It shouldn’t be expected that everyone has a full grasp of the different terms used by tax professionals, and we are frequently asked to explain in clear terms what a “tax resident” actually is.

As any tax accountant will attest to, the term “tax resident” is the guiding principle of taxation, which determines who is subject to tax.

But, when it comes to US tax residency for individuals living in New Zealand, this whole concept begins to raise a few eyebrows.

In this weeks article, we’ll provide a brief explainer on who is a tax resident, and what this entails from a tax perspective.

What is a tax resident?

A tax resident is an individual (or entity), which is seen by the local tax authorities as resident in a particular country. The term doesn’t have anything to do with physical residency in many cases, but nevertheless it is the globally used term to describe someone subject to tax.

You might say an alternative term could be more helpful, such as “taxable person” or similar.

So, anyway, back to the point…

A tax resident is someone who is treated as a taxable person by the authorities. This means, for example, as a tax resident of New Zealand, you’re expected to pay tax on your worldwide income to the IRD here in NZ.

The opposite of this is a non-resident, which might be a foreign person who spends no time in NZ, but maybe owns some income producing property here. For example, a foreign investor who holds NZ rentals, but doesn’t live here, might well be a non-resident. This would then mean that NZ would only tax this person on their NZ sourced local income, but not their worldwide income (as they are not tax resident, or shall we say an “NZ taxable person”).

Tax residency is not in any way tied to immigration status. You can be an NZ permanent resident who lives in Australia, and this would not necessarily make you NZ tax resident. Indeed, you could be present in NZ on no visa at all (ie an illegal migrant), but still be NZ tax resident.

Whether you are tax resident of a country is usually determined using a number of factors, such as the amount of time you’re present in the country, whether you have a home there, or certain other ties.

So, we know now, that a tax resident is in essence, someone who is fully subject to tax within a certain country.

Tax residency rules are complex, and its always best to get advice to confirm your tax resident status.

Why is this particularly relevant to the USA?

Whilst most countries centre their tax laws to be imposed on tax residents of the country, the US base their tax laws around US persons.

A US person is any US citizen, green card holder, or individual otherwise physically resident in the USA. For someone who doesn’t hold US citizenship or a green card, but lives in the US, the substantial presence test will determine if they are tax resident of the USA.

This means that, rather than distinguishing between who is a tax resident of the USA due to time spent there, home there, ties etc., it instead means that US tax laws are applied to any US person, regardless of where they live in the world.

Be default, US persons are US tax residents. This has some caveats for non-citizens (ie green card holders), but in the case of a US citizen, all are tax resident of the USA.

What is the implication of being tax resident of the USA?

Well, as mentioned above, being tax resident of a country usually means that said country will tax a person on their worldwide income.

By being considered a US person, even residing in New Zealand, it means that an individual is also treated as a tax resident of the USA, and thus, required to follow all of the same tax laws that they would’ve done had they been living in the USA.

It is because of this system, why US tax accounting firms exist all over the world, as opposed to just the USA.

But I live in New Zealand, I must be a tax resident here too?

Most likely yes.

You can be dual-tax resident of two countries at once. Whilst this applies to any US citizen who resides in New Zealand, this also affects other individuals who live more transient lives across multiple countries.

Fortunately, the US and New Zealand have a Double Taxation Treaty (DTA) in place, which sets the rules for accountants to determine which country gets to tax a dual-resident’s income, and prevent double taxation.

In practice, for most US citizens in New Zealand, this works well, however it can be difficult to understand.

What is New Zealand transitional tax residency?

Transitional tax residency is a system unique to New Zealand, whereby new migrants (and some returning Kiwi) are entitled to a 4 year period after moving here, whereby any foreign (non-NZ) passive income is not subject to NZ taxation.

For clarity, passive income means items such as bank interest, pension withdrawals, rental income etc.

However, New Zealand tax lawyer, Julia Johnston helpfully quoted for the article – “Approximately 90% of the people we work with have, either themselves or via their accountant, incorrectly calculated their transitional tax residency period”, so it is worth getting professional advice.

As a US citizen living in New Zealand is likely to be both tax resident of the USA and New Zealand, the transitional residency period is an excellent opportunity to move US based funds/investments to NZ whilst they are not taxable here.

What is a non-resident of the US for tax purposes?

A non-resident of the United States for tax purposes is someone who doesn’t meet any of the conditions to be considered a US person. As a reminder, this is someone who is not a US citizen, green card holder, or otherwise someone who resides in the US and is treated as a resident there.

There are however some caveats to this with regards to persons who do not hold citizenship (ie green card holders and other US residents), in that NZ and the US do have a provision in the DTA which can “tie-break” an individual to a certain country. This means that, depending on their ties to a particular country, they can in some cases be treated as a tax resident of only one country rather than both.

For example, a green card holder who lives in NZ permanently, but is travelling back to the US frequently enough to maintain their green card for immigration purposes. In some cases, this individual could use the tie-breaker to tie their tax residency to NZ only, and be a non-resident for tax purposes in the US.

What does it mean to be a non-resident for tax purposes in the USA?

This means that, as an individual would not be a tax resident (as above, taxed on their worldwide income),  but rather taxed only on their US sourced income. This could mean, interest from US bank accounts, wages from the US or other US sourced income. This has the benefit that their NZ interests, such as KiwiSaver etc., do not need to be reported or taxed in the US.

Summary

It is completely expected that not everyone will know, or understand the terminology used by tax professionals. But, understanding what tax residency is, is key to ensuring you meet your tax obligations correctly in any country where you have a residential or financial interest.

As you’ve likely gathered, there are many ifs and buts to the above, and seeking tax advice is always helpful, and in some cases, necessary.

If you’d like to discuss further, reach out to us at info@usatax.nz or 09-242-3445