AN URGENT MESSAGE FOR KIWI EXPATS RETURNING HOME
If you are a Kiwi expat returning to New Zealand to settle you will assume tax residency in New Zealand which can have significant tax implications for you. In particular, consider the following questions:
- Will you be retaining investments offshore such as property, shares etc?
- Will you be paying interest to offshore lenders?
- Will you have foreign dominated loans?
- Will you have foreign dominated savings or cash investments?
- Will you retain interest in offshore super schemes, pension funds or life insurances?
- Are you are a beneficiary of an offshore established Trust?
- Will you retain significant shareholdings in closely-held offshore companies?
If you answer yes to any of the above you will have significant tax issues to grapple with once you become a tax resident of New Zealand. That said, it is important to note that there is relief from some of the harsher aspects of New Zealand’s offshore tax rules if you are a transitional resident. As explained in our article on the transitional resident rules you are a transitional resident if it has been 10 years since you were last a tax resident of New Zealand and you have not been a transitional resident before. The transitional residency rules provide a 48 month exemption from having to bring most types of offshore income into the New Zealand tax net.
In short, if you are returning to New Zealand with the intention of retaining offshore assets, loans or investments then you need to contact us for advice as there will be tax implications upon your migration to New Zealand.
Special Message For Kiwi Expats Returning to NZ
If you are a Kiwi expat returning to New Zealand to settle you will assume tax residency in New Zealand which can have significant tax implications for you. In particular, consider the following questions:
- Will you be retaining investments offshore such as property, shares etc?
- Will you be paying interest to offshore lenders?
- Will you have foreign dominated loans?
- Will you have foreign dominated savings or cash investments?
- Will you retain interest in offshore super schemes, pension funds or life insurances?
- Are you are a beneficiary of an offshore established Trust?
- Will you retain significant shareholdings in closely-held offshore companies?
If you answer yes to any of the above you will have significant tax issues to grapple with once you become a tax resident of New Zealand. That said, it is important to note that there is relief from some of the harsher aspects of New Zealand’s offshore tax rules if you are a transitional resident. As explained in our article on the transitional resident rules you are a transitional resident if it has been 10 years since you were last a tax resident of New Zealand and you have not been a transitional resident before. The transitional residency rules provide a 48 month exemption from having to bring most types of offshore income into the New Zealand tax net.
In short, if you are returning to New Zealand with the intention of retaining offshore assets, loans or investments then you need to contact us for advice as there will be tax implications upon your migration to New Zealand.
Asset Ownership in New Zealand: What Structures?
Are you a non resident looking to invest in New Zealand?
If so, you will need advice on the tax implications before you invest. Looking at property investment for example, income derived from property situated in New Zealand is taxable here as the income is sourced here. This is according to New Zealand domestic law – which sometimes can be overridden by double tax agreements. However, in the case of most of the double tax agreements that New Zealand has, the right to tax income off land situated here is preserved.
Given that there is income that is taxed here, the next questions are how is the amount of taxable income calculated and what is the relevant tax applicable? This is where you need advice. There are different rules that apply to inbound investors including thin capitalisation rules that limit the amount of interest that can be deducted in certain circumstances to calculate what the ultimate taxable income is.
The tax rate applicable depends on the ownership structure chosen. There are different tax rates for individuals, companies and Trusts. As a general rule we advise our inbound investors to stay away from company structures as they often lead to double taxation. To illustrate, a company taxable on profit produced in New Zealand will then distribute a dividend to its offshore shareholders. Often the country of residence for the offshore shareholder does not permit a tax credit to be claimed by the shareholder in relation to the dividend when the tax has been paid by the company in New Zealand. In other words, there is a mismatch between the income at shareholder level and the tax liability at company level in New Zealand.
Contact us at GRA if you are contemplating inbound investment into New Zealand and we can help you work through these issues.
How to Choose the Right New Zealand Accountants & Lawyer
If you are not residing in New Zealand, but have dealings (or are about to have dealings) there, then picking the right New Zealand accountants and lawyers will be important.
In New Zealand there can be a fair degree of cross over between the services that lawyers and accountants offer.
That’s why when picking a professional, it makes sense to choose someone who for the large part possesses skills of both a lawyer and an accountant.
That’s what we at Gilligan Rowe & Associates (GRA) do and why we have staff solicitors and accountants working together under one roof.
What does this mean to you?
It means faster service, higher quality advice, better value and the peace-of-mind knowing that your affairs are being handled in the best way possible.
Here’s an example of why we provide both of these services…
An offshore investor or a potential migrant to New Zealand will want three things from a professional:
- Advice on the tax implications of moving to New Zealand or investing in New Zealand
- Advice on the best ownership options available to them
- Advice on the asset protection merits of ‘structures’ to help minimise tax.
Typically tax advice is provided by an accountant, whereas asset protection and relationship property advice is provided by a lawyer.
There are however a select group of professionals based in New Zealand such as GRA, who can straddle both disciplines.
Following this, when choosing a professional you want a New Zealand company who specialises in helping people with financial interests outside of NZ. They could be migrants, Kiwi expats returning home, property buyers or investors, or business owners.
As recognised property accounting and investment experts, we at GRA are familiar with all the ins and outs to do with tax minimisation and compliance.
There are certain areas where the two disciplines do not intersect. Conveyancing is an example of this and generally should be handled by a lawyer. Conveyancing occurs when property is purchased or sold and involves transferring the funds from the purchaser or receiving them on behalf of the vendor as the case may be and dealing with the banks and the correct registration of the new ownership on the title.
You will also find that lawyers generally have limited knowledge when it comes to tax and accounting issues.
As a result, of this, offshore investors or new or returning migrants will choose GRA because we provide the core tax and accounting services PLUS broader asset protection and structure advice which you would typically get from a solicitor.
We’re ready to help. If you have a technical question, go ahead and use our free Ask the Experts service or for a free initial consultation by email, phone or Skype, please Contact Us now.
Migrating Pensions to New Zealand
NEW RULES IN RELATION TO OFFSHORE SUPERANNUATION SCHEMES
One of the most complex areas of New Zealand tax law is the international tax rules that apply to New Zealand residents whom have offshore investments in super schemes. Often this arises in a context of a new migrant or returning expat taking up tax residency in New Zealand and retaining an interest in a foreign super scheme. As discussed elsewhere on this site if the new or returning migrant falls within the transitional residency rules then there is a 48 month window when income from the offshore investment can be kept out of the New Zealand tax net. In the absence of this though the rules are very complex.
At the time of writing (September 2012) the New Zealand law in relation to most offshore equity investments are the Foreign Investment Fund (FIF) rules. The FIF rules seek to deem a certain amount of taxable income based on various calculation methods. The most common calculation method is the fair dividend rate method which deems there to be taxable income of 5% of the opening market value of the offshore investment. If the fair dividend rate method cannot be utilised there are various other calculations that can be applied. Overall the FIF rules are complex and often ignored either due to their complexity or because people are simply not aware of them.
Conscious of this, the Government has proposed new rules to deal with interests in foreign super schemes. The intention is to tax distributions and transfers when they occur rather than force taxpayers to apply complicated rules to deem income on an annual basis. These rules are proposed as at the time of writing (September 2012), but intended to apply retrospectively to payments from super funds from 1 April 2011. Broadly speaking the rules will treat a certain proportion of distributions from foreign super schemes as taxable. The proportion which is taxable will be based on the length of time that the recipient has been in New Zealand. The longer that they have been in New Zealand the greater the proportion that is taxable. This is known as the inclusion rate approach.
In summary, if you are New Zealand tax resident with an interest in a foreign super fund then you should contact GRA for advice.
Cross-Border Tax Advice
Are you a non resident looking to invest in New Zealand?
If so, you will need advice on the tax implications before you invest. Looking at property investment for example, income derived from property situated in New Zealand is taxable here as the income is sourced here. This is according to New Zealand domestic law – which sometimes can be overridden by double tax agreements. However, in the case of most of the double tax agreements that New Zealand has, the right to tax income off land situated here is preserved.
Given that there is income that is taxed here, the next questions are how is the amount of taxable income calculated and what is the relevant tax applicable? This is where you need advice. There are different rules that apply to inbound investors including thin capitalisation rules that limit the amount of interest that can be deducted in certain circumstances to calculate what the ultimate taxable income is.
The tax rate applicable depends on the ownership structure chosen. There are different tax rates for individuals, companies and Trusts. As a general rule we advise our inbound investors to stay away from company structures as they often lead to double taxation. To illustrate, a company taxable on profit produced in New Zealand will then distribute a dividend to its offshore shareholders. Often the country of residence for the offshore shareholder does not permit a tax credit to be claimed by the shareholder in relation to the dividend when the tax has been paid by the company in New Zealand. In other words, there is a mismatch between the income at shareholder level and the tax liability at company level in New Zealand.
Contact us at GRA if you are contemplating inbound investment into New Zealand and we can help you work through these issues.
Temporary Migrant Rules
Transitional Resident Rules
On 1 April 2006 new legislation was enacted with the intention of making New Zealand a more attractive destination for skilled migrants or ex-pats looking to return.
Up until this date when you moved to New Zealand and assumed tax residency you were liable in New Zealand for all income irrespective of source. This means if you moved to New Zealand but retained offshore investments you were required to bring to account in New Zealand any gains on these offshore investments.
In some instances this will prove to be particularly onerous as in certain instances unrealised foreign exchange gains were brought within the tax net.
From 1 April 2006 a new migrant or a returning ex-pat who has not been tax resident in New Zealand for 10 years has a 48 month window where they are exempt from having to account for tax in New Zealand on offshore income.
Note that there are exceptions to this such as income from employment, but it does cover a wide range of offshore income including rent from offshore property, interest on offshore accounts, dividends from offshore companies and exchange movements on offshore financial assets.
Some other points to note about these rules is that you are only eligible for them once. That is, you cannot take advantage of them for 48 months, leave New Zealand for 10 years and return and apply them again.
And needless to say it is a temporary exemption so that once the 48 month window has closed offshore income needs to be bought to account under the ordinary tax rules.
As specialist New Zealand Accountants, we are involved every day with helping people who live in the US, AUS, UK, Canada (or anywhere) do business with New Zealand.
As New Zealand Accountants, we can help you to navigate through these issues so you can avoid the stress and cost of paying tax where not required.
To learn more you can use our free Ask The Experts service or we would be happy to arrange a Free Interview by phone, email or Skype.
How to Avoid “Double Taxation”
When investing from abroad into New Zealand or from New Zealand abroad you need to ensure that you have a structure that avoids ‘double’ taxation. As New Zealand Accountants we specialise in helping anyone outside of NZ with their tax and financial affairs.
While it is fair to say that most countries will recognise tax paid in other countries so you do not double pay tax there can be technical exceptions to this rule particularly when corporate structures are involved.
Take an example of a New Zealand investor who sets up a company to invest in Australia (it could also be UK or USA). The company is involved in property related activity and produces taxable profit that is subject to tax in Australia because it has a source there.
At the same time the company is regarded as being a tax resident of New Zealand so has to return the same income in New Zealand. Assuming for the purposes of this example that the company tax rates in both Australia and New Zealand are the same there would be no further tax to pay in New Zealand as the company would be able to utilise the Australian tax paid as a credit to prevent tax payable in NZ.
Whilst this on the face of it seems to prevent double taxation it is not the end of the story. Why? Because there will be a point in time when the New Zealand investor wants to extract the profit from the company. When this happens the distribution would be regarded as a dividend and taxable to the New Zealand investor.
Typically dividends from a New Zealand company carry ‘imputation credits’ (which are a form of tax credits) but that is not the case in this example.
Imputation credits only accrue when New Zealand tax is paid, and as the company in this instance will have paid no New Zealand tax, there would be no imputation credits attached. This means the shareholder will be liable for full tax on the dividend…or double taxation!
Gilligan Rowe & Associates can set up low cost structures that are legal, which can prevent this double taxation situation from occurring.
To learn more you can use our free Ask The Experts service or Request a Free Interview by Skype, email or phone by clicking on the button below.
Non-Resident Withholding Tax: Rules
Where a New Zealand tax resident pays interest to an offshore lender there is a requirement to deduct non resident withholding tax or NRWT from the interest.
The default NRWT rate on interest is 15%, but this can be reduced if the double tax agreement between New Zealand and the country of the lender says so.
NRWT is therefore a significant issue as in most cases it is the borrower that has to bear the cost. Whilst the tax is designed to be a New Zealand tax levied on the lender, there are not many lenders who will accept interest payments 15% below what is required. Why? Because part of it is being withheld and remitted to the New Zealand IRD here.
Following this, exceptions to NRWT are important and there are a number of exceptions that you should be aware of.
First, if you qualify for the transitional resident rules then during the 48 month period in which you have the exemption from accounting for offshore income you also have an exemption from having to account for NRWT
Second, interest payments to certain Australian based banks are not subject to NRWT where the bank is operating through New Zealand in a branch. The logic behind this rule is if you have a bank such as Westpac and you are making payment to Westpac Australia you are effectively making payments to the same company that operates in New Zealand (as Westpac New Zealand is a branch of Westpac Australia).
Next there is an exemption where the interest payments relate to a fixed establishment outside of New Zealand. This can be supplemented under certain double tax agreements whereby there is an exemption if the borrowing relates to a permanent establishment offshore.
Finally, if there is no exemption applicable, it is possible to apply for what is known as ‘approved issuer status’ which means that the interest payments are not subject to NRWT but are subject to a 2% approved issuer levy.
If all of this sounds confusing or involved, we understand. As New Zealand Accountants We specialise in helping clients all around the world to minimise their tax (legally) when dealing with their affairs in New Zealand.
Foreign Tax Administration for Non-NZ Residents
Where a non-tax resident of New Zealand settles a Trust and there is no New Zealand resident making a settlement on the same Trust then the Trust is regarded as a “foreign” Trust for New Zealand tax purposes. A foreign Trust is not subject to tax in New Zealand on foreign income. This means that an offshore resident can establish Trusts under New Zealand law and have that Trust hold offshore assets and derive offshore income and there will be no tax to pay in New Zealand in regard of this. Often such Trusts will have Trustees based in New Zealand that administer the Trust and in that instance there are disclosure requirements for that resident Trustee. They have to disclose to the Inland Revenue Department the name of the Trust, the name and contact details of any resident, foreign Trustees and disclose whether the settlor is resident in Australia.
Outside of these disclosure requirements there are no other tax obligations in New Zealand whilst the Trust remains a foreign Trust and its only source of income is offshore. If the settlor subsequently moves to New Zealand then the Trust needs to be converted to being a complying Trust by filing an election within 12 months of arrival. Note that this time frame is extended if you are a transitional resident to 12 months after the end of the 48 month period where you are exempt from tax on foreign income.
For more help with the above please contact us.
New Zealand Accountants
