NZ Tax Benefits / Traps

Article published in the United Kingdom, October 2012

New Zealand has no generally applicable capital gains tax, no estate duties and, as of October 2011, no gift duties. In addition, the Government encourages new migrants to the country with a four-year tax exemption on their foreign sourced income. So far so good.

We have recently come across a number of new migrants who have taken advantage of the above benefits only to find that they are facing a large tax bill in their fifth year of residency in New Zealand. In each case, the person involved failed to use the four-year tax exemption period to arrange their affairs in a tax efficient manner prior to their becoming subject to income tax on their worldwide affairs.

The four-year tax exemption is available to new migrants to New Zealand and New Zealanders returning after ten or more years abroad. The tax exemption applies to non-NZ sourced income, other than salary and income derived from personal services, during the first four years of your tax residency in New Zealand.

Once the exemption ends, you will become subject to tax on your worldwide income in New Zealand. It is important to understand the particular intricacies of New Zealand tax law that might apply to your investments at this time.

For example, the financial arrangements rules, which apply to debt investments and obligations, such as bonds, term deposits and mortgages held in foreign currencies, can apply to tax not only the interest earned on such investments but also the foreign currency movements. In some cases this can result in tax liability payable on capital gains on an unrealised basis.

Similarly, the foreign investment fund rules, which apply to shares held in foreign companies, foreign life insurance policies and (under current legislation) foreign pension schemes, can apply with the result that a deemed return and/or foreign currency gains may be taxable, notwithstanding that no cash has been received.

The tax treatment of foreign pensions is under review, with a proposal to tax significant portions of lump sum amounts withdrawn or transferred.

It is vital to ensure that you review your global investment portfolio and seek advice on the tax treatment that will apply to it well in advance of the expiry of your new migrant tax exemption, so that you can plan for what lies ahead.

The above article is provided for general information purposes and does not constitute legal advice.

The partners at Jones Law are internationally qualified and practise in the areas of cross-border tax planning, estate planning and acquisition structuring.

We invite you to contact us at info@jones-law.co.nz to discuss your specific circumstances.

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