Transitional Tax Residents and Finance
The financial arrangements rules spread income and expenditure over the term of an arrangement and require a base price adjustment when the arrangement matures. However, financial arrangement rules do not apply to non-residents. To ensure base price adjustment only includes gains and losses when the person is a NZ resident, there is deemed acquisition of the arrangement when the person becomes a NZ resident.
This deemed acquisition was amended in 2006 to include the transitional residence rules. The aim of the transitional residence rules was to encourage immigration to New Zealand by allowing qualifying residents to exclude their offshore assets from the New Zealand tax base for the first four years. The consequence of these rules is that, when a financial arrangement does not have a New Zealand source, a person will only have a deemed acquisition of the arrangement once their transitional residence period expires rather than when they became a New Zealand resident.
However, the changes made for the transitional residence rules did not consider that immigrating transitional residents may hold financial arrangements with a NZ source. Such arrangements are always subject to NZ tax, even when held by non-resident – however, they are not taxed under the financial arrangements rules unless held by NZ resident, so accrued gains and losses are not included.
The deemed acquisition rules currently do not cover a person who becomes a transitional resident while holding NZ sourced financial arrangements. Although the person is taxed correctly during the life of that arrangement, the base price adjustment wrongfully includes gains and losses in the period before the person became a NZ resident.
The issue arises for some immigrants who are required to hold New Zealand assets (such as New Zealand government bonds) to meet their visa requirements and acquire these before moving to New Zealand.
Proposed Amendments
The amendments would add an additional paragraph to the end of each section creating deemed acquisition of financial arrangement with a New Zealand source held by a non-resident when they become a New Zealand transitional resident and therefore become subject to the financial arrangement rules.
Effective Date
The proposed amendments would be effective for financial arrangements if a base price adjustment is required to be completed after the date on which the Bill receives the Royal assent.
*The above article is a high-level explanation of the methods of calculation, and there may be other technicalities/rules that are applicable. The complexity of the calculations can also vary. Please reach out to us if you have specific questions regarding your situation.
Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.
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