In 1789 Benjamin Franklin wrote “….in this world, nothing is certain except death and taxes”. Since early 2020 the Covid 19 pandemic has turned our world upside down – creating uncertainty at a level most of us have never seen and providing a sobering reminder of just how accurate Franklin was all those years ago.
Since New Zealand’s first (and to date only) national lockdown was mandated in March 2020 we have had many enquiries from prospective clients wanting to return to or immigrate to New Zealand, physically in New Zealand and unable or unwilling to return to their home country, and on rare occasions wanting to leave New Zealand.
Such arrivals and departures often have implications for tax residence, and Covid 19 modifications to residence rules applying sometimes introduces additional complexities.
In the following article we discuss some of the interesting situations on which we have advised.
Firstly, we emphasise that taxpayers should in the first instance base their initial decisions on personal and commercial imperatives. However, running a tax ruler over potential actions can sometimes help discard or cement different options.
Tax residence is usually driven by an individual’s physical presence and/or ties and connections to New Zealand. Tax residence is important because a tax resident is generally taxed in New Zealand on their worldwide income.
While IRD have helpfully announced some relaxation of rules in relation to days of physical presence tests, we have recently advised a number of individuals where their tax residence position was still found to be impacted in ways different than they had expected – either back on New Year’s Eve a little over 12 months ago or based on a cursory application of IRD’s modifications to the rules.
Non resident taking refuge in New Zealand
A previous New Zealand resident had been living and working in the Middle East for many years, with his only New Zealand connections being extended family and occasional brief holidays – certainly not sufficient to constitute a permanent place of abode. He returned to New Zealand just as the pandemic began to acutely affect global travel. For a period he could not physically leave and reached out to extended family in New Zealand for assistance.
When travel restrictions ended, he was wary of returning to a location struggling to cope with the pandemic… besides which, it wasn’t clear his job was still available in any event.
IRD’s temporary relaxation of the day count test for physical presence only applies if the individual departs from New Zealand as soon as practicable after travel is no longer restricted, irrespective of whether there is a job or even a home to which they could return.
In this case we advised the client about application of the relief rules and under what circumstances the travel restrictions would likely be considered lifted. He was then able to make an informed decision about whether:
- to remain in New Zealand after that occurred – meaning he could not rely on the modified residence tests and would become New Zealand tax resident; or alternatively
- to leave New Zealand as soon as practicable – meaning he could rely on the modified residence tests and would not be considered New Zealand tax resident.
Australian FIFO worker
We have also advised a New Zealand citizen and tax resident with a Fly-In-Fly-Out job on an oil rig in Western Australia. He had a partner and child in New Zealand and previously returned here for his rostered time off after every swing or rotation on the oil rig. Knowing that if he did return to New Zealand during the pandemic he would likely not have been permitted to return to Australia to work, he chose to remain in Western Australia working and has not physically returned to New Zealand for almost twelve months now.
Needing assistance with a young child, his partner and child moved out of their rental accommodation and in with a relative in New Zealand soon after the pandemic began.
The FIFO worker has had to establish a home in Western Australia to stay between swings on the jobsite. After a long time apart, his partner and child have now joined him there and neither of them have any intention to return to New Zealand in the foreseeable future.
Determining if and when his tax residence changed from New Zealand to Australia is not straightforward. Without access to any dwelling that he had previously lived in New Zealand, he arguably no longer had a permanent place of abode in New Zealand – despite his intention until recent times being to return to New Zealand. The Australia and New Zealand double tax agreement also needed to be considered and the tie breaker provisions within that agreement applied.
After considering all the relevant facts, and applying the modified residence rules, we were able to provide this client with a specific date that we considered his tax residence changed to Australia.
Date NZ tax residence ceases – IRD website misleading taxpayers
Our client had been physically in New Zealand deriving New Zealand sourced contract income, before then leaving New Zealand and ceasing to have any permanent place of abode in New Zealand.
Having been encouraged by IRD to review his own tax status [grrr] he initially sought to do this himself and did not seek professional advice. Turning to the IRD website for guidance he found the following comments there at that time:
Am I still a tax resident when I have left New Zealand?
Yes until you have been out of New Zealand for 325 days in any 12-month period and you don’t have a permanent place of abode in New Zealand. If you’re here for only part of a day it’s counted as a whole day.
The 325 days don’t have to be consecutive.
On this basis he (incorrectly) concluded he would remain a New Zealand tax resident and would not cease New Zealand tax residence until the first day AFTER he was personally absent from NZ for 325 days.
When he approached us for assistance on an unrelated technical query, we identified that his understanding of when he ceased New Zealand tax residence was incorrect and he had in fact ceased New Zealand tax residence almost a full year earlier than he had determined following IRD’s guidance.
We advised IRD of their misleading guidance on this matter and IRD have subsequently amended their website comments. It now reads as follows:
If you’re a New Zealand tax resident, you’ll become a non-resident taxpayer if you both:
- do not have a permanent place of abode in New Zealand
- are away from New Zealand for more than 325 days in any 12-month period.
Regrettably, while it removes the erroneous guidance regarding timing of ceasing residence, it does not comment at all on when the non-resident period will commence.
Avoiding unexpected tax outcomes through Covid
We urge caution for any individual who has physical presence or ties and connections to New Zealand that have been impacted by the Covid 19 pandemic.
Unforeseen changes in tax residence can result in material tax obligations and, as always, the sooner these are identified and dealt with, the better – and less likelihood there will be need for a ventilator.
Finally, as always, don’t rely on IRD statements – they can be misleading and are not always a valid interpretation of the relevant legislation.