$200,000 tax shock!

15th May 2014

A security guard worked in the Iraq and didn’t pay tax in NZ as he was a non-resident.   IRD recent TRA case 10/2013 went against the tax payer and he was deemed to be a tax resident in NZ and therefore liable for NZ tax of around $200,000 on his Middle East income!   The tax payer is appealing this case to the High Court in July, but it does highlight the importance of getting residency correct.

If you, your family, or friends live overseas or work overseas, I suggest you keep reading as IRD’s view on Tax Residency has changed over the last few months.   If you are a client of Coombe Smith and non-resident, we will be looking at your situation further and sending you some more detailed information.

It is likely that your old Tax Residency status applies to 31/3/14.  However, from 1/4/14, there could be a change, and therefore NZ tax could be payable.

Tax Residency

If you are a Tax Resident in NZ, then you are taxable on your worldwide income in NZ.   So if you earned $50,000 in Iraq as wages for six months, then this would firstly be taxable in Iraq.  Then, in NZ you would also return the $50,000 income (in NZD) and be able to claim a tax credit for Iraq tax paid.  Obviously if no tax was paid in Iraq, then you would pay full NZ tax at your marginal tax rate.

To be a non-resident, you must meet the timeframe tests:

• Have been out of NZ for more than 325 days in total in a 12 month period.
• Not have been in NZ for more than 183 days in total in a 12 month period since satisfying the 325-day rule; and
• Not be absent from NZ in the service of the Government of NZ.

Plus not have a ‘permanent place of abode’ in NZ.

What is a ‘permanent place of abode’ has been tested in the TRA case 10/2013 and also clarified by IRD in IS 14/01(Interpretation statement):

• Need to have a NZ dwelling to have a ‘permanent place of abode’ – Will include properties that you control through a Trust.
• Most likely an investment property wouldn’t be a person’s permanent place of abode, but it still could be:

• Rental properties that have always been rented as rentals, shouldn’t be.
• If you rent your personal house, this could be, especially if you then move back into the property when you come back to NZ.

• Lasting or enduring place where they usually live.
• In a locality with which they have a durable connection and that is a current focal point of their living – So if all your family is in Hamilton, and if you returned to NZ to live you would live in Hamilton, having an old personal house in Dunedin would not have a durable connection or current focal point, so wouldn’t be a ‘permanent place of abode’.

In some cases you can have permanent place of abode’ in two countries, and a Double Tax Agreement (DTA) can then determine where tax is due.  In some cases this can provide a favourable outcome.

Main Risk Areas

• The main risk area is if you work in a country where you are not liable for tax such as Jersey Islands, Iraq or Cayman Islands.  IRD are most interested in these, as you are paying no tax.  (If you work in a country and pay a reasonable level of tax such as Australia or UK, then IRD are not so interested as you are likely to be paying close to the correct amount of tax), and
• You have a property in NZ that is rented but used to be your family home; and
• Short term away.  Old IRD guidance was under 3 years.  However, this statement has been overridden by IS 14/01 which doesn’t specify a time period.   So one tax experts opinion was that needed to be 5-6 years

Things that could help you with Tax residency

• I like to fill out the IRD residency form and provide as much information as possible to IRD, so that IRD can give their opinion on your residency.  This isn’t binding, so IRD could still challenge later, but often it brings issues to a head at the start, rather than creating a huge issue later.

• Keep as much evidence as possible that you plan to live overseas long term:

• Employment contracts for long term, and also discussions with employers.
• Notes to lawyer/accountant.
• Bank accounts – If you are moving overseas permanently, then you should be able to close most NZ bank accounts and credit cards.
• Furniture, cars and other assets – If you are moving overseas permanently, then you would most likely sell these.

• If you do move back to NZ, don’t move back into the old family home, if you kept this as a rental.  IRD could then argue that it was always a “permanent place of abode’ available to you, and therefore you were a NZ tax resident.

• Don’t try to cheat the system.  If you are a true non-resident, then you should be able to be classified as one.  But if your spouse/family is still based in NZ with a house and other ties, then you are always going to be a NZ tax resident.

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?