Expat ruling on residency reveals complex nature of tax regimes

by Ray Clancy on February 13, 2014

For many expats proving where they live and whether or not they have ties with their home country is crucial in determining where the pay their tax.

It can come down to the number of days spent in a particular country or whether they still own property in another country and can become very complex.

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Tax matters for expats can come down to the number of days spent in a particular country or whether they still own property in another country

Some countries have more complicated proof of residence than others and legal cases can affect the outcome. Now it seems that living abroad for 10 years is not enough for expats from New Zealand.

A recent Taxation Review Authority (TRA) case decision has the potential to undermine the nonresident tax status of New Zealand expats who may otherwise have considered themselves out with the New Zealand tax system, according to Rebecca Armour, head of KPMG’s International Expatriate Services tax team.

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, 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. He also visited New Zealand every five to six months, including to see his immediate and extended family.

The tax residency rules are complex, and a high level of judgment is generally required in applying the rules. Armour explained that generally a person is deemed to be a New Zealand tax resident if they have a permanent place of abode in the country. A key part of the test is having a home or other property 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 despite the fact that he has never lived in the property and 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 expats’ 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 is family connections, including a continuing relationship with children, 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 said that in this 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 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.

Armour believes that overall the decision was surprising 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. ‘Certainly, past Inland Revenue guidance on this issue would suggest this is the case,’ she explained.

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 expats 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.

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