US-based Kiwi businessman Sam Blackman says he knows of dozens of Kiwis like him who are trapped overseas because of the Foreign Investment Fund (FIF) tax rules.
Sir Paul Callaghan famously talked of making New Zealand the place where talent wants to live.
More than a decade after he called for a national transformation driven by science, technology and evidence-based decision-making, his words continue to influence government and industry thinking. They inspired talented people from around the world, including returning overseas Kiwi entrepreneurs, to consider settling here and establishing forward-looking businesses.
Unfortunately, a major barrier stands between New Zealand and that potential influx of fresh and returning talent: we have an outdated and unusual international tax regime that contradicts our immigration strategy.
The most pressing tax issue is the Foreign Investment Fund (FIF) tax regime. The FIF rules were established almost 40 years ago to stop wealthy taxpayers moving assets to overseas tax havens out of the reach of Inland Revenue. When the rules were drawn up, nobody anticipated a world where talented Kiwis working for US start-ups would be paid with equity that they could not quickly turn into cash.
The FIF rules assume anyone who has overseas assets is earning an income from them. The assets are taxed as if the investment pays a 5% dividend. With the top rate of personal income tax sitting at 39%, the assumed 5% dividend amounts to a wealth tax of 2%t. This applies even when the assets are unrealised.
An overwhelming majority of tech specialists and entrepreneurs affected by these rules have worked for US-based businesses at some point in their career.
That’s where there is a second tax issue: our double tax agreement with the United States does not offset FIF against US capital gains, and that means people end up being taxed twice.
If a Kiwi entrepreneur holds equity in a foreign company, that is taxable. It also applies to tech sector workers employed by overseas start-ups where stock options form part of the pay package.
FIF rules kick in four years after the taxpayer moves to or returns to New Zealand. In practice, this means there is an exodus of talent leaving the country just before the transitional period ends.
US-based Kiwi Sam Blackman says he knows of dozens of Kiwis like him who are trapped overseas because of these rules: “There are Kiwis who genuinely want to come home. I want to come home and give back to the tech ecosystem in New Zealand. It’s not about not paying tax, I’m happy to pay tax on my gains, it’s about the barriers to entry.”
Among other business ventures, Blackman is the co-founder of Nuvocargo, which uses digital technology to smooth trade between the US and Mexico. He is studying at Harvard and lives in the Boston area.
“I’m bullish about New Zealand as an entrepreneurial ecosystem. It’s got all the right building blocks,” he says. “It’s easy to do business in New Zealand. We’ve got entrepreneurial creative people.
“I want to do business in New Zealand and I want to bring people with me. I’ve built a network over the past 10 years working with brilliant people in companies and start-ups who would be interested in coming. They are mainly Americans, but there are others from Morocco, from Mexico and elsewhere. But they’re in the same position as me: they have stock options in companies they worked for that haven’t yet been acquired or IPO-ed. I can’t in good faith ask them to join me in New Zealand and build businesses.”
Amber Taylor came to New Zealand two years ago as the chief digital product manager for Les Mills after a 20-year career in the US that included spells with Nike and Amazon. She represents the kind of talent Paul Callaghan had in mind. Taylor wants to live here, but an FIF cloud hanging over her means her long-term future in New Zealand is uncertain.
Two things attracted Taylor to New Zealand. First, there is the challenge of her job at Les Mills. She says: “The company is incredible. I think that they’re changing the industry. I wanted to work in a smaller company in a space where I could drive growth.” Her second motivation for moving was to give her teenage family an opportunity to live abroad, an adventure. She says from both these points of view, coming here was a great decision and has worked out well.
Taylor’s initial plans were to live here for 12-18 months and potentially take a role as the business expands its US operations. She’d like to stay longer because she says it is hard to pull away from her role on the company executive team. However, the FIF rules could change that.
“I always knew there would be some tax implications when I came to New Zealand, so I hired tax attorneys both here and in the US. Neither of them told me about the FIF tax because it doesn’t kick in until after four years and I wasn’t looking at that when I accepted the role.”
As a US citizen, Taylor pays taxes in New Zealand and the US, but in general taxes paid in one country are offset in the other. This doesn’t apply to FIF. She says: “The FIF tax is different because it taxes something that wouldn’t otherwise normally be taxed. It becomes a tax that I must pay in addition; it has the potential to really hurt me because it affects my long-term savings. Some of those stocks are my retirement fund.” She says the whole point of these shares is that they don’t need to be cashed for a long time.
For Taylor, FIF creates a climate of fear and uncertainty. She says she enjoys her job; she has a positive impact and is meeting great people. Her sons are thriving, healthy and safe.
But staying in New Zealand could hurt her family in the long term.
Investor Rob Coneybeer says the FIF rules amount to a form of double taxation. Coneybeer, a US venture capitalist, has several investments in New Zealand including Auckland-based start-up Auror, which helps retailers deal with crime. He is also co-founder of Silicon Valley-based Shasta Venture, and splits his time between the US West Coast and New Zealand. He says he could spend more time here if it weren’t for the FIF rules.
“FIF ends up taxing exactly the type of risk that the New Zealand economy needs to encourage. These are the risks entrepreneurs should be taking because they don’t know if something is going to work out or not. It’s paper wealth.
“You can’t eat it. You can’t spend it, yet you get taxed on it.”
He says people considering moving to New Zealand from the US, whether they are returning Kiwis or first-time migrants, look at FIFs and decide they simply cannot afford it. “It’s not like they are looking for tax breaks. They are just looking to being treated fairly. I see it as the No 1 reason holding back recruited talent.”
“Three years ago, I led Shasta’s investment in LawVu, a Tauranga-based legal-tech start-up.
“It was the first time I sat up and paid attention to what was going on in the Kiwi tech ecosystem. Since then, through Shasta, we’ve made another seven investments in New Zealand. During that I’ve talked to people who tell me FIF creates issues not just with recruiting Americans, or people staying for more than four years past a transitional period, but for returning Kiwi expats. And don’t forget, the most successful Kiwi companies tend to do a US incorporation.
“Firms like Halter and Rocket Lab do a US incorporation to unlock more capital to build their New Zealand businesses, and then they get hit with this tax as well. This tax has the pernicious effect of what I’d call negative selection bias: it punishes exactly the entrepreneurs and people you want.
“If you’re a Kiwi entrepreneur and you’re subject to this tax, are you going to want to start your next company in New Zealand or in Silicon Valley? Over time, people just opt out.”
Rosalie Nelson is the CEO of the Hillary Institute and the Edmund Hillary Fellowship, which was set up in 2016 as a pilot programme with Immigration New Zealand to find new ways to attract talent to the country.
She says: “A big part of the focus is attracting innovation talent.
“There was a recognition that this country needs experienced serial entrepreneurs who have connections into global ecosystems. It also attracted innovation investors who tend to be mid-career. They will have money tied up within a venture capital fund and bring an understanding of the risk for investing in early-stage businesses. That is something someone who might have personal high liquidity won’t necessarily have.”
Which means FIF is a live issue with the fellows. There are just over 400 international fellows, they come from 47 countries, and many come from the US or have worked there. Nelson says she hears anecdotally that FIF is stopping some of them from moving here and causing problems for some who are here.
