it is for a year or a more permanent move, you should seek expert international tax advice in order to maximise your assets and mitigate any additional tax being payable in New Zealand or overseas. For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.
Click here to download our Tax Overview drop sheet written by Julia Johnston in March 2019.