Contributed by: Gilligan Sheppard.
Are you looking to either invest in NZ or to move the family here while you retain your various connections – including investments in another jurisdiction? If so, the following brief introduction to NZ taxation will help you understand your potential exposures to pay NZ income taxes based on your individual scenario.
How does NZ tax?
Your obligation to file income tax returns and pay income tax in NZ is predominantly based on your NZ tax resident status. If you are considered to have triggered an NZ tax resident status in accordance with the various NZ tax residency tests, then potentially, NZ will gain a right to tax your worldwide income.
However, if you remain a non-resident for NZ tax purposes, then NZ’s taxing rights over your income will usually only extend to income deemed to have derived from NZ sources.
What tax rates am I exposed to?
With the exception of certain interest, dividends and royalty income derived from NZ sources by a non-resident, which may be subject to a deduction of a non-resident withholding tax at the time of payment and considered to be a final tax on the income, the following is a summary of the current NZ income tax rates (2022/23 income year).
If you are subject to income tax in NZ as an individual, the tax rates are:
$0 – $14,000 – 10.5%
$14,001 – $48,000 – 17.5%
$48,001 – $70,000 – 30%
$70,001 – $180,000 – 33%
Over $180,000 – 39%
NZ’s company tax rate is a flat 28%. Income derived by trustees of a trust (not distributed to the beneficiaries) is taxed at a flat 33%.
Presently NZ has no inheritance taxes, stamp or estate duties or a capital gains tax, although there is potential that the latter will be introduced within the next few years.
NZ has a value-added tax applied usually to the consumption of goods and services within NZ, referred to as GST, which is presently set at a rate of 15%.
So when will I be deemed a NZ tax resident?
NZ has two types of tax residency tests – the physical presence test and the permanent place of abode (PPOA) test. At all times, the PPOA test takes precedence over the physical presence test.
The physical presence test is very clear. Spend more than 183 days physically present in NZ in any 12-month rolling period, and you will be deemed an NZ tax resident from your first day of presence in that period.
The PPOA test, however, is not so clear. The PPOA is where most disputes between the person and Inland Revenue arise. At a basic level, you first must show you have an abode (a place to stay) available to you in NZ.
Satisfy that criterion, and it will then depend on the strength of your connection with the abode – which will determine whether it will be deemed a PPOA. Some of the common questions that you will be asked are; How often do you stay there (regularity), how long do you usually stay (continuity), and do other family members live there when you are not in NZ.
It is also important to understand that you do not need to personally own the NZ abode before it can be considered a PPOA. However, once you are deemed to have an NZ PPOA, you will be deemed an NZ tax resident from the date the PPOA was established.
But what if I’m then physically absent from NZ for extended periods?
To a large extent, the answer to this question will depend on which test you were deemed to qualify as an NZ tax resident in the first place.
If you have been deemed an NZ tax resident under the personal presence test, you will remain an NZ tax resident until you have been physically absent from NZ for more than 325 days in any 12-month rolling period. Once you have satisfied this test, you will be deemed a non-resident again from your first day of absence – unless you still have an NZ PPOA.
Regardless of your physical absence from NZ, you will remain an NZ tax resident for as long as you retain an NZ PPOA. So if you have satisfied the 325-day absence test but still have an NZ PPOA, your status as an NZ tax resident will not cease until you are deemed to have relinquished the NZ PPOA.
So as soon as I am a NZ tax resident, my worldwide income is subject to NZ tax?
Not necessarily, and this is because NZ (like most foreign taxing jurisdictions) has entered into a suite of Double Tax Treaty Agreements (DTA), which may include the country with which you are presently most connected.
The DTA can work from two perspectives.
Firstly, when you have triggered an NZ tax residency status, your continued close connections with a foreign country will also deem you to be a tax resident of that jurisdiction still. A person in this situation is referred to as being a dual resident.
Naturally, the risk for any dual resident is that both jurisdictions attempt to tax the person’s worldwide income, thereby exposing the person to potential double taxation. However, the DTA essentially eliminates this risk by applying (what is often referred to as) a residency tie-breaker test, of which only one country can be the winner – obtaining the worldwide taxing rights. The test usually also includes the sole taxing right over income you may have derived from other sources outside of the two DTA jurisdictions.
The country of which you are not deemed to be a tax resident under the DTA tie-breaker test will usually still retain a right to tax any income derived from within its boundaries. However, there may still be a limit on this right – say a reduced rate of tax.
Secondly, even when you are not considered a tax resident of the other DTA jurisdiction, but you source income from a particular type of investment in that country (usually in the nature of interest, dividends and royalties), the DTA will limit that country’s taxing right.
For example, under NZ domestic law, a withholding tax of 30% can be withheld from dividends paid to a non-resident shareholder. Most of the NZ DTA’s, however, reduce that taxing right to 15%, if not less.
So NZ wins the tie-breaker – worldwide taxation immediately?
Not necessarily. If you have never been an NZ tax resident, or at least not for over ten years, then you may qualify for NZ’s Transitional Tax Residents Regime (TTR).
Under TTR, essentially for up to the first 48 months of your NZ tax residency period, you are still treated for NZ tax purposes as if you were a non-resident, except for any employment or personal services income you derive from non-NZ sources.
What this means is that, in essence, you have four years post-coming to NZ to deal with your offshore interests. When worldwide taxation does apply, you will at least then have had a reasonable opportunity to reorganise your affairs into an optimal structure.
Ok, so I’m just going to invest in NZ and not become a tax resident – NZ tax exposures?
NZ income tax rules deem certain types of income to be derived from NZ sources, and in this respect, a right to tax that income so sourced from NZ. It, therefore, depends on your type of investment. Still, in essence, if you are deriving income in the nature of interest, dividends or royalties, then unless there is an exemption or restriction under either domestic law or the provisions of a DTA, it is likely a Non-Resident Withholding Tax (NRWT) will be deducted from your payment. Often the NRWT will be considered a final tax, meaning that you will have no obligation to file an NZ income tax return.
Other types of NZ sourced income, such as rent you may derive from an NZ investment property, will not be subject to NRWT. However, you will be expected to file an NZ income tax return and directly pay income tax to the NZ Inland Revenue.
Naturally, this document has only been prepared for information purposes and should not be seen or relied upon as specific tax advice. Having read the narrative, you should seek the advice of an appropriately qualified tax adviser to obtain tailored advice based on your individual circumstances.
Contributed by:
Gilligan Sheppard Public Accountants
PO Box 6310
Wellesley Street
Auckland
NEW ZEALAND
Website: https://gilligansheppard.co.nz/
Email: richarda@gilshep.co.nz
Phone: (649) 365-5532
