Tax guide for Americans in New Zealand

Filing income taxes

When to file tax returns?

The New Zealand tax year runs from 1 April to 31 March of the following year.

The standard deadline for filing individual income tax returns is July 7 following the end of the tax year.

If you use a registered tax preparer, the deadline may be extended to March 31 of the following year.

You should file a tax return if you:

• Earned income that was not taxed at source (such as self-employment, rental income, or overseas income).
• Worked more than one job and didn't use the correct secondary tax codes.
• Incurred deductible expenses that you want to claim.
• Have been asked by the IRS to file a tax return.

How to file a tax return?

Online via myIR:

1. Register for a myIR account on the IRS website.
2. Complete and file your tax return electronically.

Paper filing:

1. Obtain the forms you need, such as the IR3 individual income tax return.
2. Complete the form and mail it to the IRS at the address provided on the form.

Information is required:

• Income details: PAYE summaries, interest and dividend statements, and overseas income records.
• Expense records: Documentation for any deductions or credits you're claiming.
• Personal Information: IRD number, contact details, and bank account details for refunds.

Penalties for late or incorrect filing

1. You may be charged a late fee if you miss the deadline.
   Penalty amounts vary depending on your net income and can range from NZD 50 to NZD 500.
2. Use of Money Interest (UOMI) applies to any unpaid tax from the day after the due date.
   Interest rates are set by the Inland Revenue and are subject to change, so check the current rate.
3. Underpayment penalties may apply if there's a discrepancy between the tax owed and the tax assessed due to errors or omissions.
   Penalties may be reduced if you correct errors before the IRS contacts you.

Types of income in New Zealand

Employment income

Earned income includes salaries, wages, bonuses, and allowances received from your employer. Tax on this income is usually deducted at source under the PAYE system.

Make sure you provide your employer with the correct tax code on Form IR330 to avoid underpayment or overpayment of tax.

Income from rentals

Income from rental property in New Zealand is taxable and must be declared on your income tax return.

Taxable rental income includes rent received and any related payments from tenants.

You can deduct certain expenses, such as:

• Mortgage interest (subject to recent limitations and phase-out rules);
• Property management fees;
• Rates and insurance;
• Repairs and maintenance (but not improvements).

Residential rental losses cannot be offset against other income; they can only be carried forward to offset future rental income or taxable gains from the sale of residential property.

Controlled Foreign Companies (CFCs)

If you are a New Zealand tax resident and have interests in foreign companies, the controlled foreign company (CFC) rules may apply to you.

• A CFC is a foreign company in which New Zealand residents have more than 50% control.
• Certain types of passive income from a CFC must be included in your New Zealand taxable income.
• If the CFC meets the active activity criterion (less than 5% passive income), you can choose not to attribute the income to expenses.

Foreign Investment Funds (FIFs)

If you're a New Zealand tax resident with overseas investments in foreign companies, unit trusts, superannuation schemes, or life insurance policies, you may be subject to the Foreign Investment Fund (FIF) rules. These rules tax income from foreign investments, even if you haven't received any distributions.

Foreign superannuation

For New Zealand tax residents with overseas superannuation, withdrawals or transfers from overseas superannuation may have tax implications.

• Tax on lump sum withdrawals. Generally taxed under the schedule method, where a portion of the withdrawal is taxable based on how long you've been a New Zealand resident.
• Transitional residents. May be exempt from tax on foreign superannuation withdrawals for the first four years of residency.
• Transfers to KiwiSaver. Treated as a lump sum withdrawal and may be taxable.

Pension system in New Zealand

Understanding the pension system is very important when planning for retirement in New Zealand. The main parts of the system are:

1. New Zealand Superannuation (NZ Super).
This is a government-funded pension available to eligible residents aged 65 and over.

Eligibility requirements:

• Must be a New Zealand citizen or permanent resident.
• Must have lived in New Zealand for at least 10 years after the age of 20, including 5 years after the age of 50.

NZ Super payments are considered taxable income.

2. KiwiSaver
This is a voluntary, employment-based superannuation scheme.

• Employees contribute 3%, 4%, 6%, 8%, or 10% of their salary.
• Employers contribute a minimum of 3%.
• Government contribution of up to NZD 521.43 per annum if you contribute at least NZD 1,042.86 per annum.

Access to funds is usually available at age 65.
Early withdrawal of funds is allowed if you are buying your first home or experiencing significant financial hardship.

Tax deductions for expats in New Zealand

Employment expenses

Most work-related expenses are not deductible, such as:

• Transportation between home and work.
• Work clothes, unless they are uniforms or protective gear.
• Home office expenses are generally not deductible unless you are required to work from home and meet certain criteria.

Exceptions include:

• If you earn income from commission work and incur expenses that are not reimbursed by your employer, some deductions may be allowed.
• Self-employed individuals can claim a wider range of business-related expenses.

Business deductions

If you're self-employed or run a business in New Zealand, you can deduct certain expenses to reduce your taxable income.

• These include costs directly related to your business, such as office rent, utilities, equipment, travel expenses, and professional services such as accounting or legal fees.
• If you use part of your home for business purposes, you can deduct a portion of your household expenses, such as mortgage interest, rent, utilities, insurance, and electricity. The deduction is usually calculated based on the square footage used for business to the total square footage of your home.
• Business-related vehicle expenses, including fuel, maintenance, and depreciation, are deductible. If the vehicle is used for both personal and business purposes, only the business portion is deductible.

Personal deductions

New Zealand offers limited personal deductions for individual taxpayers. Most personal expenses are not deductible, but there are some exceptions:

• Premiums for income protection insurance policies are generally deductible because they are related to protecting your income stream.
• If you have investments in PIEs, you may benefit from lower tax rates, but personal deductions for investment expenses are generally not available.
• If you borrow money to invest and earn income (other than residential rental property investments), the interest expense may be deductible.

Credit for donations to charitable organizations

Donations to approved charities and organizations may qualify for a tax credit.

Contributions of $5 or more to organizations recognized by the Internal Revenue Service as donee organizations.

You may claim a tax credit equal to 33.33% of the total contributions made, up to the amount of your taxable income for the year.

How to claim:

1. Complete the tax credit claim form (IR526) after the end of the tax year (March 31).
2. Attach donation receipts provided by the charities.
3. Claims must be made within four years of the donation.
4. If your employer offers payroll giving, you can donate directly from your paycheck and receive tax credits immediately in your paycheck, reducing your payroll taxes.

Tax credits for expats in New Zealand

Credits for withheld or paid taxes

Tax credits for PAYE and RWT

• PAYE. If you're employed in New Zealand, your employer will deduct income tax from your salary or wages under the PAYE system. The tax withheld is credited against your annual income tax liability.
• RWT. For income such as interest and dividends, tax is often withheld at source by the financial institution paying you. This withheld tax is also credited against your income tax liability.

Foreign tax credits

If you're a New Zealand tax resident and have paid income tax on foreign source income in another country, you may be eligible for a Foreign Tax Credit (FTC) to prevent double taxation.

To be eligible:

• The income must be taxable in New Zealand.
• The foreign tax must be similar to the New Zealand income tax.
• You must not have already received a refund or relief for the foreign tax paid.

Imputation credits

New Zealand operates an imputation system to prevent double taxation of company profits. When New Zealand companies pay dividends to shareholders, they can claim imputation credits representing the income tax the company has already paid on its profits.

How do imputation credits work?

• The company pays income tax at the corporate rate (currently 28%) on its taxable profits.
• When distributing dividends, the corporation can claim imputation credits up to the amount of tax paid.
• Shareholders receive the cash dividend plus the imputation credits attached. They must include the gross dividend (cash dividend plus imputation credits) in their taxable income.

The imputation credits can be used to offset the shareholder's income tax liability on the dividends received.

Personal tax credits

New Zealand offers personal tax credits that can help reduce your income tax liability:

Independent Earners tax credit

• Eligibility. Individuals earning between NZD 24,000 and NZD 48,000 per year.
• Amount. Up to NZD 520 per annum.
• How to claim. Use tax code ME on the IR330 form provided to your employer.

Child tax credit

• Eligibility. Children under the age of 19 who earn income that is not taxed at source.
• Benefit. Ensures that up to NZD 2,340 of the child's income is tax-free.

Make sure you're using the correct tax codes to get the full benefit of these credits.

Family tax credits

Working for Families Tax Credits are designed to help families with the costs of raising children. They provide financial assistance based on your family's income and the number of dependent children.

Components

• Family tax credit. A payment for each child, with the amount depending on the child's age.
• Working tax credit. For families where the parents work a minimum number of hours each week.
• Best start tax credit. Available to families with a newborn child, providing support for the first three years.
• Minimum family tax credit. Ensures that families earn a minimum annual after-tax income.

Eligibility

• Must be a New Zealand resident.
• Payments decrease as family income increases.
• Must have one or more dependent children aged 18 or under.

Tax treaty between the United States and New Zealand

The United States and New Zealand have a Double Taxation Treaty (DTT) that prevents double taxation and clarifies the tax obligations of individuals and corporations doing business between the two countries.

Key points

• The treaty allows you to offset taxes paid in one country against taxes owed in the other, reducing the risk of being taxed twice on the same income.
• Provides criteria for determining your tax residency if both countries consider you a resident.
• The two countries reduce withholding rates on dividends, interest, and royalties.
• Determines when and how business profits are taxed to avoid double taxation.

Impact on US expats

• You can claim foreign tax credits to reduce your US tax liability based on taxes paid in New Zealand.
• You must still file US tax returns and report worldwide income, but the treaty helps minimize double taxation.

Most popular tax forms for US expats

American expats in New Zealand are required to file an annual US tax return. Key forms include

1. Form 2555: To claim the Foreign Earned Income Exclusion.
2. Form 1116: To claim the foreign tax credit.
3. FinCEN Form 114 (FBAR): Report of Foreign Bank and Financial Accounts, required if total foreign account balances exceed $10,000 at any time during the year.
4. Form 8938: Statement of Specified Foreign Financial Assets, for those exceeding certain asset thresholds.
5. Form 8854: Initial and Annual Expatriation Statement, if renouncing US citizenship.

Tax returns are due April 15, with an automatic extension to June 15 for expats. An additional extension to October 15 is available upon request.

FBAR is due April 15, with an automatic extension to October 15.

New Zealand tax forms for US expats

If you are a tax resident or earn income in New Zealand, you must comply with local tax obligations. Important forms include

1. IR330: Tax Code Declaration, provided to your employer to ensure correct tax withholding.
2. IR3: Individual Income Tax Return, to report income not taxed at source.
3. IR3NR: Non-Resident Individual Income Tax Return, if you're a non-resident with New Zealand source income.
4. IR4: Company Income Tax Return, if you're running a company.
5. IR215: Working for Families Tax Credits Registration, if applicable.

If your business turnover exceeds NZD 60,000, you must register for Goods and Services Tax (IR360).