The changing face of tax residence

Determining whether you are a New Zealand tax resident is very important. Generally, New Zealand tax residents are taxed on their worldwide income.

The wine industry is very international and, as such, has many workers entering New Zealand to work and live, and many New Zealand workers who go overseas to work within the industry. What are the key tax issues to consider when moving country?

This includes exposure to a number of comprehensive regimes that pull in income earned from associated offshore entities.

Those provisions include the controlled foreign company and foreign investment fund rules, accruals rules, and foreign trust rules. Non-residents are generally only taxed on income that has a New Zealand source.

If you are living and working in New Zealand and deemed to be a New Zealand tax resident, you may have additional income to declare in New Zealand if you have offshore investments or companies overseas that you control.

The meaning of New Zealand tax residency therefore becomes very important. Reference must be made to both New Zealand’s domestic tax rules as well as any applicable double tax agreements. The latter provide tie-breaker tests in the event that a person is tax resident in more than one country at the same time under the local rules of each.

Two main tests

The New Zealand rules have two main tests. The first is a relatively objective ‘day count test’. Once you have been physically present in New Zealand for 183 days in a 12-month period, you’re a tax resident. To escape that status, you need to be physically outside New Zealand for 325 days in a 12-month period.

The second, more subjective, test is the ‘permanent place of abode’ test. Regardless of the outcome of the day count test, you will be a New Zealand tax resident if you have a permanent place of abode here. There is no definition of that term in the Income Tax Act, so reliance has to be placed on court decisions and Inland Revenue guidelines.

Very broadly, the concept of a permanent place of abode can be thought of as like “a place to call home”. It’s the centre of a person’s domestic life, so things like the availability of a home, the location of family, and social and economic connections all come into play. Inland Revenue uses the phrase “an enduring relationship with New Zealand” to describe the concept.

Enduring relationship with New Zealand

Late last year, the Diamond Case helped clarify what a “permanent place of abode” is and concluded that it is a permanent home i.e. a house that you have lived in, not merely an investment property that is available for your use.

What are the implications of the above? New Zealanders often get opportunities to work overseas for extended periods. Unless New Zealand tax residency is lost, the foreign income will still be taxable in New Zealand.

An example given in the Inland Revenue guideline describes a situation where a taxpayer leaves New Zealand with her family for a three-year secondment to Canada, during which time the family home in New Zealand is rented out.

Inland Revenue’s view is that the taxpayer retains a permanent place of abode in New Zealand, and therefore New Zealand tax residency, as there is still an “available dwelling” notwithstanding the fact that it has been rented out.

Practically this means that this person needs to declare not only the New Zealand sourced income into her New Zealand tax return (i.e. the rent on the family home), but also any income earned while overseas i.e. wages and salary earned in Canada. Credits for foreign tax paid may well be used to offset foreign income, however if you are working in a low tax jurisdiction such as the Middle-East this most likely would not cover your New Zealand tax obligations.

If you are considering moving overseas or have newly arrived in New Zealand, you should discuss your tax residence status with your accountant or advisor to ensure compliance with New Zealand tax law.