Taken from article originally published 17th December 2023

In our final article for the year, we’ll cover an all too misunderstood (or unknown) issue, the New Zealand transitional residence period.

As part of our thorough and all-round approach to assisting our clients, one of our usual checks on a client’s situation is whether they are currently a “transitional resident” for NZ tax purposes.

For those who aren’t familiar with the term “transitional residency”, here’s a brief explainer.

Transitional residency is in essence, a tax benefit offered to new migrants by the New Zealand government. It isn’t limited solely to new migrants, but is also available for some returning Kiwis, or others who moved away and then returned to the country. Complicated criteria apply when determining whether someone is a transitional resident, and professional advice should be sought before arriving at any conclusion (the IRD don’t necessarily tell you if you are a transitional resident or not).

The transitional residence period is a 4 year window, beginning the date in which a new migrant begins their tax residency, whereby all foreign passive income is not considered as taxable income in New Zealand. Again, knowing the exact date of your NZ tax residency start date usually needs professional advice to determine.

A frequent misconception is that transitional residency is in any way linked to immigration status, which it is not. Indeed, an illegal migrant could be a tax resident of New Zealand, and in their transitional residence period. Holding a tourist visa, work visa, or permanent resident visa (or even citizenship) has no bearing on whether you are a transitional resident for tax purposes.

For new US migrants to New Zealand, transitional residency offers an excellent opportunity to bring US investments (such as IRAs, Roth IRAs, 401Ks, or other US investments) to New Zealand, completely tax free. Of course, US taxes may well apply on the withdrawal of these investments, however given that NZ generally has higher taxes than the US, withdrawing during the transitional residence period does frequently result in large tax savings when looked at over a lifetime perspective.

In many cases, the NZ-US double taxation treaty gives NZ sole taxing right on income of its residents. This means that in these cases, a US investment can be brought to NZ, without any US tax (nor NZ tax). This is because, whilst NZ has sole taxing right, it has voluntarily chosen not to tax the income (due to the transitional residence period), but this doesn’t necessarily mean that the US gets to tax instead.

The above situation is limited to very specific cases, and tax advice should be sought before making any withdrawals.

But, more often than not, many of the clients whom we consult with are not aware of the transitional residence period, and whether they are indeed one at all. All too often, new migrants only find out about the transitional residence period only after their 4 year window has passed, and their US investments begin to be taxed by NZ.

It is very important to note, that you should not arrive at a conclusion as to your transitional residence status based on the above. Significant caveats, conditions, and complexities apply to the above, and thus why professional advice is needed.

If you’re a recent migrant to New Zealand, or believe you might be in the transitional residence period, you should seek advice now to ensure tax savings whilst they are available to you. Do not leave it too late! The difference in taxation (either side of the transitional residence period) on US based investments can be huge, and seeking advice now can result in significant tax benefits.

Whilst here at The US Tax Team New Zealand, we assist with US tax advice, we can also provide excellent referrals and resources to determine if you are in the transitional residence period. Reach out to us if you need a referral.

If you’re looking for quality US tax advice, contact us on 09-242-3445 or info@usatax.nz.

But, signing off for 2023 shortly, wishing you, your family and all of our clients, followers and readers a wonderful festive period and a happy new year!.