Home is where the heart is
If an individual is a New Zealand (NZ) tax resident they will be taxed on their worldwide income. Conversely, if a person is non-resident they will only be taxed on their NZ sourced income. This makes it important for a person to confirm their tax residency when they leave the country as it determines the extent of their continuing NZ tax liability.
A person is a NZ tax resident if they are either in NZ for more than 183 days in a 12 month period or if they have a ‘permanent place of abode’ in NZ. A person will be non-resident once they are absent from NZ for more than 325 days in a 12 month period and they do not have a permanent place of abode in NZ.
The concept of a permanent place of abode is not defined under the legislation. But the courts have considered the issue on a number of occasions. One recent case has arguably shifted ‘the line’.
The Taxation Review Authority recently considered whether a taxpayer was a NZ tax resident over the four year period to 31 March 2007. The taxpayer had worked for the NZ Army for 25 years. After he retired in 2003 he left NZ to work in Papua New Guinea on a 12 month contract providing personal security.
The taxpayer gave evidence that when he left NZ in 2003 he had no intention of returning to live here. After the contract finished in Papua New Guinea, he spent approximately four months living in Queensland, before he began working in Iraq. In Iraq he also provided security services, completing a number of contracts up until April 2012, when he moved back to Australia.
Despite such a lengthy absence, the individual was found to be a NZ resident (and liable for tax on his worldwide income) because he was deemed to have a permanent place of abode here. The following factors were relevant to the decision:
- The taxpayer separated from his wife in 1994 and they had four children together. The taxpayer maintained close family and financial ties to his ex-wife and his children, and he provided financial assistance to them.
- Although absent from NZ for the majority of the time, between July 2004 and March 2007 (covering the period in dispute), he visited NZ every five to six months, with an average time in NZ of 42 days per year.
- The taxpayer owned rental properties in NZ with his ex-wife (personally and then through a company) that would have been available to him if he served the required notice under the Residential Tenancies Act 1986. Those properties were in the same locality as his ex-wife and children.
- The taxpayer’s ex-wife had a debit card to access his US based bank account, to pay property and family related expenses.
Looking at the overall circumstances, the TRA found that the taxpayer continued to have a strong and enduring relationship with NZ, deeming him to be a NZ resident during the four years in dispute. The taxpayer was also deemed to have taken an “unacceptable tax position”, which is subject to a shortfall penalty based on 20% of the tax shortfall.
The IRD has also recently issued an Interpretation Statement (IS 14/01) that came into effect on 1 April 2014, that sets out its view on how to determine whether a person is a NZ tax resident. The effect of the TRA decision has been taken into account in preparing the Interpretation Statement, namely the permanent place of abode test requires that a dwelling is available that can be used by the person in NZ. This does not necessarily mean ownership or control over a dwelling.
If a person is able to use a property as a place to live on an enduring basis, then it can still be their permanent place of abode irrespective of whether the property is rented to someone else while the person is residing overseas.
Whether someone has a permanent place of abode is not easily determined. It takes judgement to weigh the particular facts and independent professional advice should be obtained.