Tax Department focus on foreign exchange paper gains

Throughout of Covid-19 we have seen the New Zealand dollar continue to bounce around the place, and unbeknown to many New Zealanders (including those who have been living abroad and who have returned), this can cause paper tax liabilities on foreign denominated bank accounts and overseas borrowings (the most common examples).

There are a number of matters to consider:

  1. If you are a returning Kiwi or new migrant, are you a transitional resident and exempt from this tax on paper profits?
  2. If you are already in New Zealand what are the New Zealand tax consequences on having foreign denominated bank accounts or overseas borrowings?

The returning Kiwi / New migrant - Transitional Residency Rules

If you are coming home after 10 years, or you are a new migrant, there is a once in a lifetime exemption for a 4 year period on your overseas assets and liabilities. The good news is this exemption should mean you can ignore the foreign exchange movement on these overseas denominated assets and liabilities. Careful planning is still needed.

So, when does this exemption start and finish? A bit of detail here but essentially the exemption period will start and end depending on how you have qualified as a New Zealand tax resident either through the 183-day test or the permanent place of abode test (which takes precedence over the 183-day test). Your exemption period will end depending on whether you qualified under the 183-day test or the permanent place of abode test and will be four years.

Tax consequences in New Zealand on having overseas bank accounts, rental properties, and mortgages abroad

If you are a New Zealand tax resident or your transitional tax resident exemption period has ended, you will be subject to tax on your worldwide income in New Zealand which will include:

  • Rental income from overseas
  • Foreign currency movements on bank accounts or debt
  • Overseas interest and dividends
  • Withdrawals from foreign superannuation schemes.

There is sometimes a misconception that if foreign sourced income is taxed offshore, it is not taxed in New Zealand. This is not the case.

Offshore bank accounts and mortgages come under specific rules which can require you to account for any unrealised foreign exchange gains or losses.

In order to come within these rules, calculations are required. Broadly speaking, you are exempt from these rules if:

  • Your income is NZ$100,000 or less and on every day in the income year (this includes the foreign exchange movements); and
  • The total absolute value of all your financial arrangements is NZ$1m or less.

If you don’t meet these criteria, you will be required to return tax on unrealised foreign exchange movements.

Separately, if you own a foreign residential rental property, you will probably need to pay tax on the rental income in both New Zealand and the country where the property is located. As a result, you must be able to calculate your New Zealand tax correctly to ensure you can claim any available credit for foreign tax paid.  If you have an overseas mortgage you may need to withhold tax on the interest you pay and pay this to Inland Revenue – you need to be wary of this.

What currencies should you be concerned about?

The exchange rates for the past year for four major currencies are shown below:


On the basis you hold the foreign denominated assets or liabilities for the whole year the following general tax positions could arise:


The above is a general indication but the exact result will depend on your balances throughout the year and then the year end revaluation. In a lot of cases taxpayers are caught out in the last month of the year.

Where to next?

In summary, these rules can be complex depending on your personal circumstances, and overlaying the tax department focus in this area, you should seek advice if you are unsure about your tax position. Penalties can apply if you fail to report these items.

If you would like to discuss the implications of your foreign currency borrowings or bank accounts, please contact Bellingham Wallace to find out what your obligations are.

Issue 124 October 2021