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26 March 2020

Emergency Benefit Tax Trap

Emergency Benefits Could Cost Temporary Residents Dearly


In welcome news, the Government passed the COVID-19 Response Taxation Bill which is now awaiting Royal Assent. The policy in this Bill is to access the Government’s response to the economic impacts of the COVID-19 outbreak.


While there are a number of relevant and helpful items in this Bill, there is one that is of concern for temporary residents. That is the amendment to allow temporary residents who are granted an emergency benefit by the Ministry of Social Development to qualify for the same Working for Families (WFF) components as other beneficiaries.


While this policy is admirable and should be applauded, this also comes at the cost of the temporary resident’s transitional tax residency, or “tax emption”. Transitional tax residency is a scheme in place to provide new residents with an exemption for foreign passive income for a period of four years based on date of becoming tax resident which can extend the period to over four years. This means the new resident will only be required to pay tax in New Zealand on New Zealand sourced income and income they earn from their personal services (working). Transitional tax residency is revoked by applying for certain tax credits, including the WFF tax credits.


Temporary residents considering applying for the WFF tax credit should seek advice prior to applying in order to confirm if they will be better off as a result of the credit. If the temporary resident has connections with their home country, such as a mortgage, property, shares, bank accounts or any other passive income overseas, then they may find the benefit of transitional residency outweighs the benefit from the WFF tax credit.


The above is intended for informational purposes only and should not replace specific tax advice.   For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.