A well-managed tax migration strategy can significantly reduce the tax costs to new migrants. Wherever possible, NZ migration tax planning should start before the first NZ Customs entry stamp in the passport.
Many individuals will be, at least for a period of time, tax resident under both NZ and the home country’s domestic residency tests and therefore the tiebreaker tests in the double tax agreement will need to be considered. A new NZ tax resident may also be a transitional resident and eligible for a 4-year exemption on all foreign sourced income other than personal services income.
Establishing the date of NZ tax residence and the transitional residence period is critical. Not getting these dates right can have significant tax consequences on the timing that overseas investments come into the New Zealand tax net and the tax treatment of pre-migration trusts.
Many new migrants from USA will have 401(k) or IRA savings schemes, investments in US LLCs and managed investment funds investing in global equities, foreign denominated bonds, ETFs and derivatives. NZ’s foreign investment fund rules, controlled foreign company rules and financial arrangement rules will apply. There will often be a mismatch between the NZ and US tax treatment of these investments, the timing of tax payments and the ability to claim foreign tax credits in NZ for the US tax paid.
Many high net-worth US citizens hold investments via a US trust. Careful tax planning is required to manage the timing of distributions as the trust becomes subject to NZ tax due to the settlor becoming NZ tax resident. It will be important for such a trust to be a complying rather than non-complying trust - distributions from a non-complying trust are taxed at 45%.
A well-managed tax migration strategy can significantly reduce the tax costs to new migrants. Wherever possible, NZ migration tax planning should start before the first NZ Customs entry stamp in the passport.
