I have friends who, even after many years overseas, still proudly call themselves Kiwis. They still faithfully support our sports teams, are always up for a BBQ (even when London temperatures are at freezing point) and maintain a “sweet as” outlook on life. Our patriotic pride would appear to know no bounds; that is until it comes to completing their non-resident income tax return.
If you are deemed to be a New Zealand tax resident then you are taxed on your total worldwide income, including both income sourced in New Zealand and in all other countries. Those who are not deemed New Zealand tax residents only pay New Zealand tax on income originating from New Zealand, for example income gained from an investment or rental property. For a New Zealander living and working in a country which has a tax rate lower than New Zealand and no double tax agreement with New Zealand, their tax residency status can determine whether their overseas income is taxed twice.
The Tests for New Zealand tax residency
So how is a person’s tax residency decided? Two tests are applied, but to be deemed a New Zealand tax resident only one of these tests needs to be met.
The first test is the “183 day rule” i.e. if you are in New Zealand for more than 183 days in any 12 month period you are considered a New Zealand tax resident from the date of your arrival here. On the other hand, a person must be absent from New Zealand for at least 325 days in any 12-month period to cease New Zealand residency, with non-residence commencing from the first day of absence.
The second test is to establish whether the taxpayer has an ‘enduring relationship’ with New Zealand. The enduring relationship test is an assessment of whether the person has a ‘permanent place of abode’ in New Zealand and it considers:
- Social ties and links to New Zealand e.g. family, clubs, associations, etc.
- Physical links and ties to New Zealand e.g. personal property ownership
- Economic links and ties to New Zealand e.g. bank accounts, credit cards, investments, business ventures, employment agreements, insurances, superannuation, etc.
- Personal ties and links with New Zealand.
The IRD’s draft interpretation statement provides a significant departure from how the tax residency position of individuals has been assessed in the past. Moving forward we could see greater emphasis placed on the ‘availability’ of a dwelling in New Zealand i.e. wider application of the permanent place of abode test. In short, more people living and working overseas could find themselves classed as New Zealand tax residents by virtue of the fact they have links or ties to rental properties (regardless of whether or not they are tenanted), holiday homes and the homes of close relatives in New Zealand. This will result in people losing a greater portion of their income to taxes as they discover they are dual resident.
Tax Residency Status Example
A good example given by the IRD describes a situation where a taxpayer leaves New Zealand with their family for a three-year secondment to Canada, during which time the family home in New Zealand is rented out. The IRD’s view in this instance: the taxpayer has retained a permanent place of abode in New Zealand, and therefore New Zealand tax residency, as there is still an ‘available dwelling’ despite the fact that it is tenanted.
Many have questioned the fairness of introducing a change that could result in some people having their income taxed twice. There is also some uncertainty around how the legislation is to be interpreted, especially considering the minimal amount of historic case law that currently exists to support the interpretation of the permanent place of abode test.
New Zealand Tax Residency Advice
It will be interesting to see how the IRD responds to the criticisms raised. In the meantime, we would suggest that any New Zealanders looking to venture overseas review their tax position at the onset to ensure they don’t get any unwelcome surprises in the form of tax bills or penalties at the end of the year. The IRDs online New Zealand tax residence questionnaire (IR886) is one way to evaluate your position, alternatively you can give us a call here at Bellingham Wallace to discuss your situation and future plans.