While the actual tax legislation has not changed, the Inland Revenue has changed its interpretation of the wording in the legislation.
Emphasis is now placed on whether or not a person has a dwelling
available to them in New Zealand. If they do, then this will more
than likely satisfy the 'permanent place of abode' test.
This represents a significant shift from the historical position
and as a result has widened the net of who is a 'tax resident'.
Tax residency determines whether an individual will be taxed
only on their New Zealand sourced income or on their worldwide
income.
An individual is treated as New Zealand tax resident if:
- They have a permanent place of abode in New Zealand; or
- They are present in New Zealand for more than 183 days in total
in a 12 month period (the individual is treated as being resident
from day 1).
A person will generally lose their New Zealand tax residency if
they are outside New Zealand for more than 325 days in any 12 month
period and cease to have a permanent place
of abode.
Historically, whether a person had a permanent place of abode or
not could be quite ambiguous. There were a number of factors
that needed to be considered (such as family and financial
connections, location of personal possessions, memberships etc)
with little guidance on how many, or which factors gave rise to an
individual having a permanent place of abode.
New interpretation
The Inland Revenue's view now is that you only need to consider
permanent place of abode if the individual has a dwelling in New
Zealand. If the individual does have a dwelling in New
Zealand you still need to consider other factors to determine
whether a permanent place of abode exists.
The dwelling does not need to be readily or exclusively
available to the individual at all times and therefore an available
dwelling can include a New Zealand property which has been rented
out, it could be the home of a parent, friend or relative and it
could even be a property held in a Trust. The Inland
Revenue's view is that a dwelling is a place with which the person
has an enduring or significant connection, and from which they
could continue their normal daily life. Ultimately this will
be a question of fact.
For those individuals who don't have a dwelling in New Zealand
there can be no permanent place of abode, regardless of whether
other factors are present. This has provided advisors and
taxpayers with greater clarity on the residency rules.
Who does this impact?
This new interpretation of permanent place of abode will impact
individuals who have left New Zealand and have retained a property
that is rented to tenants. It may result in the individual,
unintentionally, retaining a permanent place of abode in New
Zealand and therefore remaining a New Zealand tax resident (and
ultimately being taxed in New Zealand on their world-wide
income).
The Inland Revenue's interpretation of the permanent place of
abode test is not well supported by case law. Historically most
residency cases have considered the availability of a dwelling as
only one of number of factors requiring consideration.
The Commissioner's interpretation of what constitutes an
available dwelling is problematic. Fixed-term tenancies are
considered to be unavailable while periodic tenancies are
considered to be available. Assuming a regular arm's length
periodic tenancy agreement it is difficult to understand or accept
how the dwelling remains available to the owner.
Overall it appears that the Commissioner's interpretation is
strained and at odds with flavour of the commentary contained in
the latest Organisation for Economic Co-operation and Development
(OECD) Model Tax Convention and is a change from the approach
previously adopted by the Inland Revenue.
Historically the Inland Revenue has followed the OECD's
commentary, in that once a person has been out of a country for at
least 3 years; then they were considered non-tax residents of that
country. This approach will no longer be followed. If
an individual has a dwelling in New Zealand which they have a
significant and enduring connection to, then they are likely to
have a permanent place of abode.
On a practical note, the issue is more problematic for
individuals receiving income from a low-tax or no-tax
jurisdiction. Generally a foreign tax credit could be claimed
in the individual's New Zealand tax return in respect of foreign
tax already paid (thus avoiding double taxation). This
foreign tax credit would be minimal or nil if the income was
sourced from a low-tax or no-tax jurisdiction, therefore the
widening of the tax residency net is more an issue for these
individuals.
Individuals who have already paid tax overseas at New Zealand
equivalent tax rates, and are caught by the new interpretation of
permanent place of abode will simply have a compliance obligation
in New Zealand to file a tax return; no further new Zealand tax
should be payable.
Individuals living outside New Zealand but who have a property
in New Zealand should ensure they seek sound New Zealand tax advice
to ensure their compliance obligations are being met.
For more information, contact the Hayes Knight Knowledge Shop
tax team direct:
Phil Barlow
Tax Director
T + 64 9 414 5444
E phil.barlow@hayesknight.co.nz
Shelley-ann Brinkley
Associate - Tax Consulting
T +64 9 414 5444
E shelley-ann.brinkley@hayesknight.co.nz