Residential ties under closer IRD scrutiny

Phil Stevenson.
Phil Stevenson.
The Inland Revenue Department is becoming more active in monitoring when people leave New Zealand but maintain ties with this country, Deloitte Dunedin associate tax director Phil Stevenson says.

The outcome of a recent case involving a former soldier who left New Zealand in 2003 to work in various jobs around the world as a security consultant would provide momentum to the department.

The man, who had separated from his wife before he left, continued to provide financial support to her and their children.

That included having his name on the title of a house his wife purchased and meeting the mortgage payments.

He also had a financial interest in a rental property. Returning to New Zealand from time to time, the man spent an average of 42 days a year in the country.

Mr Stevenson said the key point for the Taxation Review Authority to decide was whether the taxpayer had a permanent place of abode in New Zealand.

A person was tax resident in New Zealand if they had a ''permanent place of abode'' in New Zealand, regardless of the number of days spent here.

A New Zealand tax resident was liable to return their worldwide income in New Zealand, although a credit could be claimed for tax paid overseas.

A range of factors was considered to determine if a person had a permanent place of abode in New Zealand.

Those included the availability of a dwelling, family ties, economic factors and social ties, he said.

If a New Zealand tax resident was also a tax resident of a country with which New Zealand had a double tax agreement, there was a series of ''tie-breaker'' tests, to decide whether a person was a tax resident of only one of those countries.

In a recent draft interpretation statement, Inland Revenue indicated a change in how those tests were interpreted, which would result in more people being deemed to be a New Zealand tax resident, Mr Stevenson said.

The court held the taxpayer had a permanent place of abode in New Zealand.

Particular weight was placed on the taxpayer being able to ask his tenants to leave the rental property and move into it - despite him never having lived in the property previously.

The court also held the taxpayer was liable for a 20% shortfall penalty for an unacceptable tax position and the taxpayer was also assessed for income tax for the years in question, he said.

''This case demonstrates a person's links to New Zealand do not need to be particularly strong for a person to have a permanent place of abode in New Zealand.

"With people and capital being mobile, it is not unusual for a person to have some investments in New Zealand, despite living and working elsewhere.''

It was also not unusual for a person to have family ties in New Zealand.

Many people left New Zealand and retained residential property in New Zealand or acquired rental properties while they were away and still considered themselves to be non-resident, Mr Stevenson said.

The case, and the recent draft interpretation statement issued by Inland Revenue, meant they would need to reconsider that position.

The main impact would be felt by taxpayers who lived and worked in low-tax jurisdictions that did not have double-tax agreements with New Zealand.

''They will need to return the offshore income in New Zealand but will have little or not overseas tax credits to claim. The taxpayer in the case was in this situation.''


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