The IRD has recently released a draft interpretation statement on tax residency. Although only draft at this stage, it signals a significant change in the way the IRD applies tax residency rules and if finalised without alteration may impact upon clients whom are outside of New Zealand and currently regard themselves as non-tax resident.
First, by way of background, the current tax residency rules for individuals are twofold in that you are regarded as a tax resident of New Zealand if:
(a) You are present in New Zealand for more than 183 days in any 12 month period; or
(b) You have a permanent place of abode in New Zealand.
The 183 day rule is black and white and warrants no further discussion. The permanent place of abode rule is key in that even if you are not present for more than 183 days you are still regarded as a tax resident if you have a permanent place of abode here. The term permanent place of abode is not statutorily defined but is based on a number of factors designed to test the strength of one’s ties to New Zealand. The availability of a dwelling is just one of the factors looked at. To illustrate by way of an example, here is a case study taken from the IRD’s current view on tax residency.
Bob is seconded to Canada in connection with his employer for a fixed three year period. He intends to return to New Zealand at the end. His spouse and children accompany him to Canada. He owns a house in New Zealand and it is rented while he is away on a one month notice basis. He retains New Zealand investments and connections with several professional and sporting associations.
Under the current IRD statement, the IRD view is that Bob does not have a permanent place of abode. Despite retaining ties in New Zealand including the availability of a dwelling and membership of professional and sporting associations, they consider that the protracted period of absence is significant and outweighs the ties with New Zealand.
Under the proposed new IRD interpretation, they place far greater weighting on the availability of a dwelling. In doing so, they note that the dwelling does not need to be a home that the individual previously lived in. It simply needs to be a house that potentially could be available to the individual to occupy as a permanent home. As an illustration of this new position, the IRD give exactly the same facts in a case study in their draft statement, and conclude that they have sufficient ties to be regarded as having a permanent place of abode here despite the length of absence. This is particularly influenced by the availability of the dwelling.
The takeaway point from this is that if you are offshore and currently regarding yourself as a non-resident but you have property in New Zealand (whether it was previously occupied as a home or always held as a rental investment), there will be a stronger likelihood of the IRD viewing you as a tax resident. On the flip side, if you are departing New Zealand without retaining any real estate here you may be more likely to be regarded as a non-resident.
As always, these comments are of a general nature only and not a substitute for advice on your specific circumstances. Please contact us at GRA if you wish to discuss any aspects of the above.