Law briefs: Emigrants wise to sort out tax rules

By JILLIAN LAWRY*

Amid all the hype about escaping to Australia before welfare and other concessions are removed, some individuals may have forgotten to check out of the New Zealand tax system.

A person may have left the country intending never to return, except, maybe, for a holiday, but the Inland Revenue Department may still regard him or her as one of its clients.

In other words, that person has retained New Zealand tax residency and is subject to New Zealand tax on his or her worldwide income.

This issue is of particular concern to people emigrating to lower tax jurisdictions such as Singapore and other parts of Asia.

So what are the tax residency rules?

If a person is absent from New Zealand for a total of 325 days or more in any 12-month period, then for tax purposes that person will be deemed to be a non-resident from the first day of absence.

However, this physical absence rule is subject to another rule which takes precedence - the permanent place of abode rule.

A permanent place of abode is not defined in income tax law. There appears to be little difference between the concepts of permanent place of abode and home.

In other words, a person who leaves New Zealand to take up a permanent residence in another country will have a permanent place of abode overseas.

However, the term also envisages that a person can have more than one permanent place of abode.

So a person could move to Australia, and have a permanent place of abode there, but still retain a permanent place of abode in New Zealand.

The result is that a person may retain New Zealand tax residency because he or she has retained a permanent place of abode in New Zealand.

On a practical level, departing New Zealand tax residents should get clearance from the IRD confirming that they will no longer be New Zealand tax residents. The IRD will require final tax returns before clearance is given. In some situations, there could be a refund.

Factors taken into account when determining whether a person has a permanent place of abode in New Zealand, and therefore remains a tax resident, include employment history, accommodation arrangements, financial ties retained in New Zealand, where holidays are taken, whether any family have accompanied the person or stayed in New Zealand and whether any social welfare benefits are received in New Zealand.

Retaining significant interests and even leaving family members behind in New Zealand are not fatal for a person wishing to give up New Zealand tax residency.

In a case decided in 1999, the taxpayer in question accepted a job in Singapore after he and his wife separated.

The estranged wife and children remained in New Zealand in a home provided by the taxpayer. He subsequently bought a dairy farm, which was income-earning and a means of employment for his wife and children.

He made frequent trips back to New Zealand in connection with the farm and as a director of a company.

The IRD decided that the taxpayer was resident in both Singapore and New Zealand, and assessed him for tax at the higher New Zealand rates.

Not surprisingly, the taxpayer objected.

The Taxation Review Authority held that the taxpayer had kept assets in New Zealand in order to provide for his family in New Zealand and to provide an asset base against which he could finance his Singapore business.

His frequent visits to New Zealand did not detract from his assertion that he had given up his New Zealand residency and had become wholly resident in Singapore for the relevant period.

The court decision serves as a reminder that the IRD will track previously resident individuals who return on a regular basis.

* Jillian Lawry is the author of the CCH publication Guide to Taxing Internet Transactions. CCH New Zealand Ltd is a tax, business, employment, health and safety and land law publisher based in Auckland. For further information visit the CCH website or phone 0800 500 224.

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