In between catching up with friends and family, indulging in too many calories and hopefully spending some time in their favourite restful places, many readers will have reflected over the holiday break and maybe looking for a change. For some, this will involve remote working in New Zealand for a foreign employer.

Back in August 2020, we wrote an article in relation to Inland Revenue’s draft operational statement relating to PAYE, FBT and ESCT obligations in cross border employment situations

Nearly 18 months later, on 1 December 2021, Inland Revenue published the finalised Operational Statement “OS 21/04 Non-resident employers’ obligation to deduct PAYE, FBT and ESCT in cross-border employment situations”. Not much has changed from the draft version, although a few points have been clarified.

As mentioned in our earlier article, employment income that an employee earns from services provided in New Zealand is New Zealand sourced income. This means it is taxable here, subject to some limited exemptions, and it makes no difference whether this is paid by a NZ employer or a foreign employer. Generally, employment income is taxed in New Zealand through the PAYE regime, where the onus is on the employer to withhold PAYE on employee’s earnings, report the employment information and pay the tax to Inland Revenue.

But in some circumstances our tax laws do not apply when the employer is offshore. The operational statement clarifies that a non-resident employer is only required to withhold PAYE from employment income paid to an employee in New Zealand if:

• the non-resident employer has made themselves subject to New Zealand tax law by having a sufficient presence in New Zealand; and

• the services performed by the employee are properly attributable to the employer’s presence in New Zealand.

A sufficient presence includes where a non-resident employer has a permanent establishment, a branch, permanent office, or site in New Zealand where trading operations are performed. It also includes a non-resident employer that has an individual employee working in New Zealand performing contracts on behalf of the employer.

Where an employee works in New Zealand due to their personal preference, and not because of a requirement of their employer, then provided the employment activities have no connection to New Zealand and the employee is not representing the non-resident employer in New Zealand, it is unlikely that this will be a sufficient presence for the employer to become subject to tax laws in New Zealand.

Final comments

OS 21/04 applies from the date it was released, 1 December 2021, and the Commissioner states that resources will not be applied to “examine positions taken by taxpayers prior to that date”. For non-resident employers this means that if they do have a sufficient presence in New Zealand and are subject to our tax rules, they will need to comply from 1 December 2021 but can expect not to be audited for earlier periods. For individuals that have an IR56 taxpayer responsibility, again Inland Revenue may not enforce that obligation to amounts received prior to 1 December 2021. But this does not mean the amounts are not taxable – those individuals will still need to return the amount pre 1 December 2021 in their income tax returns and pay tax on assessment of the return.

And finally, this may all change! OS 21/04 is based on the current legislation. Inland Revenue has also been consulting on possible law changes relating to non-resident employers and when they will be subject to PAYE, FBT and ESCT in New Zealand, so watch this space as we may see further developments in 2022.

Please contact your local Deloitte advisor if you have any queries.

February 2022 Tax Alerts