IRD issues new advice on tax residency

New Zealanders living and working overseas can breathe a little easier now tax authorities have agreed that renting out a house they own in New Zealand doesn't automatically make them a New Zealand taxpayer.

The Inland Revenue Department has issued an interpretation of New Zealand residency after a Taxation Review Authority decision last year appeared to massively widen the scope for kiwis to be taxed in New Zealand on income earned offshore.

A key determinant in the TRA's decision was property ownership and the existence of a permanent place of abode.

"After more than a year of uncertainty, heightened by the somewhat surprising decision from TRA, we finally have a basis on which to begin reconstructing the foundations for assessing an individual's tax residence when they leave New Zealand," said Deloitte associate tax director Mike Williams.

The combination of the TRA decision and IRD's view that "commercially rented dwelling houses constituted a permanent place of abode left many long-term non-residents with a sense of unease," said Williams.

"The acknowledgement from the Commissioner of Inland Revenue that long term investment properties and holiday homes would not normally constitute a permanent place of abode, but need to be considered with all other circumstances, is reassuring."

The TRA decision arose from the case of an expatriate New Zealander fulfilling security contracts offshore, whose children and ex-wife continued to live in a house in which he had an interest.

His circumstances were "certainly ... more of an exceptional set of circumstances than a common sense set of circumstances."

However, KPMG tax director Rebecca Armour warned the new determination was not cut and dried.

"Inland Revenue's position for any specific person must be predictable at the time decisions need to be made (about tax residency)," said Armour. "In this respect, the Inland Revenue operational guidance is unhelpful."

Even if they had already received confirmation of their tax residency status, expatriate New Zealanders should review their positions, especially if they were relying on the fact they had been out of New Zealand for more than three years to establish non-resident status for tax purposes.

"No comfort has been provided that their previously approved positions will not be challenged," said Armour.

Employers should also be alive to the potential for offshore staff to run into tax residency problems, and the potential obligation to deduct PAYE, ACC and fringe benefit tax on their behalf.

"The tax costs associated with an employee will impact on the cost of remuneration, the pricing of contracts, and how competitive New Zealand tenders are for overseas projects," KPMG said.