A fairer approach to taxing foreign-currency financial arrangements

By Stephen Walker

While recent reforms to New Zealand’s tax rules for migrants have focused on the Foreign Investment Fund rules relating to overseas shares, the Financial Arrangements rules can create even greater tax exposures and disincentives for people considering a permanent move to New Zealand.

Recent and prospective migrants, and other taxpayers, should therefore welcome the significant changes proposed in the Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill (the Bill).

Why change?

New Zealand’s Financial Arrangements rules apply to a wide range of arrangements, including bank accounts, bonds, term deposits and loans. Income and expenditure in relation to these arrangements are generally calculated in New Zealand dollars, even where an arrangement is denominated in another currency.

For example, a New Zealand tax resident holding USD in a US bank account may have taxable income solely because the USD strengthened against the NZD during the income year, even if the account earned no interest and there were no transactions.

This often surprises migrants when their four-year transitional residence exemption expires. Many have no intention of converting their funds into NZD, yet they face unpredictable tax liabilities from exchange-rate movements that are outside their control and may never be economically realised. For some, this has been a factor in deciding to leave New Zealand or not to relocate here.

What is changing?

The Bill proposes several measures intended to reduce compliance costs and uncertainty for taxpayers with foreign-currency financial arrangements:

1. A functional foreign currency election
2. Quarantined foreign financial arrangements, particularly to improve alignment with US tax treatment
3. Removal of the revaluation requirement for arrangements acquired to satisfy visa eligibility requirements
4. Expansion of the list of arrangements that are exempt from the Financial Arrangements rules.

Functional foreign currency election

Under these proposals, individuals, family-run companies and family trusts would be able to calculate income from foreign-currency financial arrangements in a currency other than NZD.

An eligible taxpayer could elect either:

• A single nominated functional currency for all non-NZD financial arrangements, or
• The currency in which each individual arrangement is denominated.

For example, an individual holding mainly USD cash accounts could elect to apply USD to all non-NZD arrangements. Alternatively, they could calculate each arrangement in its own denomination.

For most individuals with foreign-currency bank accounts or loans, the broad economic effect would be that movements between the elected currency and NZD are ignored. Instead, foreign-currency interest income and expenditure would be calculated in the relevant currency and converted into NZD using an appropriate exchange rate.

The same broad approach would…