Inland Revenue update New Zealand tax residency rules
In December 2012, Inland Revenue released a draft interpretation statement for consultation regarding residence of individuals and companies. This statement attempts to update and replace the June 1989 Public Information Bulletin (PIB) No. 180 entitled ‘’ New residency rules’’ and also replaces a number of Tax Information Bulletins from the 1990s. Changes outlined in this draft statement have been noted to be made to ‘’reflect current legislation and ensure consistency with the latest case law and the Commissioner’s views’’.
For the purpose of this article we have focused on three proposed changes in approach for individual residency tests.
Residency is vital in determining the extent to which individuals and companies are taxed in New Zealand i.e. whether they will be taxable on their New Zealand sourced income only or on their worldwide income. However tax residency is also relevant for the purposes of the Student Loan Scheme Act, GST and the working for families’ tax credit. Therefore any interpretive change to the residency rules is very important to a wide spectrum of taxpayers.
Residence of Individuals
An individual is treated as a New Zealand tax resident if either:
- They have a permanent place of abode (PPOA) in New Zealand or
- They are present in New Zealand for more than 183 days in total in a 12 month period. The individual will be treated as being resident from the first of those 183 days.
An individual who meets the tests above will cease to be treated as New Zealand tax resident if:
- They no longer have a PPOA in New Zealand and
- They are absent from New Zealand for more than 325 days in a 12 month period. The individual will be treated as not resident from the first of those 325 days.
Therefore, an individual will be considered a tax resident of New Zealand even if they are absent for more than 325 days if they continue to have a PPOA here. The residency rules appear to have been constructed to place a higher emphasis on having a PPOA in determining residence.
Key proposed changes
What constitutes a PPOA
For an individual to have a PPOA the draft statement outlines that an individual must have a particular place of abode that is an ‘’available dwelling’’. This in itself is insufficient as courts have held that there is also a need for a broader enduring connection with New Zealand. However, the draft statement has placed a significantly higher emphasis on the availability of a dwelling in determining if a PPOA exists. The statement goes on to suggest that the term ‘’available’’ does not mean that the property is required to be vacant and can include a property that has been rented out. It does not need to be exclusively available to the individual at all times, but available to them whenever the person requires it.
This change is particularly significant to individuals who have left New Zealand and have retained a property here as outlined below in one of the many examples from the draft statement.
Facts: Cate, who is normally resident in New Zealand, is seconded to Canada in connection with her employment, for a fixed period of three years. Cate intends to return to New Zealand after the period of secondment. Cate’s partner and children accompany her to Canada. Cate and her partner own a house in New Zealand, and this is rented out while they are in Canada. Cate retains her New Zealand investments, and her connections with several professional and sporting associations here.
Result: Cate has a permanent place of abode in New Zealand.
Explanation: Cate has a place of abode in New Zealand – being the house she owns with her partner. Cate has retained ties with New Zealand – she still has a dwelling available here, maintains membership of several professional and sporting associations, and has investments here. Cate also retains employment ties with New Zealand, as her secondment is in connection with her New Zealand employment. Cate has an intention to return to New Zealand at the end of the three-year secondment.
Although Cate will be absent from New Zealand for a substantial length of time, this is not inconsistent with having a permanent place of abode in New Zealand. All of the relevant factors must be weighed up. In this case the strength of Cate’s enduring connections with New Zealand is sufficient to establish that she has a permanent place of abode here.
This example can be contrasted to the example in PIB No. 180 which, on almost identical facts, determined that there was not a PPOA.
The key difference appears to be a change in the view of the Commissioner in relation to the impact of the period of absence. Previously the Commissioner of Inland Revenue considered 3 years to be sufficient time to break the enduring connection to New Zealand.
Our View: We do not agree with the Commissioner’s view that case law supports a change in approach. Most of the cases since the original PIB No. 180 was issued relate to absences of a year or less. The outcome in such cases is non-controversial as there has been an insufficient lapse of time to break the enduring connection with New Zealand.
Relevance of ‘permanent home’ for DTA tie-breaker tests
As outlined above, for an individual to have a PPOA the draft statement outlines that an individual must have a particular place of abode that is an ‘’available dwelling’’.
This definition of ‘’available ’’ will also impact upon dual resident individuals who rely on the tie-breaker tests in New Zealand’s international double taxation agreements (DTAs). The first of these tie-breakers in the DTAs considers which country the individual has a permanent home available to them in. This change in approach may now mean that a large number of dual residents will be considered to have a permanent home available in New Zealand despite it being rented out. This differs from the position in the previous PIB, which recognised that where a person rents their house to non-related persons while they are overseas, that house will not be a permanent home which is available to them. While the OECD does not discuss what is ‘’available’’, they do note that a permanent home ‘’must be permanent, that is to say, the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration’’. The guidance goes on to state that permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc...).
Clearly if it is rented, it is not available continuously.
Personal and economic relations / centre of vital interests test
In cases where an individual is deemed to have a permanent home in both countries, the next tie-breaker will generally be the personal and economic relations test. This test gives preference to the country with which the personal and economic relations of the individual are closer i.e. the centre of vital interests.
In PIB No. 180 more importance was given to the individual’s personal relations, such as which country their family was located in, than was given to economic relations. The Commissioner has now outlined in this statement that this position is ‘’no longer considered to be correct’’. The view the Commissioner is taking is that both the social and the economic relations of the individual should be treated with equal importance.
This part of the statement is particularly vague and is probably best illustrated by way of an example. Say Joe, an Irish individual who has lived all his life in Ireland, is married to Jane who arrived in Ireland 5 years ago from New Zealand. They have two children, a house, a car, a joint bank account and a credit card in Ireland. Joe is also a member of a professional body in Ireland. Joe also received a large inheritance which he invested in an Irish fund and from which he receives significant dividends each year. The couple decide to move permanently to New Zealand and buy a house here. They will rent the house in Ireland as the rental market is strong. They will keep the Irish bank account open to collect this rent and will also retain the credit card for any house related expenditure. Joe does not currently wish to withdraw his money from the managed fund investment as it is performing well and will therefore leave this in place. They intend to return to Ireland every year or so to see Joe’s family and decide to keep the car as it is not valuable and the cost of car rental is very high. Joe wants to keep his membership with the Irish professional body (which has recognition in New Zealand) and will continue to pay the annual subscription there. However the couple have no intention of returning to live in Ireland.
The couple are domestic tax resident in both Ireland and New Zealand. Assuming no long fixed term lease in Ireland and given the Commissioner’s view on ‘’permanent home’’ above, the couple will likely satisfy the first DTA test as they have a permanent home in both jurisdictions and can terminate the lease at any time to return. The couple will therefore go to the second tie-breaker test. Under PIB No. 180 the couple would have been treated as treaty resident of New Zealand as their family is in New Zealand with them and they intend to stay here indefinitely. However, using the Commissioner’s logic of treating both personal and economic relations as equally important it is unclear, given the greater economic ties to Ireland, where the couple will be treaty resident under the second DTA test.
Our View: By placing equal value on both personal and economic relation, the Commissioner has muddied the waters somewhat and will create more uncertainty for individuals. The Commissioner’s view appears to conflict with the OECD guidance in this area which notes ‘’ the circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention’’. The Commissioner also does not offer any guidance on how many personal versus economic factors it will take to treat individuals as treaty resident under this second test.
The draft statement in its current form does not provide individuals with clarity regarding residence and gives no indication as to whether Inland Revenue will seek to apply this new approach retrospectively. From our viewpoint there has been no case law to support a change in approach.
Submissions on this statement were due to be submitted to Inland Revenue by 31 January 2013. Deloitte has made a submission on the changes outlined in the draft statement.
Tax Alert February 2013 contents
- Tax Alert - February 2013
- Fundamental changes proposed to thin capitalisation rules
- GST remedial issues paper released for comment
- Inland Revenue update New Zealand tax residency rules
- Purchases denominated in foreign currency – proposed tax reforms announced
- Japan and New Zealand sign new double tax agreement
- Taxation of Multinational Companies: Report Issued by Inland Revenue