International tax is a minefield. Many unsuspecting, well-intentioned migrants arrive in New Zealand, work hard to build a new life, have PAYE deducted from their income, only to find out via Inland Revenue (IRD) audit that they have significant amounts of additional tax to pay. It doesn’t stop there, IRD then adds penalties and interest to that tax, and the amount can quickly escalate.
Every tax regime is slightly different. It is common for migrants to move to (or leave) New Zealand without thinking about their tax affairs. This can be a costly, and stressful mistake. Simple things, like having a foreign denominated interest bearing bank account can trigger New Zealand tax obligations. Foreign superannuation schemes can trigger additional tax whether they are left in the originating country, or transferred to New Zealand. Renting the prior family home will trigger additional New Zealand tax obligations, the list goes on.
Many have heard of transitional residency, or the “four year exemption”. Don’t let this lure you into a false sense of security. This might cover passive income, but what about the software developer who still works for their home country employer? Or the professional who travels overseas to complete their work and is paid in that country (into their foreign denominated bank account). The world is becoming a much smaller place, and business is no longer confined to be 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. I am constantly seeing these types of clients who had no idea they were creating adverse tax implications for themselves or their employer. This is not confined to the super wealthy, or the top executives, it is across the board.
There are also people that move to New Zealand and don’t earn New Zealand income, maybe they are studying. Well they don’t have a job, so they don’t pay tax in New Zealand – right? They don’t have an IRD number, so they aren’t a tax resident, right? Wrong. If they are living in New Zealand, they are likely to have become New Zealand tax resident. That means they have tax obligations and are liable to pay tax in New Zealand on their world-wide income (subject to any relief provided by an applicable double tax treaty). All that money sitting in offshore investments earning interest for them to live off while in New Zealand, that is taxable in New Zealand. It mightn’t even be taxable in the home country, but that doesn’t mean it is not subject to tax in New Zealand.
International tax is a minefield. Don’t wait for IRD 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.
Thank you to Julia Johnston from Saunders & Co for allowing us to use this article.
This information is of a general nature and is not intended to be personalised financial advice.