Don’t relax on tax
The following article was written for a UK publication but the topics are relevant for all migrants to New Zealand.
Don’t let tax spoil your new life in New Zealand.
International tax is a minefield. Many unsuspecting, well-intentioned migrants arrive in New Zealand, work hard to build a new life, and have PAYE deducted from their income, only to find out via Inland Revenue (New Zealand’s HMRC) that they have significant amounts of additional tax to pay. It doesn’t stop there; Inland Revenue then adds penalties and interest to that tax, and the amount can quickly escalate.
Every tax regime is slightly different. It is common for people to move to New Zealand without thinking about their tax affairs. This can be a costly and stressful mistake. Simple things, like having a British bank account, can trigger New Zealand tax obligations. British pension and superannuation schemes can trigger additional tax, whether they are left in Britain or transferred to New Zealand. Renting out the previous family home in Britain will also trigger additional New Zealand tax obligations which are not limited to returning the income on the rental; there is a requirement to pay tax on the interest paid on any mortgage too. This is burdensome and costly. All the while, these things will also continue to have tax implications in Britain.
Many people will have heard of transitional residency, or the “four year exemption”. This is a crucial time which allows new Kiwis to seek advice in order to restructure their affairs in a tax efficient manner. However, don’t let the transitional residency regime lure you into a false sense of security. Transitional residency only applies to passive income, and is very easily cancelled by the new Kiwi without realising. Once the transitional residency exemption has been cancelled, you cannot get it back, even if you didn’t mean to cancel it.
The world is becoming a much smaller place and business is no longer confined to a 9-5 desk job. People are finding themselves working from any location in the world, and employers are offering that flexibility. This can lead to significant adverse tax implications for both the employee, and the foreign based employer. The foreign based employer mightn’t even have considered that allowing such flexible working arrangements could trigger New Zealand tax obligations for their overseas business. I frequently work with these types of clients who had no idea they were creating adverse tax implications for themselves or their employers. This is not confined to the super-wealthy or the top executives; it is across the board.
The transitional residency exemption only covers passive income, but I find a lot of new Kiwis that move to New Zealand still work for their British employer. Some common examples are software developers and admin staff. Then there are people who are settled in New Zealand, but travel overseas to complete their work. These people are often paid via a bank account in that overseas country. These people usually do not understand that this can be subject to tax in both jurisdictions.
I also work with a number of clients that move to New Zealand but don’t earn New Zealand income, for instance if they are studying. These clients often tell me that they do not have a job so they don’t need to pay tax in New Zealand. This is not the case. If you are New Zealand tax resident, then you pay tax in New Zealand on your world-wide income, subject to any relief provided by an applicable double tax agreement, or the transitional residency exemption. If you are living in New Zealand, then you are likely to have become New Zealand tax resident (tax residency is different to immigration residency). All New Zealand tax residents have tax obligations in New Zealand and as such, you should be aware of how best to structure your move to New Zealand to ensure ongoing tax efficiency. Even things that are not taxable to you in Britain may still be taxable to you in New Zealand.
It is also extremely important to consider your British tax residency position. If you continue to be British tax resident then it is necessary to consider the New Zealand/UK double tax agreement (DTA) to confirm which country will retain primary taxing rights for your world-wide income. It is then necessary to look at the sources of income and see if the specific articles in the DTA modify the taxing rights set out in the residency article.
This is not straight forward, and is not something most accountants in New Zealand deal with often, or at all. I have had a number of clients come to me who have received incorrect advice from their accountant as they have not understood how to apply the DTA. This has led to the client paying many thousands of dollars of additional tax which wouldn’t have needed to have been paid had they sought specialist tax advice. Unfortunately, it is often not possible to recover these amounts later.
International tax is a minefield. Don’t wait for Inland Revenue to find you, seek specialist international tax advice upfront. Early tax advice provides many opportunities to ensure tax efficient structures are in place, and all tax obligations are met. It also allows individuals and corporates to consider world-wide assets and determine the tax consequences which allows for correct and timely tax returns, avoiding any additional penalties and interest which can accumulate on unpaid or underpaid tax.
The above is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.