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What returning Kiwi expats should know about tax traps

Thinking of moving back to New Zealand? Here are some things to know about tax, from our partners Mobile Relocation Experts.
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Kiwis moving back to New Zealand have enough to do without thinking about tax.

Admittedly, New Zealand tax never loomed large in my life as an expat.  Money from my income and investments disappeared into the coffers of whatever country I was living in at the time.

My main contact with IRD was paying GST on a packet of pineapple lumps when home for the summer holidays.

Why you should care about tax

Doing the right thing to support the team of 5 million is the reason to pay tax. Yeah nah. Maybe.

Actually, for most of us, it’s more about the risks and costs of ignorance, as I learned recently from tax expert Rebecca Simpson-Heine.

What IRD wants …

IRD loves rule-followers.

And has little tolerance for people who avoid or make mistakes with their tax.  The onus is on you to get it right, and IRD always has the benefit of hindsight when assessing what individuals should have paid.

There is certainly the capacity to hunt down rule breakers.  A web of international information exchange agreements gives IRD access to information such as foreign bank account data on any taxpayer registered in New Zealand.  It doesn’t take too much effort to detect unpaid tax.

Prudent Kiwi expats will  understand their tax obligations, then work out ways to minimise and manage tax payable.

There are many simple actions you can take that are well within the law.  And some IRD provisions even favour New Zealanders returning from offshore.

Here’s our basic checklist to get your tax planning underway

1. Know the tests for tax residency

IRD has two ways of deciding who is ‘tax resident’ and must pay tax in New Zealand.

Being in the country for a total of 183 days over a rolling 12-month period makes you tax resident from the date you first arrived in the country.

Beware, this total includes trips in and out.  So, if you came for a summer holiday and then returned permanently less than six months later once COVID hit, both trips count towards the 183 days.

Many expat Kiwis don’t realise that owning a house here can also make you tax resident if it’s somewhere that you can, or have, habitually lived in.

Sometimes owning a home gets you treated as tax resident in New Zealand before moving here, even if the property is  currently rented out or has been used as a bach for holidays.  A number of factors are considered such as family, economic and social ties.

It’s also possible to be liable for tax in New Zealand as a non tax resident.  This may apply if you’re working and earning here for more than three months (or six months if you live in a country that is part of New Zealand’s international tax treaty network, like the UK, Australia, the USA and Hong Kong/Singapore to name a few).

Kiwis who’ve come home for a specific period, perhaps to wait out COVID lockdown in the country where they normally live, could fall into this tax trap. Although the government has some put in place some special provisions to help people trapped here by COVID.

2. Understand worldwide taxable income

Once tax resident in New Zealand, you’ll need to pay tax on your worldwide income – what you earn here AND overseas.

In the past, returning Kiwis may have cashed up before moving home. So they’d just be paying tax on New Zealand income once resident here.

Now, hasty moves and COVID lockdowns have made it difficult to sell houses or liquidate share portfolios overseas.  More Kiwi repats are now receiving rentals, dividends or interest payments from offshore, which all count as worldwide taxable income.

The good news is that some New Zealanders returning after more than 10 years away don’t have to pay tax on overseas investment income for 4 years.  That’s called ‘transitional residence’ and you can only claim it once.

It provides valuable breathing space, if required, to restructure your investments.  And even if you decide to hold onto the offshore assets after your transitional residence ends, you usually get a tax credit for any tax paid overseas to prevent double taxation. 

3. Consider cashing up foreign superannuation schemes

Years away often add up to significant funds deposited in offshore superannuation and pension schemes, particularly if contributions are mandatory.

Rather than leaving it there, returning Kiwis who were non-resident for tax purposes while away, have four years to withdraw their offshore pension funds and not pay tax here.

That can be a big help for people looking to enter the New Zealand housing market.

4. Structure remote working carefully

Remoting a great offshore job back to New Zealand seems an attractive option for many returning Kiwis.  However, your employment income will be taxable here.

Things get tricky with PAYE obligations.  Your employer is responsible for withholding PAYE and paying it to IRD, but offshore employers are not usually set up to do this in New Zealand.

If they aren’t, the responsibility can fall on you, and you may need to become an “IR 56 taxpayer”.

You’ll be required to register with IRD and comply with the payday filing rules and PAYE payment rules instead of your employer.  And you may be liable for penalties and interest charges should you fail to report your income correctly.

Planning for happy tax homecoming should be a must-do task for every Kiwi expat.  If this checklist raises more questions than answers, it’s worth investing in expert tax advice.

The price of getting right is small, compared to the cost of getting it wrong.   No returning Kiwi wants their return to New Zealand marred by a large tax bill from IRD.

Visit Mobile Relocation Experts to learn more.