Country of ‘yes’ says ‘maybe’ to changing tax law putting tech talent off NZ

Saturday, 1 February 2025

New Zealand - or the country of “yes” as the Prime Minister’s speech writers might now have it - is increasingly faced with the conundrum of how to attract the best and brightest taxpayers in the world to its shores.

This week, Christopher Luxon and finance minister Nicola Willis put forward their latest gambit: a digital nomad visa, allowing people to work in New Zealand for offshore employers. They would not pay tax, but presumably spend on food, entertainment and travel, generating GST.

Some 50 countries around the world now offer this option to those who plough their trade online, but the general idea is that once someone’s visa runs out, off they pop. Residency is not the end goal.

The issue for New Zealand, however, is not that it is unable to attract short-termers. It’s that we struggle to attract entrepreneurs, investors and others that will stick around and not only pay tax but help grow the parts of the economy that are not primary sector exporting or tourism.

A few years ago, New York-based economist, NZIER’s Julie Fry, interviewed some 30 would-be investor-residents in New Zealand and uncovered one possible reason why they didn’t want to live here - a small but impactful part of the New Zealand tax code.

Our Foreign Investment Fund (FIF) rules tax immigrants on their “worldwide income”. Anyone who becomes a New Zealand tax resident, and who directly owns shares costing more than $50,000 in foreign companies, must make a payment each year to the tune of 5% of the value of the company or companies they are invested in, whether or not those companies are making any returns.

The idea of the tax when it was devised decades ago was to ensure foreign investments were taxed as much as domestic investments.But this was before living across different countries became commonplace. Now, there’s the risk of double taxation, where, say, New Zealand takes a cut on the paper value of assets and then the other countries also take capital gains on their realisation (sale).

Moreover, those that come are often invested in tech startups, many of which burn cash for years before turning a profit. And they are notoriously tricky to value properly.

It all leads to a potentially enormous tax bill. Fry found the issue impacted not just wealthy venture capitalists but also smaller investors.

“So these are not all wealthy people; they’re not even people who've left the country, sometimes,” she says. But were they anti-tax zealots?

No, says Fry. “The amount of people I interviewed who would say, completely without prompting, ‘I am happy to pay tax. I'd actually much rather pay it in New Zealand than to the US government’ was quite a lot.

“They wanted to support the New Zealand government building infrastructure. But sometimes, they just didn’t have the cash to pay the tax being asked of them.”

Far out

One who possibly can afford the tax bill is Silicon Valley veteran Rob Coneybeer, who spends half of his year in New Zealand. Like others, he leaves just before he’s spent 183 days in the country each year, to avoid being deemed a tax resident.

That is not to say he hasn’t contributed significantly to this country. Through his early stage venture capital firm Shasta Ventures, which has raised $US1.3 billion over two decades, he has latterly invested in Kiwi companies including Dawn Aerospace, Tracksuit, Vessev and Zenno among others.

He’s currently heading up his second 4x4 Far Out convey of entrepreneurs and investors from one end of New Zealand to the other, helping facilitate relationships between this country’s bright young things and people with capital, experience and connections. Coming along for the ride this year are the likes of Tony Fadell, the “father of the iPod”, Ralph Gilles, head designer for Stellantis, and Randy Reddig who, with Twitter founder Jack Dorsey, created payments platform Square (now Block).

“FIF tax is a major impediment for a lot of people; I just hear it over and over again, from investors, founders and others,” Coneybeer tells The Post, adding that many in Silicon Valley are keen to not just invest in New Zealand but work alongside promising Kiwi companies.

“A lot of people stay for as long as their transitional tax status lasts, but when that ends, they’re faced with the prospect of double taxation. And they’re like, ‘we can’t change it. We’re going to move on’.”

Coneybeer explains that a specific problem with the regime applies to local companies that “flip” to being US companies to secure US funding, but might still have staff in this country. FIF rules incentivises these companies to relocate out of New Zealand to avoid double taxing, something he calls “utterly insane”.

“My personal view is that [we should] allow people to voluntarily opt into a realisation based-tax … it could be set up so anybody subject to US and New Zealand tax could take a full credit against what they owe the IRS in the United States, and pay it into the New Zealand Treasury … it'd be a significant net revenue generator for New Zealand.

“You could both remove a roadblock, and create an incentive for people to pay taxes to New Zealand, because they want to stay here and they're happy to become tax residents because they're treated fairly.”

Changes afoot

Being able to choose to pay a realisation tax is, in fact, one of the proposals put forward in the Inland Revenue Department’s enticingly-named “Effect of the FIF rules on immigration” proposal paper, released just prior to Christmas.

The proposals were put out in response to NZIER economists Peter Wilson and Julie Fry’s report “A Place Where Talent Does Not Want To Live”, which kicked the conversation off about 18 months ago by collating views that painted New Zealand’s tax policy towards immigrants’ assets as unfriendly, even “hostile”, and turning off the kinds of people the country needed in droves.

Now alongside proposing migrants could opt to have some of their assets taxed on a realisation basis, another idea is to confine the current approach only to shares that are illiquid, or to segment out people by time they’ve spent in New Zealand or increasing the threshold at which the current rules kick in.

Fry and Wilson have noted “many of the proposals add additional complexity by making fine distinctions between different types of taxpayers (migrants versus returning expatriates), between different types of assets (illiquid shares versus other investments), and between source country tax rates”.

But the approach, they say, risks introducing unnecessary complications detracting from the objective of making New Zealand a more attractive place to live, they say. The pair’s preference is all assets acquired by first-time migrants and returning expatriates are not subject to any New Zealand tax at all, on the grounds that this country has no legitimate interest in taxing such income, and its a barrier to talented people emigrating.

Revenue Minister Simon Watts told The Post the Government would now begin to make decisions, and “we expect to have more to say on this in the near future”.

Ad hoc concession?

Peter Wilson, who was manager of international tax at Treasury from 1990-1997 and director of tax policy 1998-2002, took a lead role in designing the current FIF regime, even if several decades later he’s now been one of the main voices for change.

“It never occurred to us at the time that those rules might apply to venture capitalists who’d founded a tech startup in America and then wanted to move to New Zealand because it's a nice place,” he says.

Wilson is pleased the current government is considering changes, adding there was an urgency to the timing given many people who emigrated to New Zealand over Covid were about to lose their more favourable transitional tax status after four years, as per the rules.

The economist stresses changes to FIF would not be “ad hoc concessions” to those affected, but an acknowledgement of a changing world, in which countries like the US attracting the best talent from all over the world with favourable tax treatment (even if Elon Musk and Donald Trump are currently at loggerheads over one of those mechanisms, the H-1B visa).

“There’s a big industry there built on taking smart, trained people from the rest of the world and using them to make weird stuff - the stuff Sir Paul Callaghan thought New Zealand should be focusing on - and then leaving,” he says.

“I will not say that New Zealand can become the next Silicon Valley, because no one can say that for sure. But there is the potential, in a in a de-stabilised world, for New Zealand to look more attractive.

“Anecdotally, websites for migrating to Canada and Australia and New Zealand are getting a lot of hits … but they’re losing interest when they learn about FIF. And that is something that needs to change.”