New Zealand FIF Rules to be Reviewed

On Tuesday night Revenue Minister Simon Watts announced the latest update to New Zealand Inland Revenue's Tax and Social Policy Work Programme. The Work Programme details a number of important changes to the tax system which are already under review or are set to be legislated in early 2025 when the Taxation (Annual Rate for 2024-25, Emergency Response, and Remedial Measures) Bill is enacted. It also contains some new and very welcome reviews of New Zealand's tax settings. Of key importance to many of our clients is the announced review of the Foreign Investment Fund (FIF) rules.

We have been vocal in our support for a fundamental reform or the entire abolition of the FIF rules for many years. This is because we believe they are a significant inhibitor to globally mobile capital and talent (whether new migrants or returning expats) coming to New Zealand. The rules are complex, time consuming and expensive to comply with. They can result in the double taxation of migrants who become subject to the FIF rules, while also remaining subject to taxation on their investments in their former country of residence.

While new migrants can benefit from a four-year exemption from the FIF rules upon becoming a tax resident in New Zealand, our firm has advised many high impact investor migrants back out of New Zealand before their four-year exemption period ends, solely to avoid the imposition of the FIF regime on the multi-national businesses they have founded. We have also advised many potential migrants who decided to abandon their application for New Zealand residency upon becoming aware of how the FIF rules would apply to their assets. The same is true for returning expats, whose desire to return to New Zealand becomes compromised because of the FIF rules.

The issue new migrants have with the FIF rules is that they tax unrealised and non-existent gains. As far as we are aware New Zealand is the only country with rules as draconian as the FIF rules, which seem disproportionately harsh for a country that does not, for example, tax capital gains. In a world where people and capital are more mobile than ever, and other countries "roll out the red carpet" to attract new migrants, the FIF rules put us at a significant disadvantage in attracting the sort of people who could add significant expertise and capital to our domestic economy.

We therefore welcome the announcement that the FIF rules are to be reviewed and urge the Government to proceed with this review as quickly as possible. Given the on-going uncertain global political environment, New Zealand's perceived status as a "safe haven" from potential global conflicts is something we should be looking to capitalise on now. In order to do that we need to ensure our tax system is not acting as a disincentive to people we would gladly welcome to New Zealand as their new home.