New Zealand: New Zealand’s Inland Revenue finalises interpretation statement on tax residence
New Zealand's Inland Revenue has finalised its interpretation statement (IS 14/01) regarding New Zealand's tax residence rules. The interpretation statement is structured in three parts and addresses the residence rules for individuals, companies and how the residence of persons connected with a trust will determine the tax treatment of trust income. (The separate consideration of trusts reflects the fact that, under New Zealand law, whether the trustees of a trust are taxed on worldwide income, or rather only on income sourced from New Zealand, depends primarily on the residence of any settlor rather than on the residence of the trustees.) The interpretation statement was issued on March 6 2014 and provides taxpayers with a welcome update of Inland Revenue guidance in this area, given that the previous published statement on tax residence was issued in 1989. Inland Revenue issued an exposure draft of the interpretation statement for comment and discussion in December 2012. One of the more troublesome aspects of that exposure draft was Inland Revenue's interpretation of the rules regarding the tax residence of individuals.
Under New Zealand law, an individual will be tax resident in New Zealand where either:
The individual has a permanent place of abode in New Zealand (even if they also have a permanent place of abode elsewhere); or
The person satisfies certain day-count tests that depend on how many days an individual is personally present in New Zealand in a given 12-month period.
While the day-count tests are relatively straightforward in their application, the application of the permanent place of abode test is often less certain and is dependent on the circumstances of the particular case. The concept of permanent place of abode is not defined in New Zealand's tax legislation. According to relevant case law, the test looks to the nature and quality of an individual's connection with New Zealand, with particular emphasis on the nature of a dwelling available to the person in New Zealand.
However, the exposure draft was considered by many to place undue emphasis on the question of whether an individual owned or leased a dwelling in New Zealand. The exposure draft contained no acknowledgement that, even where a residential property may be available to a person in New Zealand (for example as an investment property or holiday home), that may not result in a person having a permanent place of abode in New Zealand if all other personal and economic factors lead to a contrary conclusion.
This concern arising from the approach taken in the exposure draft was heightened further by a decision of New Zealand's Taxation Review Authority in December last year. In that decision (TRA 43/11) the disputant was a soldier that had spent a significant amount of time outside New Zealand but was nevertheless regarded as having a permanent place of abode in New Zealand. One of the main factors the authority relied on in reaching that conclusion was that the disputant was said to have an available dwelling in New Zealand. This was found to be the case notwithstanding that the dwelling had been acquired as an investment, that the disputant had never lived in the dwelling and that the property was owned by a company that meant it was not within the sole control of the disputant.
While the finalised interpretation statement adopts certain of the principles expressed in TRA 43/11, it goes some way to restoring certainty in this area of New Zealand law. The interpretation statement states that a person must have a dwelling in New Zealand to have a permanent place of abode in New Zealand. However, in response to submissions received, the interpretation statement goes on to state that the existence of a dwelling in New Zealand in which an individual could live will not, of itself, give rise to a permanent place of abode in New Zealand. The totality of the particular circumstances must be considered in each case. That position will be welcomed, in particular, by expatriate New Zealanders that are tax resident offshore but that have holiday homes or investment properties in New Zealand.
Greg Neill (firstname.lastname@example.org)
Tel: +64 9 367 8879
Fax: +64 9 336 5010
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