Tax residency is basis upon which people can be taxed. A New Zealand tax resident is subject to tax in New Zealand on their worldwide income, subject to any relief provided. In New Zealand domestic law there are tax residency tests, the first known as the “day-count test” and the second known as the “permanent place of abode test”. If you are a tax resident under one of these tests, then you will be considered New Zealand tax resident, you do not have to meet both. However, to cease to be New Zealand tax resident, you must cease to meet both tests.
Day-count Test
If you are present in New Zealand for more than 183 days in any 12-month period, then you will be New Zealand tax resident from the first day of presence. This means tax residency is backdated once the criteria is met. While the day-count test may seem simple, we frequently see this calculated incorrectly. For example, many people review their day-count test based on a calendar year or income year. The rolling 12-month criteria can be complex to calculate and requires significant experience and time in order to calculate this date, especially where there are multiple trips over a number of years. In addition, there are rules about part days being full days, and backdating can also apply. So while the test is very clear, the calculation method requires in-depth knowledge of how the tax law is applied.
We frequently meet clients who advise they became New Zealand tax resident on a certain date. Often this is the date they considered they moved to New Zealand, or when they got a certain visa. These are not relevant considerations for the day-count test. Often we will find that they have actually been New Zealand tax resident for much longer than they think due to previous time spend in New Zealand during holidays, or for job interviews.
The day-count test does not work the same in reverse i.e. for someone is to cease to be New Zealand tax resident, they must be absent from New Zealand for more than 325 days in a rolling 12-month period. Many people become tax resident subject to the day-count test, and may be aware of that fact. However, what they are not aware of is that they have not ceased to be New Zealand tax resident due to spending too much time in New Zealand after “leaving New Zealand”. This is particularly important for people who leave New Zealand and live somewhere that does not have a double tax agreement with New Zealand such as Saudi Arabia or Qatar. In these cases, your worldwide income will continue to be subject to tax in New Zealand, this includes any income earned in those foreign countries that often are known to have no or very low tax. It can be extremely expensive to get this wrong. Often it is not known until a much later date, at which time interest has been accruing since the original due date.
If Inland Revenue were to commence an audit, then you will also have lost the opportunity to make a voluntary disclosure in order to reduce shortfall penalties. Read more about Inland Revenue audits and voluntary disclosures here.
Permanent Place of Abode Test
The permanent place of abode test is not as simple as the day-count test. There is no line in the sand or magic detail that means that you will have, or will not have, a permanent place of abode. A permanent place of abode is not defined but is interpreted based on caselaw as well as reference to Inland Revenue’s Interpretation Statement. There is no one size fits all approach as everyone’s circumstances will be different.
To have a permanent place of abode you must first have a place of abode in New Zealand. We note that this does not mean that you have to own a property in New Zealand. A rental property or a property owned by a family member, friend, family trust or related entity, could also become a place of abode. If you have a place of abode then it is necessary to consider the ties that you have with that place of abode and to some extent, the wider ties that you have with New Zealand. This requires an in-depth review of significant amounts of information in order to determine whether or not there is a permanent place of abode in New Zealand.
When Inland Revenue considers if someone has become a New Zealand tax resident pursuant to the permanent place of abode test, they generally have the benefit of hindsight. For example, if you have a holiday home in New Zealand which you visit and you later return to New Zealand and move into that holiday home, it is possible that Inland Revenue may consider that your holiday home was a permanent place of abode prior to you returning to New Zealand.
The same works in reverse, when leaving New Zealand you will have had a permanent place of abode prior to leaving. If you are only leaving for a couple of years, and will return to New Zealand and live at the same property, then it is possible that you continue to have a permanent place of abode in New Zealand while you are absent. You need to be away from New Zealand and the permanent place of abode for a reasonable period of time in order for that place of abode to cease to be your permanent place of abode. However, there is no clear period of time that is considered enough. Each case is different, and will depend on the individual facts and circumstances for that person. What is important is that you do everything possible to cease to have a permanent place of abode before leaving New Zealand especially where you may be moving to a country that does not have a double tax agreement with New Zealand.
Transitional Tax Residency
Transitional tax residency allows returning kiwis and new migrants a period of four to five years without paying tax in New Zealand on foreign passive income in certain circumstances. It is vitally important to note that employment income of any kind or work from your personal services, will continue to be subject to tax in New Zealand if you are New Zealand tax resident even if you are a transitional tax resident. Therefore, if you work for a foreign employer while present in New Zealand, then that income will not be subject to the transitional tax residency exemption.
The transitional tax residency exemption applies for up to 48 months from the end of the month in which you first met New Zealand tax residency under one of the domestic tax laws. Therefore, it is important to know when you met both the day-count test and the permanent place of abode test as they are unlikely to have occurred on the same day. Transitional tax residency is something we see calculated incorrectly more often than not. Lots of people will take it as four years from the date that they arrived in New Zealand, and this is nearly always incorrect. The benefits of transitional tax residency are immense for any person that still has ties overseas. These include foreign shares, foreign denominated bank accounts, foreign pensions, foreign rental properties and any other assets which may derive foreign passive income.
It is important to note that transitional tax residency can only be used once and it can be revoked – generally unknowingly. For example, claiming working for families tax credits can mean that you have opted out of the transitional tax residency regime. In addition, if you return any foreign passive income during your transitional tax residency period (which is completely legitimate and you may wish to do so in some circumstances), then you will be considered to have opted out of transitional tax residency. Further, if you cease to be a New Zealand tax resident during your transitional tax residency period, then you do not get the balance of your transitional tax residency period again.
How does this impact me?
A New Zealand tax resident is subject to tax in New Zealand on their worldwide income subject to any relief provided by an applicable double tax agreement or transitional tax residency. There are two tax residency tests which while may seem simple at first blush, are generally quite complex to calculate and establish and, more often than not, are worked out incorrectly. The cost of getting these tax residency dates incorrect can be significant either in additional tax that is paid when it wasn’t required due to the transitional tax residency regime applying for a longer period than anticipated, or due to Inland Revenue later establishing that you were New Zealand tax resident at an earlier date and as a result, you have additional tax to pay and penalties and interest are also added.
Confirming your tax residency dates and applicable transitional tax residency period early can provide significant benefits in terms of allowing time to structure assets for tax efficiency during the transitional tax residency period. Where you will continue to have offshore interests or tax filing obligations (such as being a US citizen) then this should be completed by advisors from both jurisdictions to ensure that you have the best structure in place that allows for the lowest net taxes across all countries applicable.
This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax residency issues please contact us.
This article was accurate at the time of publishing.
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