How do I break my New Zealand Tax Residency?
Following on from my recent video on the Green Party’s proposed wealth tax we had a flurry of enquiries looking to leave New Zealand and wanting to know what is involved. Although Labour has currently ruled this proposal out on 13th July 2023 what happens with the Election results on October 14th 23 may change this stance.
Breaking Your New Zealand Tax Residency
Let’s set out the steps. Firstly, there are two basic tests that both must be broken if you are going to cease to be a New Zealand tax resident. Remember a New Zealand tax resident is taxable in New Zealand on their worldwide income and assets whereas a non-resident is only subject to income tax on their New Zealand sourced income and assets.
1. Physical Presence Test
The first test is the physical presence test. While you may only need to be in New Zealand 183 days in any 365-day period to become tax resident here, to cease to be tax resident you need to get out 325 days in any 365-day period. Once you are out for 325 days you are deemed to be non-resident from the first of those 325 days, and it doesn’t need to be continuous. Any part day in New Zealand counts as a whole day.
The first test is mathematically and factually pretty simple. If you are not sure if someone’s been in New Zealand or not on particular dates you can apply to the immigration department using the prescribed form on their website and noting the particulars of the passport and they will give you a list of when someone came and went.
2. Permanent Place of Abode
The second test is the hard one. You must cease to have a permanent place of abode in New Zealand. There is no statutory definition of this in the Income Tax Act 2007 so don’t go looking it up. It is decided by case law and the case law has been moving probably more in favour of the IRD than against it. Earlier cases were probably more against the IRD but the recent ones are certainly more in their favour.
To decide whether you have a permanent place of abode or not we first look at whether you have a home available in New Zealand?
You don’t need to own it, it could be owned by a trust, it could be rented but it is not an Airbnb. It is something that is more permanent.
If you are looking to leave New Zealand and you think you can sell your house to your kids and use it when you come back that won’t work and if you think you can keep a house here and not have a permanent place of abode it’s going to be a bit of a push. But we don’t just look at your house. If you had a house and nothing else here, you might get away with it particularly if you just bought the house.
In combination with the availability of a ‘Home’ is to look at the strength and duration of your links to New Zealand, do you have Wills here, bank accounts, investments, do you have family here, do you have business interests here, do you belong to the golf club, the tennis club, the tiddlywinks club whatever it might be.
For many clients the idea of leaving New Zealand is attractive but they then want to come back in just under 183 days and argue that they are not tax resident here, that is not going to cut it. If you are going to be non-resident even coming back for up to six months a year while it might not trip the physical presence test it can point to a permanent place of abode here, depending of course to what you do while you are in New Zealand and how you spend your time and where you stay.
The final piece in the puzzle is that you may become a resident in a foreign country. Let us use Australia as an example for the moment. So, you might become tax resident in Australia because you spent more than 6 months of the year there and you intend to make it your home. Australia will want to tax you on your worldwide income and assets subject of course to our Covisory white paper “Tax Free Sunshine” which explains the foreign temporary migrant regime.
With Australia wanting to tax you but you are still tax resident here, either you haven’t got rid of your permanent place of abode or alternatively, you are not out for the 325 days, in which case you are what we call dual tax resident. In fact, you can be a resident in more than two countries. If you are a US citizen or green card holder you would be resident there as well.
When you are dual tax resident we need to determine if the country in which you are tax resident has a double tax agreement with New Zealand. New Zealand and Australia happen to do so, and the agreement contains what we call a “tie breaker” series of tests to determine which country gets to tax as resident and which one gets to tax as non-resident. The tie breaker tests vary from double tax agreement to double tax agreement so always look them up but in the case of Australia and in most of them the first test is “do you have a permanent home available in one country the other or both”. AS mentioned earlier the permanent home doesn’t need to be owned, it can be rented, it can be owned by a trust and made available, and it could be something that you have the right to use like a retirement village. If this is the case and you have got one in both countries, you move to the next test which is your centre of vital interest. This is the country with which you have stronger personal and economic interests, and it needs to be stronger by a margin. Imagine Granny’s old scales on one side we put New Zealand and on the other side we put Australia and we see where the scales end up, how close to even and how much they move in a particular direction. If that cannot be decided, we move on to the next test which is habitual abode and then we move on to nationality.
There are a series of tests, the advantage of this is it depends on the country you are going to but if you can become dual tax resident we can often manipulate the double tax agreement tie breaker to be a little bit more favourable. The problem is that is going to be difficult again to do if you want to retain a home in New Zealand because then you have got to move on to the centre of vital interest which still may be New Zealand until you can move enough, break enough links and move them to Australia or whether you are located so the tie breaker may not be that bigger assistance in the normal run of the mill cases.
We can manipulate facts to get an outcome but more importantly, we need to make sure that you as the client get accurate advice. You do not go to the IRD and get a declaration that you are a non-resident because New Zealand self-assesses. If it's significant you might go and get a binding ruling, anything less than that is not worth the paper it is written on.
The same can apply in a foreign jurisdiction we will often go and get binding rulings confirming that a person is tax resident in Australia as an example from the ATO obviously not the IRD and their status as a foreign temporary migrant again refer to our Covisory whitepaper No. 1 Tax Free Sunshine: A guide for Kiwis to tax-free living in Australia for more details on this.
It is not a simple process but with planning you can break your New Zealand tax residency. I think the key point is you have got to want to leave New Zealand and you have got to genuinely leave New Zealand to break the tax residence or the permanent place of abode will be difficult. The IRD has put out an extensive interpretation statement on tax residency it is worth reading, it is always a little bit biased in their favour but it does at least give you something to benchmark yourself against.
prepared by
Nigel Smith
