In a first for New Zealand taxation, tax on New Zealand residents who are also subject to taxation of another country through citizenship is being addressed as New Zealand reviews the Foreign Investment Fund (FIF) rules.
Earlier this year, Inland Revenue released a fact sheet outlining the proposed changes.
Only two countries in the world tax their citizens based on citizenship. Those countries are the United States, and Eritrea.
Changes on the horizon signal what is emerging as a valuable development for U.S. citizens becoming full tax residents of New Zealand from 1 April 2024.
Background
FIF taxation has been in effect since 1 April 2007. FIF rules currently tax New Zealand residents on attributing interests in certain offshore investments. There are currently three categories: portfolio investments in foreign stocks (Category 1), rights to benefit from a foreign superannuation scheme (Category 2), and rights to benefit from a foreign life insurance policy (Category 3).
The current rules apply irrespective of a person being subject to taxation in another jurisdiction through citizenship. That is, all New Zealand residents with FIF assets must apply the FIF rules.
Understandably, these rules have been unpopular and have led to double taxation. The U.S. taxes citizens on realized gains, while New Zealand’s FIF regime traditionally taxed unrealized gains, creating permanent double taxation. Foreign tax credits on dividends received provide very minimal relief from double taxation.
The proposal creates one new method of FIF taxation (revenue account method), with two subcategories:
Subcategory a) Those who are not subject to taxation through citizenship. These individuals becoming tax resident of New Zealand from 1 April 2024 can choose either the current method or the new revenue account method. Under that method, 70% of realized gains are taxed together with dividends.
Subcategory A individuals may apply the new rules to investments in unlisted foreign stocks only. Investments in listed foreign stocks will still be taxable under the existing FIF rules.
Subcategory b) Those who are subject to taxation through citizenship will apply the revenue account method to listed and unlisted entity investments subject to the FIF rules.
The application of the revenue account method will be optional. Taxpayers will be able to choose between the current methods and the revenue account method.
In this context the rules under subcategory B, will be significantly more beneficial to U.S. citizens than to other persons, in that they will get the benefit of applying the revenue account method to all foreign stocks that are FIF assets (listed and unlisted).
How the Revenue Account Method Works
| Feature | FIF Rules (Current) | Addition of Revenue Account Method |
|---|---|---|
| Tax basis | Unrealized gains (e.g. FDR or CV) | Realized gains + dividends |
| Percentage of income | 5% of opening value (FDR) | 70% of realized gains |
| Applicability for U.S. citizens | All FIF assets taxed annually | All FIF assets taxed on realization |
| Relief from double taxation | Limited to foreign tax credits on dividends received. | Substantial improvement due to matching of realized gains in both NZ and US. |
A bill is expected to be passed in forthcoming months containing further information.
Disclaimer:
This article is intended for general informational purposes only and does not constitute legal, financial, or tax advice. International taxation is complex and subject to change, and the implications can vary significantly based on individual circumstances, jurisdictions, and treaties in force.
Readers are strongly encouraged to consult with a qualified tax advisor or legal professional before making decisions based on the information herein. While every effort has been made to ensure accuracy, the author and publisher accept no liability for any errors or omissions, nor for any loss incurred in reliance on this content.
References to specific countries, regulations, or filing procedures are current as of the publication date and may not reflect the most recent developments.
