Inland Revenue released a draft interpretation statement in December 2012 outlining how they propose to apply the residence tests.
The most notable change is the emphasis placed on whether or not a person has a dwelling available to them in New Zealand. It seems to be that if a person has a dwelling available to them in New Zealand, then this will satisfy the permanent place of abode test.
If the statement is finalised in the current form this represents a significant shift from the historical position and in our view is a cause for concern.
Residence of individuals- background
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 will be treated as being resident from the first of those 183 days.
A person will generally lose their NZ tax residency if they are outside NZ for more than 325 days in any 12 month period and cease to have a permanent place of abode. The permanent place of abode test takes precedence over the day count test.
The view taken in the statement is that an individual will satisfy the permanent place of abode test if he or she has an available dwelling in New Zealand.
An available dwelling could include a New Zealand property which has been rented out, or the home of a parent, friend or relative. It does not need to be readily or exclusively available to the individual at all times. However, the dwelling is a place with which the person has a connection and from which they could continue their normal daily life. Ultimately this may be a question of fact.
A person who does not have an available dwelling in New Zealand will not satisfy the test.
This change is likely to impact individuals who have left New Zealand and have retained a property that is leased to tenants. It may result in them, unintentionally, retaining a permanent place of abode in New Zealand and therefore remaining a New Zealand tax resident.
This proposed application 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 criteria 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.
Implications of changes
If the statement is finalised in its current form many more people may be considered to be New Zealand tax resident than is currently the case. This will result in increased compliance costs where employees or individuals discover they are dual resident.
If you have any questions or for more information, please contact our Tax Team:
Phil Barlow Tax Director T + 64 9 414 5444
Shelley-ann Brinkley Senior Tax Manager
T +64 9 414 5444