IMPACT OF COVID-19 ON RESIDENCY RULES
Tax and the new or returning migrant
If you are a new migrant or a returning Kiwi you have a number of tax issues to consider.
For example, new migrants and returning New Zealanders (if absent for more than 10 years) qualify for the Transitional Residency rules. In brief, this gives you 48 months tax exemption on passive overseas income, and to sort out any overseas passive investments and particularly trusts that need sorting (e.g. if you are a trustees or a settlor). However, one key thing that people don’t know is that if you apply for a Family Assistance benefit you automatically renounce your Transitional Residency rules. That can be a costly mistake, and one that may occur accidently if you apply for a benefit in New Zealand.
Any new or returning migrant also has a Foreign Pension/Superannuation exemption for 48 months. After that you are taxed (progressively) when you transfer your pension or superannuation to New Zealand. Many migrants use that 48 months to determine where they want to live in retirement and to arrange (if possible) transfers of their pension funds and superannuation to the right country in the most tax efficient manner.
The date you become a New Zealand tax resident is the date these exemption start counting down. You need to know what that date is, what you options are and when you need to act.
Trapped in New Zealand?
Tax residency is based on a number of rules. For individuals this can be as simple as being in New Zealand for more than 183 days in a 12 month period, or having a permanent place of abode in New Zealand (which includes but is more than a home here). For non-residents employees and contractors of non-resident employers who exceed 92 days in New Zealand can make what would otherwise be tax free income in New Zealand taxable for the foreign employer.
For companies, this could be having the majority of your directors in New Zealand controlling the company from New Zealand, for directors or other employees creating a “fixed establishment” here, or for a building or installation project exceeding the 6 month rule as a result of the lockdown creating a “permanent establishment” by default.
If you are a settlor or trustee of a foreign trust, being stuck in New Zealand can also have other adverse consequences.
Trapped out of New Zealand?
Still more trouble for New Zealand residents who, as a result of COVID-19 travel restrictions, cannot return to New Zealand within the required time to qualify as a resident. For example, this will affect Student Loan interest-free criteria or to continue to qualify for certain benefits including the National Superannuation. Others, such as those who are in the middle of their Transitional Residency for example, may lose it if away from New Zealand too long – and you only have one go at that concession.
Hope is at hand
In April 2020 the Organisation for Economic Co-operation and Development (OECD) released guidance on the impact of COVID-19 for companies, individuals and employers trapped in the wrong country.
The New Zealand Inland Revenue also issued a significant paper on the effects of COVID-19 and unintended tax consequences in April 2020.
In summary, they both offer a potential to not be caught up in tax residency rules in your old home country, in New Zealand or a third country you happen to find yourself in for a while. While the Double Tax Agreements between New Zealand and the other country may help, we don’t have agreements with every country, and there may well be some gaps. But we are somewhat confident that if you return to where you ought to be (tax residency wise) as soon as practicable, you should be alright. However, what is a reasonable timeframe is arguable and we don’t know how long the Tax Department considers is a long enough piece of string. If in doubt, get professional advice on your situation – particularly if you and your family, or your employees are stuck here (or there) for much longer than expected.
If you have any questions, you are welcome to contact us at [email protected]
Posted: Wednesday 22 July 2020