Transitional Residents

Grange Associates Ltd - 24 January 2012

People arriving to live in New Zealand on or after 1 April 2006 may qualify for a temporary tax exemption on their foreign income. All foreign-sourced income will be exempt, except for employment income connected with employment performed while in New Zealand and income from services.

The exemption applies to an individual who is a “transitional resident”. An individual is a “transitional resident” provided that she or he has not been tax-resident in New Zealand during the last 10 years, and provided that she or he has never been a transitional resident before. The period that the person becomes a “transitional resident” (the period of exemption) starts on the first day of the month that the individual arrives in New Zealand to take up the exemption and continues for a further 48 months.

The rules were introduced to help New Zealand businesses recruit highly skilled individuals from overseas, resulting in positive effects for the New Zealand economy.

Under New Zealand’s residence rules, an individual who has been in New Zealand for an aggregate of 183 days in any 12-month period is considered to be a New Zealand resident and is liable to pay New Zealand tax on their worldwide income. Consequently, people coming to New Zealand from overseas may have faced extra tax costs compared with what they would have at home or in other countries. This is partly because some of New Zealand’s tax rules relating to foreign-sourced income are more comprehensive than those of other countries. Often these extra tax costs were passed on to New Zealand businesses who recruited these people or who used their services. This occurred because the individual often negotiated higher remuneration to compensate for the additional tax liability.

Types of income that are exempt

Foreign-sourced income
All foreign-sourced income derived by a transitional resident is exempt, except for employment income connected with employment performed while a transitional resident and income from the supply of services.

CFC rules
Transitional residents are exempt from the controlled foreign company (CFC) rules.  Attributed CFC income does not arise if an individual holding an interest in a foreign company is a transitional resident.

FIF rules
Transitional residents are also exempt from the foreign investment fund (FIF) rules. FIF income does not arise if an individual holding an interest in a foreign investment fund is a transitional resident.

Financial arrangements rules
The exemption ensures that the financial arrangements rules do not apply to foreign financial arrangements of transitional residents.

Share options
A transitional resident who is granted an employee share option while non-resident, and who exercises the option while a transitional resident, is not liable for tax on the proportion of the gain derived which relates to overseas  employment.

A trust is considered as a foreign trust for the duration of the exemption if the settlor is a transitional resident. This means that the 12-month period to elect for a foreign trust to become a qualifying trust begins on the date that the settlor ceases to be a transitional resident. The Act further provides that if the settlor of a trust is a transitional resident, the trustee is not subject to tax on income derived from outside New Zealand.

Transitional residents do not have to withhold non-resident withholding tax (NRWT) – for example, on foreign mortgages.

Other changes
On the other hand transitional residents and their spouses are not eligible for any form of family assistance. Similarly, the definition of “principal caregiver” in the act has been amended, so that transitional residents and their spouses are not eligible for an in-work payment.

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All information is correct at the date of article publication. Please note we provide the information as a service only. Accordingly, the contents are not intended as a substitute for specific professional advice and should not be relied upon for that purpose.   

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