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Tax Residency – what's my status?
A recent TRA case (10/2013 (2013) NZTRA 10) has once again highlighted the issues surrounding tax residency, how subjective the rules are and the costs of getting it wrong.
The case surrounded a taxpayer who had been in the NZ Army for over 25 years, working in both NZ and overseas. After leaving the Army he went overseas and undertook security related contracts in various hotspots around the world.
During a three year, nine month period, he returned to NZ every five or six months, and stayed for 42 days on average during this period. While in the Army he had married, had two children and then separated from his wife, although he continued to have a business type relationship with her, owning several investment properties together. His return visits to NZ were predominantly to spend time with his family.
The IRD investigated and deemed that even though under the days count tests the taxpayer was not a NZ tax resident, his continuing enduring relationship with NZ during his absences was sufficient to say that he still had a permanent place of abode (PPA) in NZ and therefore still qualified as a resident. The IRD also claimed that the filing position taking by the taxpayer was not as likely as not to have been correct and therefore a tax shortfall penalty should be imposed.
The TRA agreed with the Commissioner stating:
- the taxpayer continued to have a strong and enduring relationship with NZ in the relevant tax years having an available dwelling to return to and maintaining close family and financial ties.
- while the length of time the taxpayer spent outside of NZ during the period favoured his position that he did intend to leave NZ permanently at the time of his first absence, more weight was however given to his continuing relationship with his children (including his financial support) and his ex-wife in finding that he still had a NZ PPA.
Further the TRA agreed that the taxpayer was liable for a shortfall penalty in each of the tax years in question for taking an unacceptable tax position.
For individual taxpayers, NZ tax residency is determined via the application of three key tests:
- Have you been physically present in NZ for more than 183 days in any consecutive twelve month period (note the count is not limited to specific income years)? If yes then likely you have obtained NZ tax residency status.
- Once a NZ tax resident, have you then been physically absent from NZ for more than 325 days in any consecutive twelve month period? If yes, then you may no longer be a NZ tax resident although consideration must be given to the final test.
- Do you have a PPA in NZ? It should be noted that a PPA is not limited to just having a home available to you in NZ. Instead consideration must be given to your overall connection/enduring relationship with NZ. If the answer is yes, at the time you are first deemed to have a PPA in NZ, until the time at which you are no longer deemed to have one, you will qualify as a NZ tax resident, regardless of the answers to either of the two previous questions.
It is this last test that creates the issues for most taxpayers attempting to determine their NZ tax residency status. Firstly because the PPA test always overrides the days count tests and secondly because unlike the days count tests, whether or not you have a PPA is often left to subjective interpretation simply because there is no black and white answer. Each case must be considered purely on its own merits, although publicised commentary on previous judgements issued by the courts can be useful in assisting to make a decision.
To understand the importance of the issue, your NZ tax residency status determines which of your worldwide income sources the NZ Inland Revenue Department can tax. Equally it can also provide a level of protection from other jurisdictions looking to tax your worldwide income, where the NZ government and the government of the applicable jurisdiction have negotiated a double tax treaty agreement (DTA). It should be noted here that the taxpayer in the above case spent a lot of his time in Iraq, and as NZ does not have a DTA with Iraq, he was unable to rely on such an agreement to protect him from the NZ IRD.
Finally, tax residency status for a non resident can determine when your transitional tax residency status commences. Under the transitional tax residency rules, non residents coming to NZ have a four year period where the only overseas income subject to NZ income tax during that period is foreign employment income and foreign personal services income. Essentially the four year period provides a reasonable length of time for the non resident to organise their overseas investments and the like prior to becoming a NZ tax resident, then subject to NZ taxation on their worldwide income.
At Gilligan Sheppard we can review your tax residency status for you, provide an opinion in this regard and then advise you of your NZ income tax obligations as applicable. The issue applies not only to people looking to come to NZ for a period of time, but equally to those looking to go overseas, particularly on an employment secondment or the traditional OE. You certainly do not want to return to NZ and discover you suddenly have a huge tax bill with all sorts of penalties attached.
Contact your advisor or Richard Ashby to make an appointment to come and see us and have peace of mind you will not be receiving any of those dreaded IRD letters in your mailbox.