Out with the old, in with IS 25/16: Updated guidance on tax residency

By Stephen Walker and Renée Nicholson
 

Whether a taxpayer is an individual, company or trust, the tax residency status of key individuals can inadvertently change a non-resident taxpayer into resident taxpayer.

In May 2025, Inland Revenue released IS 25/16: Tax Residence, replacing the nine-year-old guidance IS 16/03. This updated interpretation statement modernises and updates Inland Revenue’s views on New Zealand’s tax residence rules for individuals, companies, and trusts. It also reflects legal developments, evolving global dynamics, and Inland Revenue’s ongoing commitment to clarity and accessibility.

What does this mean for individuals?

The legislative framework for determining individual tax residency remains unchanged. An individual is still a tax resident in New Zealand if they meet either of the following two tests:

• The permanent place of abode (PPA) test
• The 183-day rule (being present in New Zealand for more than 183-days in a rolling 12-month period)

IS 25/16 improves the understanding of these tests through logical flowcharts and detailed explanations. It reinforces that satisfying just one test is sufficient to establish New Zealand tax residency. Importantly, it also provides a structured explanation of the PPA test, emphasizing that it must be a place where the person habitually resides. Habitually residing involves more than a mere physical presence and reaffirms that tax residency under the PPA test is grounded in connection, not merely location, and assessment of the strength and continuity of an individual’s connections to New Zealand is required.

The updated guidance draws from recent case law, which has identified additional primarily habitual factors to consider for the PPA test, including:

• The availability and continuity of a home in New Zealand, including whether a property is maintained for personal use, even if temporarily rented out
• The presence of a partner and children in New Zealand
• The taxpayer’s personal possessions and intention to return

Noting that for the latter two items above, there still needs to be a dwelling in New Zealand for these factors to point towards there being a PPA.

What about Non-Resident Seasonal Workers?

There remains an exemption to the 183-day rule which is available for non-resident seasonal workers. The exemption provides that certain individuals who are employed under the Recognised Seasonal Employer Scheme are not treated as New Zealand tax residents even if they are physically present in the country for more than 183-days in a 12-month period and do not acquire a PPA in New Zealand.

What about individuals working overseas on Government Service?

Inland Revenue has released a separate interpretation statement (IS 25/17: Tax Residence – government service rule) addressing special residence rules for individuals overseas in connection with the service of the New Zealand Government which allows for these workers to be absent from New Zealand for more than 325-days in a 12-month period and not lose their New Zealand tax residency status.

What about Transitional Residents?

The transitional residence exemption allows eligible new migrants and returning New Zealanders to be exempt from tax on most foreign-sourced income for up to 48 months. IS 25/16 expands on this regime with clearer guidance and practical examples. Key enhancements include:

• A warning that applying for certain government benefits such as Working for Families tax credits, Best Start payments, or other income-based support can unintentionally terminate transitional residence status
• A clarification that receiving the FamilyBoost payment (a government childcare subsidy) does not count as an election to end transitional residence
• Reminders that when an individual meets the 183-day rule test, under a back-dating rule they are treated as being a tax resident from the first day of having a presence in New Zealand. So familiarisation trips to New Zealand prior to a permanent relocation could cause tax residency to be back dated to the first day of the familiarisation trip
• Further clarification on the start and end dates of transitional residency. Generally, it starts on the first day of residency under either the PPA test or 183-day rule (including any back-dating criteria). It ends either through an election to remove transitional residency, ceasing residency, or on the earliest of either the end of the 48th month after the month in which they acquired a PPA or satisfied the 183-day rule (ignoring the back-dating concept referenced above).  So could, in theory and with the right fact pattern, last for as long as 5 years
• Clarifying that transitional residency status is triggered, even if someone is a treaty resident elsewhere

There has been an additional transitional residency flowchart published (IR 1249) which helps taxpayers identify if they qualify to be a transitional resident.

What does this mean for Companies?

IS 25/16 retains the four core tests for determining corporate tax residence:

• Incorporation in New Zealand
• Head office located in New Zealand
• Centre of management in New Zealand
• Control by directors exercised in New Zealand

These rules remain unchanged meaning that a company only needs to satisfy one of the tests to be a tax resident in New Zealand. IS 25/16 significantly enhances the interpretation of these tests and provides clearer guidance, particularly on dual residence and the application of Double Tax Agreements (DTAs). This is particularly relevant for multinational entities or foreign-incorporated companies with connections to New Zealand.

Key refinements include:

• Clarifying that companies cannot rely solely on foreign incorporation when assessing New Zealand tax residence
• Defining the head office test more precisely by distinguishing a head office from a registered office or an operational office. This includes clarifying that a head office can be a physical or operational base from which senior staff and management are located, or a location where major strategic and policy decisions are made, or where specialised functions are performed
• Emphasising that the centre of management test relates to where high-level strategic decisions are made which can differ from the incorporation location and that temporary absences do not change this. In addition, management of a branch does not usually constitute the centre of management of a company as a whole.

The guidance has focused on changes in understanding regarding the director control test, some of the practical examples highlight common themes, such as:

• If key decisions are regularly made from New Zealand, even via digital platforms, director control may be exercised in New Zealand
• Digital participation does not override substance and Inland Revenue will assess where decision-making authority is truly exercised
• Inland Revenue stresses the importance of maintaining board minutes, director travel records, and management agreements to demonstrate where control is exercised

The guidance has also outlined Inland Revenue’s view that if a company is considered a dual resident but treated as solely resident in another country under a DTA, it is generally considered non-resident for NZ tax purposes (subject to some exceptions), which impacts tax grouping, foreign tax credits, and reporting obligations.

What does this mean for Trusts?

The updated guidance reorganises and clarifies the rules surrounding trust residence, particularly by reinforcing the importance of the settlor’s residence in determining whether trustee income of the trust is taxable on a worldwide income basis in New Zealand.

If a trust is not considered to be a complying trust (i.e. non-complying trust, foreign trust, or both), then the rules around the taxing of beneficiary income and beneficiary distributions can be substantially different, potentially imposing a tax rate up to 45% on distributions.

A foreign trust’s classification is based on the tax residency of the settlor(s) while a complying trust’s classification is based on the tax residency of the trustee(s).  This can lead to a trust being a dual status trust. 

In general, the guidance outlines the following in relation to trustees:

• Each trustee is considered individually for tax residency purposes
• A single New Zealand-resident trustee can render all trustees as resident
• Corporate trustees are assessed under company residence rules

IS 25/16 includes new guidance on foreign trust disclosures (reflecting new rules introduced in 2017) and details requirements for New Zealand-resident trustees to register foreign trusts and file annual returns in order for the trust to be classified as a complying trust.

Subject to specific circumstances, in general we recommend completing annual reviews of the residency status for all trustees, maintaining proper documentation of trustee decision-making, and completing ongoing compliance with Inland Revenue’s registration and disclosure rules.

Tax residence can be complicated and misunderstanding and errors can have serious consequences, if you have any questions, please contact your usual Deloitte advisor.