Little tax comfort for Kiwi expats
Inland Revenue today released its interpretation of what it means to be tax resident.
“This is a particularly important document for New Zealanders living and working overseas. For these people, remaining tax resident in New Zealand can have significant financial implications.” says Rebecca Armour, Tax Director and Head of International Executive Services at KPMG.
“We therefore welcome its release. Residency issues have recently been at the forefront of many expats’ minds following the approach taken by the Taxation Review Authority in the recent decision about tax residency of an overseas based security consultant.” says Armour.
The initial draft of the statement caused some unease when it suggested that retaining any property in New Zealand may cause taxpayers to remain taxable on their worldwide income. Following extensive consultation, Inland Revenue has amended several areas of the interpretation statement.
“Aspects of these changes have resulted in a more reasonable outcome.” says Armour.
The Interpretation Statement still requires that individuals consider their entire circumstances and the level of their enduring connections with New Zealand when determining whether or not they are tax resident in New Zealand.
Armour notes that “The importance of the holistic approach to the consideration of residence as outlined in the Interpretation Statement is highlighted following the recent Taxation Review Authority decision.”
The residence test is still subject to judgment to be exercised and can be difficult to apply in marginal cases. “The most important thing is that taxpayers have certainty. Inland Revenue’s position for any specific person must be predictable at the time decisions need to be made.” says Armour. “In this respect the Inland Revenue operational guidance, is unhelpful.”
For expats who have previously filed a New Zealand tax residence questionnaire and are relying on confirmation they received from Inland Revenue that they are not tax resident in New Zealand, Armour says that the operational statement suggests they will need to re-evaluate their positions, particularly where they are relying on the fact they have been outside New Zealand for three years or more.
“Unfortunately for those individuals, no comfort has been provided that their previously approved positions will not be challenged, as that type of confirmation is non-binding on Inland Revenue” says Armour. “In those cases we strongly recommend that individuals re-look at their residency position and seek advice if necessary, to ensure that they have correctly applied the published guidance. An ‘incorrect’ application could have serious consequences as the recent Taxation Review Authority decision illustrates.”
The tax residence of an employee can also impact on their employer’s tax obligations. It will determine whether they need to deduct PAYE, ACC and fringe benefit tax in New Zealand. The tax costs associated with an employee will impact on the cost of remuneration, the pricing of contracts and how competitive New Zealand tenders are for overseas projects. Therefore employers also need to be wary of the implications of the residence tests.