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Tax exemption changes offer options

The rules for the temporary exemption for transitional residents have been amended to correct certain technical difficulties identified after the original legislation introducing the exemption had been enacted.

People who arrived in New Zealand to live on or after April 1, 2006 for the first time or after an extended absence would be exempt for four years after migration and would cover most types of foreign income.

There are two exceptions to this rule. They are (1) If you have employment income connected with any work, you may do for a foreign company while in New Zealand and (2) Business income relating to services..

If you have any of these types of income, you must declare them on your annual income tax return (IR3 for individuals) from the date you arrive in New Zealand.

Technical issues

The legislation has been amended to deal with various technical issues that came to light after enactment. The timing and eligibility rules for the exemption have been changed to avoid a potential mismatch with the tax residence rules for individuals.

Facility for a person to elect not to be a transitional resident has been introduced and changes have been made to clarify that resident withholding tax does not have to be deducted from interest and dividends – covered by the exemption.

There have also been changes to the timing and eligibility rules for the exemption

Tax Residents

There are two ways a person can become tax-resident in New Zealand under provisions of the Income Tax Act 2004: by acquiring a permanent place of abode here or by being present in the country for more than 183 days in a 12-month period. Where the 183-day rule applies, a person becomes tax-resident from the first of those 183 days.

Under the previous legislation, a person qualified for the exemption only after they acquired a permanent place of abode in New Zealand. Focusing on permanent place of abode was intended to avoid situations where people qualified for the exemption “too soon” – for example, where a temporary visit to New Zealand before actual migration triggered tax residence under the 183-day rule.

Potential mismatch

However, this approach allowed for a potential mismatch between the rules for the exemption and the general tax residence rules: in certain circumstances, a person could become tax-resident in New Zealand without qualifying for the exemption.

The timing and eligibility rules for the exemption contained in sections FC 23 and FC 24 of the Income Tax Act 2004 have therefore been amended (a) To avoid the possibility that a person may become resident for tax purposes without qualifying for the exemption, the eligibility and timing rules for the exemption have been aligned with the general tax-residence rules and (b) To resolve issues associated with people qualifying for the exemption too soon, any backdating under the 183-day residence rule is ignored for the purposes of the eligibility rules and time-limit for the exemption.

Opting out

In certain circumstances, a person may be better off not receiving the exemption – for example, if they have foreign losses, wish to claim family assistance, or have little or no foreign income and prefer to defer their claim. It was therefore always intended that people should be able to choose whether to receive the exemption.

The original legislation did not allow people to make this choice. A mechanism has been introduced in section FC 4 of the Income Tax Act 2004 to allow taxpayers to opt out of the exemption if they wish.

Transitional provision has been made to ensure that people are not disadvantaged as a result.

For more information, please visit www.ird.govt.nz (Temporary Tax Exemption).

Free Workshops

If you are in business, you may like to attend one of our free tax seminars or workshops held in various parts of the country. Please visit our website for details (www.ird.govt.nz).

Abdul Rafik is Inland Revenue’s Community Compliance Officer based in Auckland. He will answer your queries, which may be emailed to venkat@indiannewslink.co.nz

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