Kiwi expat tax ruling
Kiwi expat tax ruling
10 years living outside New Zealand not enough to lose tax residence for Kiwi expats
At first glance, this is the key message of a recent Taxation Review Authority (TRA) case, says Rebecca Armour, head of KPMG’s International Expatriate Services tax team. It has the potential to undermine the non-resident tax status of a number of expatriate New Zealanders who may otherwise have considered themselves well and truly outside Inland Revenue’s reach.
The case involved a former soldier who left New Zealand permanently in 2003 to work in overseas hotspots as a security consultant. He was separated from his wife at the time of leaving (and later divorced) and had children, who remained in New Zealand. Financial support was provided and he held some New Zealand property investments (including some jointly with his ex-wife). The security consultant (taxpayer) also visited New Zealand every 5-6 months, including to see his immediate and extended family.
The tax residency rules are complex, and a high level of judgement is generally required in applying the rules, says Armour. Broadly, a person is deemed to be a New Zealand tax resident if they have a “permanent place of abode” here. Permanent place of abode tests the relationships or connections a person has with New Zealand, and their durability. A key part of the test is having a home or other property (“dwelling”) in which to live.
The TRA found that one of the taxpayer’s rental property investments constituted an available dwelling. Because the property was let on a periodic, rather than fixed term basis, the TRA considered it theoretically could be made available at short notice to the taxpayer. Its location in the same area as the taxpayer’s ex-wife and his children were living was also considered a relevant factor. This was notwithstanding the taxpayer never having lived in the property and arguing that he could not simply evict the tenants due to the way the property was owned.
This is a worrying development according to Armour, as it potentially puts expatriates’ New Zealand property investments directly in Inland Revenue’s crosshairs, even if they have purchased solely with the intention of renting.
The other link to New Zealand emphasised by the TRA was family connections. Namely the taxpayer’s continuing relationship with his children, including providing financial support and regular visits. The taxpayer’s close business relationship with his ex-wife was also noted.
While some emphasis can be placed on family ties, in the residence context, Armour says that in the present case the taxpayer argued that his relationship with his former spouse and children had actually broken down while he was overseas.
The lack of economic, social or family ties to another country (or countries) also did not help the taxpayer. While the Judge accepted that the overseas locations in which the taxpayer was based were not conducive to putting down roots, he considered that this made it difficult to place any weight on ties to countries other than New Zealand.
The decision also highlights the importance of (1) evidencing the intention to leave New Zealand permanently, and (2) doing this contemporaneously, says Armour. The failure to do this resulted in the TRA placing little weight on what may have otherwise been a very important factor in the taxpayer’s favour.
Overall, the decision is surprising says Armour, as most would expect 10 years away is long enough to sever tax residency ties with New Zealand, regardless of visits, investments, and family connections here. Certainly, past Inland Revenue guidance on this issue would suggest this is the case.
Very disappointing is how Armour describes the TRA’s finding that the taxpayer’s position, if viewed objectively, failed to meet the standard of being about as likely as not to be correct, and as a result penalties for taxing an unacceptable tax position were justified. While each residence case must be considered on its facts, it is very difficult to see how the taxpayer’s fact pattern and arguments did not support at least a 50% probability of success.
A pessimistic view is that New Zealanders now need to break all ties with New Zealand to be confident they no longer retain New Zealand tax residence when they leave to work and live overseas. Bluntly, this suggests no investment properties or close family connections. This is particularly relevant for expatriates working in countries not covered by New Zealand’s network of Double Tax Agreements, such as the Middle East, Africa, South America and parts of Asia and Eastern Europe. (DTAs offer some protection in situations like these by limiting New Zealand’s rights to tax.) Taking a contra position could result not just in additional tax to pay but also shortfall penalties.
However, there is a ray of hope that Inland Revenue’s upcoming statement on tax residence may provide some workable and practical guidance in this area. In light of this recent decision, this will be more important than ever.