Tax residency rules and the lockdown
Angela • 30 March 2020
If you are in the process of moving to or from New Zealand, or you are spending regular periods in New Zealand, you are probably carefully managing your tax residency status. With the advent of the Covid-19 pandemic, I’ve had enquiries from people who are now either stuck in or out of, New Zealand. Specifically, what this will mean from a tax perspective?
New Zealand Tax Residency Rules
Generally speaking, you can be considered a tax resident in New Zealand if you:
- are in New Zealand for more than 183 days in any 12-month period; or
- have a ‘permanent place of abode’ in New Zealand.
In particular, the 183-day test can cause issues here. If you are physically present in New Zealand for more than 183 days in any 12-month period, you will be treated as a tax resident from the first day you were present here. If you earnt any overseas income during this time, it could be taxed in New Zealand. Your tax residency will also impact the timeframe you have to deal with other overseas investments.
Tax Residency and Companies
Companies are often deemed tax resident in the country where the ultimate management and control takes place. If you have an interest in an overseas company, and are acting as a Director or otherwise influencing that company, these controls can influence where the company is tax resident. If you are no longer able to travel to attend meetings, you need to consider whether this could impact on where the company is tax resident.
Your tax residency implications for offshore Trusts
Your tax residency also needs to be carefully managed in terms of offshore Trusts. You have 12 months to elect for these Trusts to become Complying Trusts with the Inland Revenue. If you miss this timeframe, there is no second chance.
The election to become a Complying Trust in itself needs to be carefully managed, as the Inland Revenue could have a claim to any earnings already sitting in that Trust.
Double Tax Agreements can provide tax relief in certain circumstances. However, our tax rules are intricate, and Double Tax Agreements can be of limited relief in certain circumstances. This can be particularly relevant for offshore Trusts.
If you find yourself stranded in New Zealand, you should talk to us for specialist tax advice. The cost of getting it wrong could be significant.
*This publication contains generic information only. New Zealand Tax Desk is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.
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The Deadline is Approaching for FY25 General Approval Applications
The end of the Work Related Vehicle FBT Exemption.
If your business is carrying out research and development (R&D) work, you may be eligible to receive a cash payment from Inland Revenue— however there is limited time to act if you want to claim this for FY24.
Among the biggest winners from the Government’s proposed Foreign Investment Fund (FIF) reforms are likely to be US citizens living in New Zealand. The proposed Revenue Account Method, which is set to take effect from 1 April 2025, offers significant relief from the sometimes harsh and often unfair outcomes created when the US and NZ tax systems collide. The Double Tax Problem for US Citizens Unlike most countries, the United States taxes individuals based on citizenship, not residency. This means that US citizens remain fully taxable by the IRS no matter where in the world they live. When they become New Zealand tax residents, they are subject to NZ’s FIF rules – which tax unrealised gains each year. The problem is that these deemed gains are not recognised by the US tax system, which only taxes actual income or realised gains. This mismatch creates a common scenario where a US citizen in NZ pays tax to New Zealand on phantom FIF income (including unrealised capital gains) but then pays US tax again when the investment is eventually sold – with no US tax credit for the NZ tax already paid. The result is real, permanent double taxation. How the Revenue Account Method Helps The proposed Revenue Account Method addresses these challenges by bringing New Zealand’s tax treatment of FIF investments more in line with the US tax system, as it only taxes: Tax is only triggered when dividends are received or capital gains are realised, allowing US citizens to align taxable events across both jurisdictions. Capital gains are only partially taxed in NZ (70%), and foreign tax credits may be available in the US when realisation occurs (US tax advice will be required). For example, under current rules, FIF income is often calculated using the Fair Dividend Rate (FDR) method – which taxes 5% of the opening value of most foreign shares annually, even if no income is actually received. While this is straightforward from a compliance perspective, it does not align well with US capital gains tax rules, which only tax gains when they are realised. This mismatch can lead to several problems: Double taxation : US citizens in New Zealand can be taxed on notional income under the FIF regime that doesn’t correspond to any US tax liability, meaning no foreign tax credit is available in the US. Compliance complexity : The requirement to use different tax bases (realisation for US purposes, deemed accrual/unrealised gains in NZ) creates extra complexity for reporting and record-keeping. Cash flow issues : As no cash is received under FDR (and potentially CV), taxpayers may be forced to fund NZ tax from other sources or liquidate investments earlier than intended. For US citizens holding private equity, start-up shares, or unlisted interests acquired prior to NZ tax residency, this new method could make a substantial difference. It removes the need to fund NZ tax liabilities out of pocket for income never actually received. The new Revenue Account Method should be especially attractive to US citizens holding equity in start-ups, employee share schemes, or private investment vehicles, where growth potential is high but cash flow is minimal. However, it is important to remember that ultimately this method will still tax capital gains on these offshore investments, as well as taxing dividends. The Revenue Account Method should not be a default go-to for new residents, as some taxpayers may have more favourable outcomes with the existing FIF methods. See our more detailed article on the new Revenue Account Method here. Planning Tips for US Citizens and Advisors If you or your clients are US citizens becoming NZ tax residents, consider the following planning steps: Document asset values on entry : For investments eligible for the Revenue Account Method, the cost base will be the value at the time NZ tax residence begins. A formal valuation may be required to substantiate this. Review eligibility : Confirm that the taxpayer became fully tax resident in NZ on or after 1 April 2024 and that investments were acquired before residency (or pursuant to pre-residency arrangements). Coordinate with US tax advisors : Cross-border alignment is key. A coordinated strategy that considers both US and NZ tax consequences will reduce surprises and improve outcomes. Contact us to discuss how these changes could affect your US-NZ tax position. Disclaimer: The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.
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The Inland Revenue has recently released a new draft Interpretation Statement, PUB 0040: Income tax – overdrawn shareholder loan account balances . This statement is currently open for consultation until 2 August 2024. Family-owned small businesses often operate through close companies. Given the significant control shareholders have over these companies, it is common for them to withdraw company funds for personal use. These amounts are commonly transacted through the Shareholder Current Account. The issue is when these Shareholder Current Accounts become overdrawn. In practice, the reasoning behind an overdrawn Shareholder Current Account can often be the sale of a capital asset and the withdrawal of those funds by the shareholder (without declaring a dividend). Unfortunately, we also commonly see this when a company, or the shareholders, are struggling financially. In this context it is perhaps timely, given the struggles businesses have been going through, for the Inland Revenue to issue a reminder about the potential tax issues these overdrawn Shareholder Current Accounts can present. Understanding Shareholder Loan Accounts and Their Tax Implications Firstly, the Inland Revenue refers to a Shareholder Loan Account. In practice, this is often a Shareholder Current Account, thus I have used the terminology interchangeably. Shareholder Current Accounts are generally informal arrangements between close companies and their shareholders, documenting any advances made between the two. When a shareholder withdraws more money from the company than they have advanced, the account becomes overdrawn, leading to several potential tax issues. The following tax issues apply equally to a Shareholder Loan balance, where the shareholder owes the company funds. Tax Issues Arising from Overdrawn Shareholder Loan Accounts 1. Dividend Income: If a shareholder pays no or low interest on an overdrawn loan account, dividend income may arise. For this reason, the company will generally charge the shareholders interest on the overdrawn shareholder current account. 2. Fringe Benefit Tax (FBT): Shareholder-employees who pay no or low interest on their overdrawn accounts may face FBT liabilities. 3. Interest Income: Companies charging interest on overdrawn accounts generate interest income. This interest will be taxable income to the company and may be non-deductible to the shareholder (discussed further below). 4. Resident Withholding Tax (RWT): Companies can claim a tax credit for RWT withheld from interest payable. The credit is claimable in the year the interest is derived, provided the RWT has been paid to Inland Revenue. 5. Interest Deductibility: Interest paid by shareholders on overdrawn accounts is typically not deductible as it often funds private expenditure. However, if the borrowed money is used for income-earning activities or businesses, a deduction may be available, subject to documentation and general limitations. 6. Withholding and Reporting Requirements: Shareholders paying RWT may have obligations to deduct RWT on interest paid to the company on the balance of the current account (or loan). 7. Debt Forgiveness: If a shareholder is relieved of their obligation to repay an overdrawn loan balance, this typically results in taxable debt remission income for the shareholder. For this reason, the company cannot simply forgive the loan or overdrawn balance. Importantly, the company should never be wound up with the shareholders owing the company funds, as this could also trigger taxable debt remission income. Beyond the scope of the Interpretation Statement, there are additional potential tax issues to consider with Shareholder Current Accounts: 8. Salary: If the shareholder is taking regular drawings to meet their living costs, there is support for the Inland Revenue to reconstitute these drawings as taxable salary or personal services income in some circumstances. This is particularly where the company has not paid the shareholder a reasonable market salary or met the personal services or attribution rules. 9. Documentation: There is caselaw in which loan repayments have been reconstituted as taxable income to the shareholder, however those are extreme examples involving an absence of documentation. It is always important to document all loans to the company. Any transactions between the company and the shareholder should include clear narrations e.g. on the bank transfer. Take care in those narrations, if something is labelled “salary”, chances are the IRD would argue it should be taxed as such. Understanding these tax implications is crucial for both companies and shareholders to ensure compliance and optimize their tax positions. *This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.
