Essentially the case centred on a taxpayer who had been in the New Zealand Army for circa 25 years. The nature of their job meant that he was working in both New Zealand and overseas. On completion of service the taxpayer travelled to a number of countries where he undertook security related contracts. This was over a period of three years and nine months. During this period he returned to New Zealand every five to six months and stayed in the country for an average of 42 days a year. While in the service of the New Zealand Army he married, had two children, bought several investment properties and eventually separated from his wife. Therefore the aforementioned return visits to New Zealand were primarily made to see his family.
Unfortunately, even though this taxpayer was under the days count test (rule 1 below) he was still deemed to be a New Zealand tax resident because of his continuing and enduring relationship with New Zealand i.e. he still had a permanent place of abode in New Zealand and therefore still qualified as a tax resident. The IRD went on to impose a tax shortfall penalty.
Thankfully, common sense appears to have prevailed and this thinking has been relaxed somewhat.
Determining your tax residency status
A quick recap, determining an individual’s tax residency status is based on two sets of long standing rules:
- If you reside in New Zealand for more than 183 days in any 12-month period, you are a New Zealand tax resident from the date of your arrival; or
- If you have an “enduring relationship” with New Zealand (referred to as the permanent place of abode test.) you are considered a New Zealand tax resident from the date it is determined that you have a permanent place of abode in New Zealand. Overlaying these rules are Double Tax Agreements between countries which adds a further layer of complexity.
The IRD’s view on what is a New Zealand tax resident
The latest discussions have centred on the second rule and the application of the place of abode test. It’s fair to say that the boundaries to-date have been unclear, inconsistent and have shifted with the winds over time. The key points recently released by the IRD are:
- In the first instance, to be classified as a New Zealand tax resident you will need to have a dwelling in New Zealand. What is a dwelling? A dwelling can either be a place in which someone has lived or will live in the future. The dwelling does not need to be vacant or able to be occupied immediately, so long as it can be used by a person. The definition therefore also encompasses any dwellings owned by a family trust.
- A person’s connections to the location in which the dwelling is situated is also relevant in determining New Zealand tax residency status.
Clear as mud? So what are the practical implications if you are a Kiwi living overseas and the IRD consider you to have an enduring relationship with New Zealand?
- Depending on the marginal tax rates of both countries you may have to pay additional tax;
- Shortfall penalties could apply (they did apply in the recent tax case);
- Use of money interest on late paid tax will apply; and
- Costs incurred in representing yourself.
Tax residency rules and employers
Finally, if you are an employer who has mobile employees, have you considered how you can remunerate your employees to reduce costs and remove the potential risk of double taxation? Given the cost structure of overseas projects, particularly in New Zealand’s engineering and construction sectors, this is an important point to consider.
If you spend at least a third of a year outside New Zealand, or if you are an employer with a high degree of mobile employees, then you should discuss your tax position with your tax advisor for peace of mind. At Bellingham Wallace we offer a range of services, including a Residency Check which reviews your tax position at a high level without you having to incur significant costs.