By Chelsea Traver at Evergreen Advice
The below article is a guest submission from Evergreen Advice, a Wellington based wealth management practice. The content of the article solely reflects the views and opinions of Evergreen advice.
This article is provided for general information purposes only. The information provided is not intended to be tax advice or financial advice.
Many Americans are making the move to NZ to enjoy a more relaxed lifestyle or to take advantage of the beautiful scenery this country offers. I’m one of those citizens. I made the move nine years ago in what was supposed to be a travel-filled, one year working holiday but ended up being permanent with a house and business as well. Even though I had a basic understanding that I needed to file US taxes, I didn’t understand the magnitude of the reach of the IRS when I first arrived. The US tax system is highly complex, potentially punitive and unquestionably confusing. Even people who file their US taxes on a regular basis can end up facing significant complications and a hefty tax bill.
This article is not tax advice but instead is designed to be a plain language resource on the investment implications for US citizen’s investing in NZ (or as plain language as possible given we’re talking about US tax) This article has been reviewed by David Tzmenakis from the US Tax Team. Evergreen Advice specialises in investments and financial planning, not tax. For personalised tax advice, it’s best to go with a US tax accountant. Let’s dive in!
First and foremost: You have to file taxes
Almost every American citizen is required to file taxes to the IRS every year. Even if you just got American citizenship through your parents and have never actually lived in the States it’s still a requirement for most people. The US is one of only two countries with lifetime filing requirements and with FATCA in place, there is digital information sharing between NZ banks, IRD and the IRS- which means the US knows what accounts you have overseas. So if you don’t file there might be negative consequences. The only way out of filing is to renounce your citizenship. However, that comes with its own complications and requirements as well as being a deeply personal decision.
Whether you actually have taxes to pay in the US, or are just required to file a return, will be down to your specific circumstances and depend on a number of factors such as whether you have a high salary or own investment assets outside of the US. The US and NZ have a double taxation agreement in place which reduces your tax liability but this might not get you out of having to pay taxes in the US.
What are the tax implications for Americans investing in NZ?
Each asset type has its own nuances but one of the most challenging investment assets is also one of the most popularly used in NZ. It’s known by the IRS as a Passive Foreign Investment Company (PFIC). The definition of a PFIC is a foreign company with:
At least 75% of the corporation's gross income is "passive"—that is, derived from investments or other sources not related to regular business operations.
At least 50% of the company's assets are investments, which produce income in the form of earned interest, dividends, or capital gains.
Included in this definition are popular NZ investments such as managed (PIE) funds and (non-US) ETFs. If Americans invest in these types of assets, they are subject to onerous tax reporting requirements and potentially punitive taxes. Each PFIC that you are invested in requires the completion of an additional tax form annually and any time you buy, or sell there are additional tax consequences. Cash investments like Term Deposits or Notice Savers may be PIE funds and fall under this legislation.
The primary challenge when investing in NZ as an American is knowing how to invest in tax efficient manner for both the US AND NZ tax systems. As a US taxpayer, you have a couple of options:
- Avoid PFICs altogether - this will simplify your tax situation but limit your range of investment options.
- Still invest in PFICs but do so selectively to avoid the additional time/cost/taxes.
KiwiSaver – to be (a trust) or not to be
KiwiSaver is many Americans' first introduction to investing in New Zealand. You are automatically enrolled when starting your first job here unless you specifically opt-out. This might seem similar to a US 401k, however, in KiwiSaver you are subject to a US tax double whammy.
The structure of the KiwiSaver generally makes it a Trust in the eyes of the IRS. Trusts have additional filing requirements in the US and high penalties if you file incorrectly.
KiwiSaver funds are generally considered PFICs. As previously mentioned, these can be punitively taxed and have significant filing requirements.
Some investment advisers offer KiwiSaver schemes that do not invest in PFIC investments. For example, we use KiwiWRAP KiwiSaver Scheme.
For more information about KiwiSaver, Stuart Clouden of Cloudtax has a comprehensive article explaining the complexities of KiwiSaver and US tax. While there are complexities to investing in KiwiSaver it would still make sense to enrol if the money your employer contributes to your KiwiSaver is more than the cost would pay for an accountant and taxes. If you are earning a decent salary and your employer will not pay you the KiwiSaver contribution as a part of your salary, then it is worth considering.
When isn’t KiwiSaver considered a trust?
This is a common question we get from clients, so we asked US accountant David Tzimenakis of the US Tax Team. He responded:
When your total historical contributions are less than the government and employer contributions combined, then generally speaking trust reporting is not needed. It is important however that the NZ employer contribution is much higher than the employee one, as an employer contribution has PAYE deducted before it goes into the KiwiSaver fund.
Note: There are a few caveats to this, and professional advice should be sought as there are instances whereby trust reporting is needed even after changing the contribution ratio.
To explain, on a typical KiwiSaver fund, you would contribute 3% and your employer would contribute 3% (with the government chipping in $521). However, your employer’s contribution is taxed so in actual fact they are contributing less than you. For your KiwiSaver not to be considered a trust by the IRS your employer would need to be contributing much more than you are. Since KiwiSaver contributions are generally matched by employers this would require specific negotiation with your employer. Given this, in our experience, it's quite rare that a KiwiSaver would meet the guidelines to not be a trust.
What about your US investments?
If you are planning to stay in NZ for the long term the question arises about what should be done with your investments in the US? Should you leave them there or bring them to NZ? As a broad statement, everyone wants to tax you so if you leave investments in the US then you may be liable for NZ tax annually or on withdrawal.
Retirement Accounts- 401ks, IRAs
The IRS does not let you transfer retirement accounts overseas so the only way to move this money is to withdraw it early and be subject to any taxes payable on that account plus a 10% additional early withdrawal penalty on the value of the investments. Alternatively, you could leave it in the US until it’s accessible at retirement age (usually 59 ½ ).
NZ considers investments such as 401ks and IRAs foreign superannuation schemes and as such you are only taxed by NZ on withdrawals. Generally, NZ has a higher tax rate than the US and you can use this as a tax credit on your US taxes.
Everything else
Other investment accounts are generally taxable by the NZ government and as such need to be reported. This includes 529b, brokerage accounts, money market accounts, and any other investment-type instruments.
You have a temporary tax exemption for four years to move your investments to NZ before you start paying NZ taxes on your foreign assets. If you have over $50,000 NZD in Foreign investment funds then they fall under the NZ FIF tax rules.
Where to get help
If your US tax obligations feel overwhelming the first step might be talking to a specialist accountant about your situation. This can also be beneficial before taking any big moves such as:
Buying an investment property
Starting or investing in a business
Opening a new investment portfolio
Merging finances with your partner
Opening a KiwiSaver account
Creating a trust
Estate planning
Temporarily moving overseas
By understanding the tax complexities, you can take steps to minimise your taxes and set yourself up for easier filing in the future. There are several accountants in NZ who offer this service including the US Tax Team New Zealand. Further references are available at Evergreen Investments main website.
Don’t let the tax complexities stop you from investing
Investing is an important part of a successful financial future and as such I would encourage you to not give up on it because you’re afraid of the potential taxes. Know what your obligations are, figure out how to minimise your tax burden while retaining key investment principles like diversification, and get started.
At Evergreen Advice, one of the areas we specialise in is investment advice for US tax residents. We collaborate with accountants with expertise in this area to ensure our client's specific tax situation is incorporated into their investment strategy. Reach out if you want help.