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 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.
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.
Shelley-ann Brinkley Associate – Tax Consulting
T +64 9 414 5444
T +64 9 414 5444