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Thread: Tax exemption for New Residents- any flexibility?

  1. #1
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    Default Tax exemption for New Residents- any flexibility?

    After an agonising wait of 5+yrs we arrived in NZ (on parents' visas) 2 months ago.
    Unfortunately we were unable to completely sever all ties with UK as we were unable to sell our property so once we have gained PR status in 22 months time we need to return to UK for an indefinite period in order to sell the property which is currently tenanted and ship our belongings.
    Currently we are paying UK tax on our personal pensions and also the rental income.

    Can anyone advise please on whether or not we should opt into the the NZ tax system a.s.a.p?
    Would we then lose the remaining 2yrs eligibility once we returned to UK or could this be "carried over" until we returned?
    Is it be possible/advantageous to wait until we return to NZ permanently to become tax residents and claim the full 4 yr tax exemption at that point

    I have followed various links on the IRD website but not found anything relevant - also these thing don't make easy reading for us "oldies"! We would greatly value any advice!

  2. #2
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    You are likely to have become NZ tax residents when you arrived 2 months ago. This is because you are deemed to be a NZ tax resident if you are in NZ for 183 days in total in any 12 month period. You cannot opt into or opt out of NZ tax residence, as it is based on statutory tests, being the 183 days test or a permanent place of abode test.

    The 4 year tax exemption rules contain their own tests for the timing of the exemption but basically the exemption runs from your first day of NZ tax residence and can extend to almost 5 years, depending on your circumstances. It is possible to opt out of the exemption eg if you had losses from your rental property you could then claim these losses against your NZ income. However, given your rental property appears to be in a taxpaying situation, you would likely want to avail yourself of the 4 year tax exemption.

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    Hello and welcome.

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    Quote Originally Posted by chrisl34 View Post
    can extend to almost 5 years, depending on your circumstances
    Can you expand on this remark? I've not seen anything that would tell me that the period could extend beyond 49 months. Thanks.

  5. #5
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    Quote Originally Posted by Bozeman View Post
    Can you expand on this remark? I've not seen anything that would tell me that the period could extend beyond 49 months. Thanks.
    No problem. However, you will have to suffer some technical analysis below as it is not an easy one to explain.

    The duration of the tax exemption is contained in S HR 8(3) of the Income Tax Act 2007. The tax exemption is referred to as the "transitional resident" exemption.

    This duration was also referred to in the IRD's Tax Information Bulletin Volume 19 No 3 (April 2007), where the IRD stated:

    “Subsection (2) [s HR 8(3)–(6)] provides that the period for which a person is a transitional resident begins on the first day of tax-residence in New Zealand and lasts for up to 48 months from the end of the month in which the person satisfies the requirements in section OE 1(1) or (2) [s YD 1(2)–(4)]. The effect is that the starting point for the exemption is aligned with the start of a person’s tax-residence in New Zealand — including when the period of tax residence has been backdated by virtue of section OE 1(2) [s YD 1(4)] — but any backdating is ignored for the purposes of the time limit for the exemption.”

    I suspect this will confuse everyone, but I will try to clarify below by way of an example. Assume John came to NZ for the first time on 5 January 2010 to check out the possibility of migrating here. He stayed for 2 weeks then left. He decides to move to NZ and comes back on 25 June 2010 with his whole family and stays in NZ permanently. John will have become a NZ tax resident on 5 January 2010, as he will have been in NZ for a total of at least 183 days in the year ended 5 January 2011 (and tax residency is backdated to the very first day of presence here i.e. 5 January 2010). Without the tax exemption, this means that John is liable for NZ tax on worldwide income from 5 January 2010.

    5 January 2010 is also the start date of the transitional resident exemption. However, the tax legislation deems the end of the tax exemption period to end:

    "on the day that is the earlier of—

    (i) the day before the person stops being a New Zealand resident:

    (ii) the last day of the 48th month after the month in which they meet the requirements of section YD 1(2) or (3), ignoring the rule in section YD 1(4)."

    The relevant part is (ii) above. (ii) requires that you ignore the backdating of tax residence to the first day of the 183 day period of presence in NZ. Therefore, in John's case we ignore the backdating to 5 January 2010 and the relevant date for (ii) above becomes 25 June 2010 (which is when John acquired a permanent place of abode in NZ under S YD 1(2)). The end of the transitional resident exemption is therefore the last day of the 48th month after 25 June 2010. By my calculations, this would be 30 June 2014.

    Therefore, the duration of the exemption is from 5 January 2010 to 30 June 2014, which is almost 54 months.

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    Thanks!

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    Quote Originally Posted by chrisl34 View Post
    You are likely to have become NZ tax residents when you arrived 2 months ago. This is because you are deemed to be a NZ tax resident if you are in NZ for 183 days in total in any 12 month period. You cannot opt into or opt out of NZ tax residence, as it is based on statutory tests, being the 183 days test or a permanent place of abode test.
    This is not the complete story for many of us. If you are from a country that has a tax treaty with New Zealand, residence is only one of the tests to determine tax status. Other factors could mean that you are still tax resident of the other country and the 4 year tax exemption applies from when you became a tax resident, which may be different from when you arrived in the country.

    Quote Originally Posted by babscat View Post
    After an agonising wait of 5+yrs we arrived in NZ (on parents' visas) Can anyone advise please on whether or not we should opt into the the NZ tax system a.s.a.p?
    As chris34 says, you can’t opt out of the New Zealand tax system. The only question is whether you need to pay New Zealand tax on your UK income. No matter where you are deemed to be a tax resident, you will need to pay taxes in New Zealand on New Zealand income so you should get an IRD number. If you don't have an IRD number, any financial provider in New Zealand will charge tax at the highest rate on that income, for example any interest on bank accounts in New Zealand.

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    Thanks for all the above replies.

    [QUOTE=Millieandme;466520]This is not the complete story for many of us. If you are from a country that has a tax treaty with New Zealand, residence is only one of the tests to determine tax status. Other factors could mean that you are still tax resident of the other country and the 4 year tax exemption applies from when you became a tax resident, which may be different from when you arrived in the country.

    Our main residence is still in UK which apparently means we can still be classed as UK residents. We have no NZ income (pensions and rent come from UK and we have only a small and dwindling NZ current account on which the bank sort any tax liabiity.)
    As our UK income is currently higher than usual due to rental income it maywell be to our advantage to be classed as NZ resident, butwe need to return to UK after 2 years in NZ and will be in UK until we sell our house, which may take well over 12 months in the present economic situation. We would presumably then be paying UK tax and I am assuming that the NZ exemption period would likely be ended by the time we could return to NZ permanently. By then we would have lost quite a large period of the exemption. In these circumstances there could be an advantage for us to delay NZ tax residency if possible.

    We spent Friday afternoon at our local WINZ but although they have a door marked "Inland Revenue" they only deal with the public by phone or email. We rely on cell phones so my next step is to try to find the appropriate department to email.
    Perhaps it would be easier if we apply for IRD numbers first?

    Incidentally, we have found the Napier branch of Settlement Support just as elusive!!
    Last edited by babscat; 3rd December 2012 at 07:02 AM.

  9. #9
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    Sorry Millieandme, seem to have messed up your quote. All this immigration business is fast wearing out my few remaining brain cells!

  10. #10
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    Can I just ask why you need to return to the UK to sell your house? We had ours rented out for 3.5 years until we sold it last year, not setting foot on English soil. Our situation was different and we hadn't tried to sell it before (having originally left the UK with the intent to return after 3 years). The agents and lawyers were happy to deal with us from overseas. Our tenants stayed in the house until right before completion. We weren't paying UK or NZ tax on our UK rental income because the shared income didn't reach the individual threshold, but obviously with your pension incomes, that is likely to be different for you.

    Our main residence is still in UK which apparently means we can still be classed as UK residents.
    Can I also ask where you got this from? I don't know if it's right or wrong, but just because you own a house somewhere else, doesn't make it your main residence. You have to live in it for a certain period for it to be classed as that (I believe).

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