Tax residency can be a tricky issue. It’s easy to become a tax resident of Aotearoa, but much harder to shed your tax residency.
Getting this right is vital for anyone, particularly for those with large overseas investments. If you think you’re not a tax resident, and continue to invest in offshore businesses and shares, you might get a very unpleasant surprise if you’ve got it wrong.
For high-net-worth individuals, this is a mistake that can cost them dearly – potentially millions of dollars.
What are the criteria for New Zealand tax residency?
There are certain guidelines on what makes you a New Zealand tax resident:
- You must live in New Zealand for more than 183 days in a 12-month period, and/or
- Have an established ‘permanent place of abode’.
You’ll notice you can qualify as a tax resident by fulfilling either of these two criteria. In contrast, to lose your New Zealand tax residence, you need to:
- Be outside New Zealand for more than 325 days in a rolling 12-month period, and
- Not have a permanent place of abode in New Zealand.
Both these criteria must be met to lose your tax residence status, not just one. In particular, Inland Revenue (IRD) will look closely at whether you have a permanent place of abode (PPOA).
Home ownership is not the acid test
You may have heard this advice from friends: Just move your property into a spouse’s or child’s name, and you’ll no longer have a PPOA. However, it’s not good advice – the IRD may well find that you have a PPOA even if you do not own a house, or your house is rented out, or it is in a family member’s name. What works for your friend might not work for you; it will all depend on your own circumstances. Even a home that you rent from a third party can be a PPOA.
You may also be a tax resident in another country, and it may have a double tax agreement with New Zealand. The double tax agreements may be used to determine your sole country of tax residency. However, while double tax agreements mitigate being taxed twice, they don’t necessarily eliminate higher taxes.
Everyone’s circumstances are unique, and the IRD will carefully consider each person’s tax residence status on the details of their situation.
Why does it matter if you’re still a New Zealand tax resident?
Not every nation taxes income, wealth and capital gains in the same way. New Zealand doesn’t have a comprehensive capital gains tax. However, we do, for example, capture tax on certain foreign investment funds. This may amount to tax of up to 39% on 5% of the value of your foreign shares each year. Other countries do not tax foreign investments in the same way. The New Zealand system can give rise to double tax exposures. This is often seen as unfair given the New Zealand taxing date may occur every year based on annual deemed “unrealised” value gains, as opposed to real disposal gains.
If you are assuming you’re not a New Zealand tax resident, and investing heavily in international shares, you might not expect to be taxed on those holdings. You could be investing happily for years without realising your mistake. However, if Inland Revenue finds you are a tax resident, it will want you to pay tax on those years, plus interest and penalties. This is only one of the taxes you might not be expecting if you believe you’re not a tax resident.
The cost of getting it wrong can run into the millions
How much of a risk is it if you’re wrong about your tax residence? Consider this example: A person born in India moved to New Zealand during the pandemic to visit her family. She was stuck here much longer than expected due to the lockdowns, and she is still living in Aotearoa. Although she had a home in India and was only staying in her daughter’s granny flat in New Zealand, the IRD still considered her a NZ tax resident under the domestic legislation of NZ. The woman unexpectedly found herself with over $100,000 in additional taxes to pay.
Here's another scenario: A man originally from the UK inherited $35 million from his parents while living part-time in New Zealand. He used most of it to buy international shares, assuming he wasn’t a Kiwi tax resident. He had put his house into his wife’s name, because he thought that would mean he couldn’t be taxed here. But in the eyes of the IRD he remained a New Zealand tax resident under our domestic legislation. He was at risk of owing nearly $5 million in tax after three years, including interest and penalties unless the double tax agreement could provide double tax relief.
Another example documented on the IR website is that of a bank manager who lived in both Fiji and New Zealand, while managing a bank in Fiji. Because he was paying tax in Fiji, he thought he didn’t need to pay tax here. The IRD disagreed, and the tax, interest and penalties payable on his income over four years came to over $1 million – and that was back in 2006, so you can see the high potential cost of getting this wrong.
Clarify your tax residency before you invest
It is well worth establishing your tax residency before you make significant financial decisions or decide to move overseas. This can save you a huge amount of stress and nasty surprises from IR.
We can assist with understanding your tax residency position and making a self-determination of this with the IRD. Alternatively, we can assist with a short-form ruling with the IRD for even greater certainty. IRD have recently released a new draft interpretation statement on tax residence. Given it has been ten years since the existing tax residence statement has had a full refresh, it is a timely opportunity to consider your tax residence position.
Understanding your tax residency position and the interaction with any relevant double tax agreements can allow you to invest with confidence as long as there are no major changes in your circumstances. Without a clear understanding of your tax residence, you might be making some expensive assumptions – so do not rely on advice from friends or family members when it comes to tax residency. This is a complex area of tax, and the cost of any mistakes will far outweigh the cost of getting it right before you start investing or working overseas.
