The residence of an individual will drive New Zealand’s ability to tax their income. Tax resident persons of New Zealand are taxed in New Zealand on their world-wide income. It is therefore an important concept.
An individual is a tax resident of New Zealand if, either:
- They are in New Zealand for more than 183 days in any 12-month period; and/or
- They have a permanent place of abode in New Zealand (“PPOA”).
The former test is objective; it’s not grey in application (unless you are a casualty of Covid and have been forced to stay in New Zealand for an extended period of time). In calculating days present, days of arrival and departure are counted as a whole day in New Zealand.
Whether or not an individual has a PPOA in New Zealand can be more subjective in application. Broadly, it’s underpinned with the premise of “the place where you normally live”.
In examining whether or not a PPOA exists we are required to consider the individual’s overall relationship with New Zealand. Specifically:
- Where does the individual stay when they come to New Zealand? Do they have a place available to them when they need it? Ownership is not relevant to this test, rented accommodation could meet the threshold, as could a place owned by your trust which is not subject to rent.
If you don’t have a normal place to stay in New Zealand as and when you need it, then you can’t have a PPOA (regardless of any other ties with New Zealand, per below).
- What other ties does the individual have in New Zealand? Where do their dependents live? Wider family? Do they have bank accounts in New Zealand used to pay expenses related to the place? Is there personal property in New Zealand and where is it located? Is the individual a member of a New Zealand club, perhaps a sports club in the vicinity of the place in question?
- What is your intention in terms of returning to the particular place, for example does it suggest an element of permanence exists in relation to that place rather than it being like a motel?
All these things (and more) can be taken into consideration and, because it is a subjective test, we see lots of case law in this area (and useful guidance provided by Inland Revenue as to where its thoughts lie), which helps us make an assessment of any given situation.
We should also acknowledge that just because you consider you have a PPOA elsewhere in the world, this does not necessarily preclude you also having a PPOA in New Zealand. From a tax perspective, you can normally live in more than one place. Tax residence in more than one country may be dealt with by a Double Tax Agreement (see below).
The Twilight Zone – transitional residents
Tax residence also includes the concept of a Transitional Resident. This is an “in-between” stage and is a concessionary measure designed to encourage individuals to New Zealand.
An individual who meets the requirements to qualify as a transitional resident is effectively treated as a non-tax resident person for most foreign sourced income for a period of time. That is, foreign sourced income, with the exception of employment income or other income from personal exertion, is exempt from income tax for four years (or so) from the date the person meets the criteria for New Zealand tax residency.
A transitional resident is broadly an individual who has not been a tax resident of New Zealand for the prior 10 years and has not been a transitional resident before; you only get one go at this.
It’s a useful tool that cannot be ignored and is often useful, for example, with respect to tax efficiency for trusts established while a non-tax resident.
What happens if I am a tax resident of New Zealand and another country?
This is a good question. It is quite normal for an individual to manage to be a resident of more than one country.
The answer rests with Double Tax Agreements (“DTAs”). New Zealand has entered into many DTAs with other countries, which seek to resolve this problem.
A DTA generally acts as a shield from double taxation. In respect of residency, it provides certainty as to which country has the main right to tax most, if not all of, a person’s different types of income. It does this by setting out tests which ultimately determine where an individual must be considered solely a tax resident.
These are commonly referred to as “tie-breaker tests”.
Leaving New Zealand
How do you become a non-resident of New Zealand; is it as simple as just leaving?
Not quite. You become a non-resident of New Zealand (from the day following departure) if:
- You are physically outside New Zealand for at least 325 days in a 12-month period; and
- You no longer have a PPOA in New Zealand.
The passing of time helps here, i.e. the longer you have been absent from New Zealand the less likely you are a tax resident. However, unfortunately, there are no hard and fast rules as to what length of absence would mean you no longer have a PPOA (as you’d argue that you don’t normally live in, say, the relevant house now) and are therefore a non-resident.
As mentioned above, it is subjectivity that can make it difficult to apply the PPOA test in the fringe cases.
If you would like assistance, please contact your local BDO Adviser.