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People becoming tax residents in New Zealand may qualify for a temporary income tax exemption of up to 49 months duration on their foreign income. This exemption can only be granted once in a lifetime.

This exemption exists because the Government wishes to attract skilled and knowledgeable migrants to New Zealand without the burden of higher taxes and other inefficiency costs.

The intention of these rules is for a person who has the status of a “transitional resident” to be treated as deriving (most) foreign-sourced income in the capacity of a non-resident and therefore not subject to income tax in New Zealand.

Requirements for transitional residence

To be a transitional resident, a person must:

1. be a tax resident in New Zealand, and
2. not have been a tax resident of New Zealand for a continuous period of at least 10 years prior to becoming a New Zealand tax resident again, and
3. not have been a transitional resident before the 10-year non-residence period, and
4. not cease to be a transitional resident after the end of the 10-year non-residence period.

The third and fourth criteria above prevent a person from being a transitional resident more than once.

The period of transitional residence begins on the first day of tax residence in New Zealand and ends on the earlier of when a taxpayer ceases to be a New Zealand tax resident, or the last day of the 48th month following the commencement of their tax residence in New Zealand.

What does being a transitional resident mean?

Rather than having to disclose and pay tax on your worldwide income in New Zealand (as is usually the case for a New Zealand tax resident), a transitional resident is only required to account for tax on New Zealand sourced income along with any offshore income derived from the supply of services or in connection with employment (as defined).

The following types of income are temporarily exempt from tax in New Zealand:

controlled foreign company income that is attributed under New Zealand’s CFC rules;
foreign investment fund income (including foreign superannuation);
non-resident withholding tax and approved issuer levy (for example, on foreign mortgages);
income arising from the exercise of foreign employee share options;
accrual income from foreign financial arrangements;
income from foreign trusts;
rental income derived offshore;
foreign dividends;
foreign interest;
royalties derived offshore;
income from employment performed overseas before coming to New Zealand, such as bonus payments;
gains on the sale of property derived offshore (held on revenue account); and
offshore business income (that is not related to the performance of services).

These types of foreign income are not tax exempt in New Zealand:

salary or wages or an allowance, bonus, extra pay or gratuity;
expenditure on account of an employee;
the market value of board received in connection with employment or service;
a benefit received under a share purchase agreement;
directors’ fees;
compensation for loss of employment or service; and
business income relating to services performed offshore.

The transitional resident rules potentially provide an opportunity to repatriate or cash-in offshore funds before the exemption lapses with less New Zealand tax consequences (subject to other jurisdiction’s legislation and other market considerations). You must file a tax return annually to maintain the temporary tax exemption.

In order to maintain transitional resident status it is important that an application is not made for Working for Families. Any application will immediately revoke the transitional resident status for both parents. It will be important to work out what is more advantageous.

For more information or to understand how this could apply to your own individual circumstances click here to email Jono Bredin (Director / Head of Tax).