New disclosure and record-keeping rules relating to resident foreign trustees apply from 1 October 2006.

2006 legislation provides a temporary exemption from tax on foreign income for new migrants and certain returning New Zealanders.

Sections CD 34, CE 2, CQ 2, CQ 5, CW 22B, DN 2, DN 6, EW 5, EW 37, EW 42, EX 16, EX 35, EX 52, FC 22, FC 23, FC 24, HH 2, HH 4, KD 3, NG 2, OB 1 and OE 1 of the Income Tax Act 2004

New rules have been introduced to help remove the tax barriers inhibiting international recruitment to New Zealand.

The tax exemption is for four calendar years (up to 49 months) from the date you qualify as a New Zealand tax resident. The exemption starts from the time you are treated as being tax resident in New Zealand, and is valid until the last calendar day of the month, four years after the month in which you began to meet the residency requirements.


The rules were introduced to help New Zealand businesses recruit highly skilled individuals from overseas, resulting in positive effects for the New Zealand economy.

Under New Zealand's residence rules, an individual who has been in New Zealand for an aggregate of 183 days in any 12-month period is considered to be a New Zealand resident and is liable to pay New Zealand tax on their worldwide income. Consequently, people coming to New Zealand from overseas may have faced extra tax costs compared with what they would have at home or in other countries. This is partly because some of New Zealand's tax rules relating to foreign-sourced income - such as the foreign investment fund rules and the controlled foreign companies rules - are more comprehensive than those of other countries. Often these extra tax costs were passed on to New Zealand businesses who recruited these people or who used their services. This occurred because the individual often negotiated higher remuneration to compensate for the additional tax liability.

Concerns with the previous law were highlighted by the Tax Review in 2001 in its Final Report and also in the government discussion document, Reducing tax barriers to international recruitment to New Zealand, released in November 2003.

Key features

The amendments introducing the new international recruitment rules are in the Income Tax Act 2004.

Eligibility for the exemption

The new rules for eligibility are contained in sections FC 23 and FC 24. The exemption applies to an individual who is a "transitional resident". An individual is a "transitional resident" provided that she or he has not been tax-resident in New Zealand during the last 10 years, and provided that she or he has never been a transitional resident before. The period that the person becomes a "transitional resident" (the period of exemption) starts on the first day of the month that the individual arrives in New Zealand to take up the exemption and continues for a further 48 months.

Types of income that are exempt

Foreign-sourced income

Section CW 22B provides that all foreign-sourced income derived by a transitional resident is exempt, except for employment income connected with employment performed while a transitional resident and income from the supply of services.

CFC rules

Sections CQ 2 and DN 2 exempt transitional residents from the controlled foreign company (CFC) rules. Attributed CFC income and attributed CFC losses do not arise if an individual holding an interest in a foreign company is a transitional resident.

FIF rules

Sections CQ 5 and DN 6 exempt transitional residents from the foreign investment fund (FIF) rules. FIF income and FIF losses do not arise if an individual holding an interest in a foreign investment fund is a transitional resident.

Financial arrangements rules

Section EW 5(15B) ensures that the financial arrangements rules do not apply to foreign financial arrangements of transitional residents.

Share options

Section CD 2(9) provides that a transitional resident who is granted an employee share option while non-resident, and who exercises the option while a transitional resident, is not liable for tax on the proportion of the gain derived which relates to overseas employment.


Section HH 2 provides that a trust is considered as a foreign trust for the duration of the exemption if the settlor is a transitional resident. This means that the 12-month period to elect for a foreign trust to become a qualifying trust begins on the date that the settlor ceases to be a transitional resident.

Section HH 4 provides that if the settlor of a trust is a transitional resident, the trustee is not subject to tax on income derived from outside New Zealand.


Section NG 2(1)(b) provides that transitional residents do not have to withhold non-resident withholding tax (NRWT) - for example, on foreign mortgages.

Other changes

The definition of "qualifying person" in sections KD 3 and OB 1 has been amended to exclude transitional residents and their spouses. The effect is that transitional residents and their spouses are not eligible for any form of family assistance. Similarly, the definition of "principal caregiver" in section OB 1 has been amended, so that transitional residents and their spouses are not eligible for an in-work payment.

Application date

The amendments apply from 1 April 2006 for people arriving in New Zealand on or after this date, with application from the 2005-06 income year and subsequent income years.

Detailed analysis

Eligibility and length of the exemption

The exemption applies to new migrants and returning New Zealanders, who arrive in New Zealand on or after 1 April 2006, and satisfy the definition of "transitional resident". To satisfy the definition of "transitional resident", an individual cannot have been tax-resident in New Zealand during the previous 10 years (section FC 23(b)). Furthermore, the individual cannot previously have been a transitional resident (section FC 23(c)).

The period that the person becomes a "transitional resident" (the period of exemption) starts on the first day of the month the individual arrives in New Zealand to take up the exemption, and continues for a further 48 months (four years) (section FC 24).

An individual can only claim the exemption once in their lifetime (section FC 23(c)). Theoretically, an individual could defer claiming the exemption until a later time, when they will become eligible again.

Example 1: Eligibility for exemption

Sally is a New Zealander who has been living in Australia for the past 12 years. Sally decides to return to New Zealand to take up an executive position in an exciting new company, and arrives in New Zealand to live on 24 April 2006.

Sally will be a transitional resident and eligible for the temporary exemption on foreign-sourced income. The exemption will apply from the beginning of the month that she arrived to live in New Zealand - April 2006. The exemption will end on 30 April 2010, which is 48 months and 1 week after her arrival to live in New Zealand.

Determining residence for the purposes of the exemption

The definition of "residence" under New Zealand law (section OE 1(2)) is based on physical presence in New Zealand. If a person is present in New Zealand for more than 183 days in any 12-month period, they are considered to be New Zealand-resident from the first date they were present in New Zealand.

This would mean that for some new migrants or returning New Zealanders, their first date of residence would be backdated to a previous visit. Therefore, they would be ineligible for the exemption, if the date of the visit was before 1 April 2006. Or, the period of exemption would begin before the new migrant or returning New Zealander actually moved permanently to New Zealand.

To overcome this problem, sections OE 1(2B) and FC 23 include a rule which effectively ensures that the exemption period begins on the first day the individual arrives in New Zealand to take up the exemption. This is achieved by disabling the 183-day test for the 12 months before arrival, and relying on the "permanent place of abode" test in section OE 1(1).

The purpose of these changes is to exclude any "scoping visits" to New Zealand an individual may have made, when deciding whether or not an individual is eligible for the exemption and when the exemption begins. Note: Whether a person has a permanent place of abode in New Zealand is a question of fact. More information and a discussion of the relevant case law, is set out in Tax Information Bulletin Vol. 7, No. 1, July 1995, pages 10-12.

Exclusion from family assistance

Transitional residents and their spouses are not eligible to receive family assistance payments.

Family assistance entitlements are determined by a modified form of net income. If individuals derive offshore income that is exempt under the amendments their net income is reduced. Without any change to the law, individuals deriving exempt offshore income could receive family assistance payments that they would not otherwise be entitled to, or receive higher payments than they would otherwise be entitled to, if this income was not exempt.

For this reason, the definition of "qualifying person" in sections OB 1 and KD 3 and the definition of "principal caregiver" in section OB 1 have been amended.

If an individual is eligible for family assistance, when their foreign-sourced income is taken into account, they can choose not to be a transitional resident and pay tax on their foreign-sourced income. Furthermore, if a transitional resident finds that his or her circumstances change and they require family assistance, he or she could "give up" the exemption by paying tax on their foreignsourced income. That way they can be assessed for family assistance entitlements in the normal way.

Scope of the exemption

The types of income/taxes that are exempt under the new rules are, for example:

  • controlled foreign company income that is attributed under New Zealand's CFC rules;
  • foreign investment fund income that is attributed under New Zealand's FIF rules (including foreign superannuation);
  • non-resident withholding tax (for example, on foreign mortgages);
  • approved issuer levy (for example, on foreign mortgages);
  • income arising from the exercise of foreign employee share options;
  • accrual income (from foreign financial arrangements);
  • income from foreign trusts;
  • rental income derived offshore;
  • foreign dividends;
  • foreign interest;
  • royalties derived offshore;
  • income from employment performed overseas before coming to New Zealand, such as bonus payments;
  • gains on the sale of property derived offshore (held on revenue account); and
  • offshore business income (that is not related to the performance of services).

The new rules eliminate those taxes that are generally passed on to New Zealand employers and provides migrants with temporary relief from the most compliancecost intensive aspects of returning foreign income in New Zealand. Those eligible continue to be taxed on New Zealand-sourced income.

Example 2: Scope of exemption

Rebecca is from France. She decides to move to New Zealand, and realises that she is eligible for the exemption. She currently owns several residential buildings in France, from which she receives rent and has a mortgage. She also has some shares in various French companies.

She has a bank account with a French bank into which she receives rent from her tenants, and receives interest from the bank.

Under previous New Zealand law, if she were to migrate to New Zealand, she would be liable to pay New Zealand tax on her rental income and interest from her bank accounts. She would also have to withhold non-resident withholding tax (NRWT) on her mortgage interest payments made to the French bank. Furthermore, the shares she owns in French companies would constitute FIF interests. She would therefore be liable to pay New Zealand tax on the value of the shares as it accrued, regardless of how much had been distributed.

The new exemption rules mean that she does not have to pay New Zealand tax on her rental and interest income for the period of the exemption. Nor does she have to withhold NRWT on her mortgage interest payments. Furthermore, for the period of exemption, she does not have to pay any New Zealand tax in relation to the shares held in various French companies (either on the value of the shares as it accrues or on distributions from the shares).
Employee share options

New section CE 2(9) effectively provides that if a share option is granted in relation to overseas employment (at a time when the employee was not a New Zealand resident), but exercised while the employee is a transitional resident, then the transitional resident will not be taxable on the exercise spread.

However, when the employment services to which a share option relates have been provided both overseas and in New Zealand, the individual is required to pay tax on the New Zealand proportion of the exercise spread. This is done by calculating the value of the benefit (as if the person was not a transitional resident) and deducting the value of the benefit attributable to the period employed as a non-resident, in accordance with the formula provided in section CE 2(9)(b):

Value before reduction x period employed as non-resident
Period employed

Example 3: Treatment of share options

David is a New Zealander who has worked abroad for 15 years, mostly in Asia. David started working for a multinational company on 2 May 2001. The multinational company transfers him to the New Zealand head office on 2 May 2006. On 1 May 2007, the multinational company issues him with some share options, which relate to his employment both in Asia and in New Zealand.

He decides to exercise the share options in December 2007. The gain he receives is $200,000. When filing his tax return he realises that he has to pay tax on the New Zealand portion of the gain. He calculates it as follows:

$200,000 x 1,826 days
2,191 days
= $166,681.88
Portion of New Zealand-sourced income
= $200 000 - $166,681.88
= $33,318.12
David is therefore liable for New Zealand tax on $33,318.12.

Previously, under section HH 2(1), if a settlor of a trust (that would have been a foreign trust had a distribution been made on the day immediately preceding the day that the settlor became a New Zealand resident) became resident in New Zealand, any settlor, trustee or beneficiary of the trust had 12 months to elect to make the trust a qualifying trust for New Zealand tax purposes. The amendment to section HH 2 defers the election until 12 months following the end of the exemption.

Furthermore, previously under section HH 2(1), a New Zealander who settled a foreign trust while non-resident could not elect into the qualifying trust rules upon his or her return to New Zealand. The changes to section HH 2 extend the election period to returning New Zealanders who are transitional residents. When a New Zealander who subsequently becomes a transitional resident settles a trust before their return, any settlor, trustee or beneficiary of the trust has 12 months, following the end of their exemption, to elect into the qualifying trust rules. The trust is deemed to be a foreign trust up until the date that they elect into the qualifying trust rules.

Foreign financial arrangements

New section EW 5(15B) states that an arrangement to which a transitional resident is a party to is an excepted financial arrangement if:

  • no other party to the arrangement is a New Zealand resident; and
  • the arrangement is not for the purpose of a business carried on in New Zealand by a party to the arrangement.

As an excepted financial arrangement, such an arrangement is excluded from the financial arrangements rules. This relieves the transitional resident from the compliance-cost intensive task of allocating income from the arrangement over the term of the arrangement and returning the income in New Zealand as allocated.

Furthermore, sections EW 37(1) and EW 42(1) have been amended to cover the situation where a transitional resident enters into the financial arrangement rules once the exemption is ended, or when the arrangement ceases to be an excepted financial arrangement.

Employment and services income

The reason for continuing to tax employment income and business income relating to services performed offshore is to prevent New Zealand-sourced income from being recharacterised as foreign-sourced income.

However, it is not uncommon for individuals who arrive in New Zealand to receive income from their previous overseas employment, such as bonus payments. This is because this income is often determined at a later date - for example, during a business's normal performance/pay review period. It would be inappropriate to tax this income simply because the individual is already in New Zealand.

Therefore, section CW 22B(c) excludes such income from being taxable. It provides that income from employment performed overseas before coming to New Zealand is exempt from New Zealand tax.

Example 4: Treatment of previous employment income

Craig is a sales professional who arrived in New Zealand from the United States on 10 April 2006. He was offered and accepted a sales job in New Zealand. Before he left the US, he was responsible for securing a big client for his US firm.

His former US employer, during its six-monthly pay and performance review, decides to pay him a bonus for securing the client.

This bonus was paid in relation to employment performed overseas before his arrival in New Zealand. Therefore, the bonus is exempt from New Zealand tax.
No deductions/losses can be taken against exempt income

As the exemption exempts foreign-sourced income, section DA 1 disallows deductions for any amount of expenditure or loss incurred in deriving this income. Similarly, any deduction that arises from investing into CFCs or FIFs will be disallowed, as transitional residents are exempt from the CFC and FIF rules.

Example 5: Deductions against exempt income

Jordan, who has been living in the United Kingdom (UK) for 15 years, decides to move back home for his children's education. He owns a house in the UK, which he decides to rent out.

However, before he leaves, he decides to modernise the house by painting it inside and out. The radiator is repaired and some electrical work is done on the house.

While in New Zealand, Jordan receives rental income each month from his tenants. However, this income is exempt under the new rules. Therefore, he cannot claim a deduction/loss against his New Zealand sourced income for the repair work he had done on his house in the UK.
No CFC/FIF disclosure requirement

The changes to section EX 16 (income interest in a CFC) and EX 35 (attributing interest in a FIF) effectively mean that a transitional resident does not have an interest in a CFC or FIF. Therefore, the transitional resident does not have any disclosure requirement under section 61 of the Tax Administration Act 1994.