Is NZ really open for business? The taxing problem repelling global talent

Sunday, 15 September 2024

In case you missed it - this story was first published in the Sunday Star-Times.

Tax rules and regulations set up decades ago to prevent the exit of cash to tax havens, are now hamstringing New Zealand’s long-held desire to attract the best and brightest minds here to live.

Kiwis and foreigners alike are shunning New Zealand, choosing not to be taxed twice - here and overseas under the country’s Foreign Investment Fund (FIF) rules, which experts say are working against the country’s ambition to be a South Pacific version of Silicon Valley.

“Talented people do want to come to NZ, but are being put off by the FIF regime,” says Julie Fry from the NZ Institute of Economic Research (NZIER), who with Peter Wilson in July released the bleakly-titled report: ‘The place where talent does not want to live’.

Once someone spends 183 days in New Zealand within a 12-month period, or they have a residence here, they are treated as a New Zealand taxpayer, and taxed on their worldwide income.

Designed to combat tax dodges, the FIF is now catching those who have invested in tech start-ups overseas, or immigrants who have start-up investments - common in the modern internet-based world, but not when the FIF was set up.

Those investments can be essentially without value - shares in a start-up that is yet to produce - but they attract tax.

FIF rules deem New Zealand residents with offshore investments to have derived dividends, so they are paying tax on investments, not gains. Migrants are taxed on investments they made before coming here.

The rules impose tax on the paper value of those investments, even if they are still in start-up phase and not making any income.

Many start-ups fail, so FIF is causing financial stress for those getting no income but being taxed on their assets. Some are either fleeing Aotearoa, or choosing not to return.

Seattle-based venture capitalist Rob Coneybeer - who spends months each year in New Zealand - labels the tax “pretty pernicious”.

“If you want to have the best and the brightest Kiwis in the tech industry come back to New Zealand, or have immigrants come that have really, really, great company-building expertise, they can't stay because of this tax.”

And so, New Zealand is losing economic ground in the race to attract tech brains, with the US, UK, Canada and Australia all more attractive financially, if not in terms of lifestyle.

It’s the antithesis to what was envisaged by Sir Paul Callaghan in 2011 when he issued “a challenge to a new generation to lead New Zealand’s transformation through the use of science, technology and an evidence base for decision-making”.

The issue is vexing minds such as that of Auckland Business Chamber chief executive Simon Bridges, as the loss is both economic and in the ability of Kiwis to learn from those involved with overseas tech start-ups.

Bridges has raised it with Prime Minister Christopher Luxon.

“This is really technical, but the chamber supported the report because we agree there is a compelling case for change. I’ve mentioned it to PM Luxon and he certainly understood the issues and had empathy for them.”

The report was commissioned by the chamber, the American Chamber of Commerce in New Zealand, the Edmund Hillary Fellowship and the NZUS Council, which is focused on advancing New Zealand’s interests in the bilateral relationship.

Speaking from Brooklyn, New York, Fry herself has her 183-day diary alerts as she hops between a home there and a family farm in Riwaka, near Motueka. She is co-owner of a bookshop in Auckland too.

Many of the people she interviewed for the report told her they also keep careful track of their days in New Zealand, to avoid the tax trap.

Coneybeer, the co-founder of Shasta Ventures, loves New Zealand and visits several times a year, and sees it benefiting from the tech regulation, in the way other industries needing physical export do not.

“New Zealand has a competitive advantage because it's a place that people want to live, and focusing on bringing in people that can help build the technology industry,” he says.

“You can have productivity enhancements with technology that raise GDP per capita more quickly. It means that the country can afford more stuff; you can't get there with tourism, you can't get there with timber, you can't get there with agriculture, it's just not value-added enough.

“What's really great about the tech world is that you can build big, valuable companies quickly and employ a lot of people, and you can get a lot of leverage and productivity enhancement, and that's a magical thing.

“If you put one American or returning Kiwi expat side-by-side with five smart Canterbury, Auckland, Victoria grads, you end up having an acceleration of knowledge for the Kiwis, so this spillover effect is incredibly important.”

Fry and co-author Wilson see a simple solution - realisation, in effect paying tax on gains only when they are realised. Both feel it should require a simple amendment to the tax laws, rather than a prolonged rewrite.

“On the face of it, this looks like something that might only affect very wealthy people, and it really isn't,” she says.

“Many I spoke to are earning very modest salaries. They are caught up in it because of who they work for, or how they came here, or where they're from. They often don't have the money to get sophisticated tax advice.

“It impacts a relatively small number of people, but they're the kind of people we have invited to come and stay – or to return home.”

People moving to or moving back to New Zealand get four years of transitional tax residence, before the FIF rules bite. Many of those who made quick-fire decisions to relocate in 2020 and 2021 are now facing tax bills.

“There are people who are going ‘I had no clue. I thought I was just coming somewhere safe in the middle of Covid’,” Fry says.

“There are people who have packed their bags and gone back home to avoid it. There are a bunch of Kiwis who are passionately committed, who left New Zealand to come to the US to learn how to do this kind of start-up, entrepreneurial business model stuff who are now, like ‘I can’t afford to stay’.”

Some are contracted to stay with a US start-up, so they can’t leave.

“It's very rare for just one particular thing to drive anybody's decision, it's a package deal, and you could be sitting there going ‘well, I wish I wasn't being taxed more’, but what we're saying is that we were finding people who just couldn't pay the bill.”

“When we talk about making New Zealand a place where talent wants to live, it's not only about attracting migrants, it's about attracting and retaining people, both the ones we already have, and the ones that want to come here,” she says.

“Our young people will always move away, whether it's for opportunities with their career, to see the world or because they're following someone they fell in love with.

Many of those people are thinking, ‘we’re going for two years’ or ‘as soon as our kids get to this age, we'll be back because we want them to go to school in New Zealand’.

“We don’t want to make it harder for people to come back.”

The reasons for moving countries are varied, with economic opportunity, OE, romance and family among them. Here are three global wanderers.

Brad Weber, former All Black now living in France

Weber is contracted for three years to Stade Français in Paris. He has played for New Zealand, Māori All Blacks, South Island and the Chiefs.

BRAD WRITES: New Zealand pluses are its smaller population, scenery, outdoor activities, and entertaining is a lot cheaper. I say entertaining because comparatively our groceries are very expensive so the New Zealand cost of living is quite high.

Living in Paris (one of the most expensive cities in the world) I realise how cheap entertaining yourself and loved ones is back in NZ. I pay upward of 5 Euro for a coffee here ($NZ9) and often at least 50 Euro for just myself to eat at a pretty standard restaurant ($NZ90).

Minuses are being so far away. Flights aren't cheap. I wouldn't say I take a deep look into politics, so that wouldn't keep me from coming home.

A lot can happen in three years, but I probably won’t remain overseas, I'd like to come home and set up life. There's no place like home, and New Zealand is the best place in the world.

Whilst we are a very small fish in a very large pond in terms of global economies, I'm very proud to be Kiwi and I still think it is held in very high regard around the world with most people.

You're not going to please everyone but pretty much every person I've interacted with here has nothing but good things to say about NZ and Kiwis in general.

Hayden Taylor, Kiwi sales professional living in London

HAYDEN WRITES: I never planned to move to the UK; it only occurred to me after dating my companion for nine months. She mentioned fairly early she planned to move to London, and asked if I wanted to come.

Before that, I had openly mocked the idea to friends as the UK economy is in disarray, the standard of living is plummeting, and London is an all-consuming rat race. But it didn't take us long to find jobs or a flat.

While my software engineer companion was in high demand, I took the first job offer that came my way. It wasn’t career advancement; merely a means to ensure my continued existence.

Here, I've come to understand many things Kiwis consider unique to us are actually quite universal - ideals of being a very hospitable and ‘down to earth’ people, a particular ‘number 8 wire’ sense of ingenuity, and loving a pint.

All true, but not unique to Aotearoa. Once you leave London, you see how similar the smaller towns and villages are to our own. You order a coffee and share casual banter with the person at the counter. You walk down the street and people acknowledge you. In London, you do not get this at all.

London is busy, with short-tempered people, the streets are a bit dirty, and while it smells like urine and weed at almost every corner, it also has its charms. The parks in summer are beautiful and bustling, the pubs in winter are packed every night.

Yet, what I love about London and the UK is akin to what I love about Aotearoa. It's the concrete manifestation of the abstract idea we call Civil Society, where individuals, going about their everyday lives, collectively build and shape the world around them.

What is positive about Aotearoa? Despite our colonial past, we have a greater sense of shared identity than many European countries. We hold on to traditions and cultural practices that define us, even as the political class fails us.

As for our global standing? I don’t think we are considered anything other than a country with good weather, friendly people, a unique cultural identity, and unparalleled geography and geology. Let's keep it that way.

I will return to Aotearoa, and it will be with a renewed sense of love and admiration for my homeland, with a determination to uphold values and ideals that make Aotearoa great.

Home is where the heart is, whether it's eating fish and chips at Lyall Bay, relaxing at Rogue & Vagabond with a good book and a pint, Newtown Festival, or hiking up Mount Vic, gazing in awe at the coastline and mountain ranges.

Home is Tara’s harbour.

Rob Coneybeer, American venture capitalist who often visits NZ

About three years ago, I started to spend a lot of time in New Zealand out of personal interest. I have invested in nine companies there, including eight through Shasta Ventures, all tech start-ups.

I go back and forth a lot, I've been in New Zealand three times over the last four months. I'm in a relationship with a woman who lives in Mount Maunganui, so I have a lot of reasons to visit.

I stay with friends, I have two cars there, and I rent. I don't really care about property. I have property in the US, I don’t need any more property. I just like spending time in New Zealand, it’s amazing.

Even after I'm only gone for a month or two, and come back to the US. I'm always overwhelmed with just the scale and choice and everything in the US, and when I go back to New Zealand, there are just so many great things about the country.

The biggest thing is people there developing a willingness to say ‘yes, we are the best in the world’, that Kiwi humility, it's a blessing and a curse, right?

New Zealand does it with their rugby team, right? So why can't the country do it with so many other things, that's the conundrum I work through.

If you want to raise money from US venture capitalists and US sources, they have to believe you're the best in the world. If you are the best in the world, you need to say, I'm the best in the world.

Then I come to this tax issue, and I'm so passionate … this tax issue keeps out the best and the brightest, the most successful from returning.

You could look at it and say, well, the tax doesn't apply to like 95% of returning Kiwis. It happens to just hit, across the forehead in an unfair way, the people that have been the most successful.

The whole thing makes me crazy. I don't think it raises a lot of money for the Treasury either.

What do you think? Email sundayletters@stuff.co.nz. Please include your full name and address.