Tax Residency

Tax residency is an important tax concept. A taxpayer who is a New Zealand tax resident is subject to New Zealand income tax on their worldwide income. It is possible to be a tax resident of two or more countries at the same time. 

Tax residency is not always straight-forward to determine, given the multiple bases for tax residency; two for individuals and four for companies. In addition, Double Tax Agreements (“DTA”) provide tie-breaker tests where an individual or a company is a tax resident of the two countries that are party to that DTA.

Individuals

There are two separate tests of triggering tax residency for individuals under New Zealand law. These are:

1. Being physically present in New Zealand for more than 183 days in a 12-month period (“the days test”); or
2. Having a permanent place of abode in New Zealand (“the permanent place of abode test”). 

It is important to note that the days test can be applied to any 365-day period and not necessarily a calendar year, the standard tax year of 1 April to the following 31 March, or a 12-month period ending on the last day of a month.

Any part day counts as a full day. Sally arrives in New Zealand at 11.30 pm on Thursday and leaves at 03.45 am the following Monday. She has been in New Zealand for five days for the purposes of the days test, even though she was here for just over 76 hours.

Ensuring that tax residency in terms of the days test can be managed with careful recording and planning. I recommend, however, that a reasonable buffer be allowed in case of illness, injury, or changes to scheduled flights.

The permanent place of abode test is the dominant tax residency test, but in my experience is not that well understood and is often ignored or overlooked. 

In short, a permanent place of abode is a link to New Zealand. The starting point is does the individual have a place of abode (dwelling) in New Zealand. There must be a place of abode (dwelling) used by or available to the individual, and the individual must have other links to both the place of abode and New Zealand. 

It also important to note that the determination of an individual’s tax residency is “a snapshot at that time” and circumstances could change. This is illustrated below.

A New Zealand family moved abroad to work and live. They received professional advice that they would break their New Zealand tax residency. That advice was correct as at that time. After several years, when the children were old enough to attend secondary school, the children and their mother returned to New Zealand to live. The father, now the owner of a business in the other country, travelled to New Zealand on a “month on month off” basis. The father still regarded himself as a non-resident of New Zealand for tax purposes.  Inland Revenue, correctly, took a different view. The ensuing tax audit resulted in an income tax debt of almost $1 million.

Companies

Section YD 2 defines tax residency of a company. There are four separate bases for New Zealand tax residency:

1. The company is incorporated in New Zealand;

2. The company’s head office is in New Zealand;

3. The centre of management of the company is in New Zealand; and

4. The directors of the company, in their capacity as directors, exercise control of the company in New Zealand, even if the directors’ decision-making also occurs outside New Zealand.

Whether a company is incorporated in New Zealand is a matter of fact. This includes companies formed overseas that have migrated their registration to New Zealand. 

A company’s head office generally will be where the company’s senior management is based and often this will often be the same as the centre of management. The centre of management test is wider than the head office in circumstances where the company has no head office.

A company formed in another country can be controlled by New Zealand directors, even if there are also directors from other countries and/or meetings are held outside of New Zealand. Two cases illustrate this point:

1. De Beers Consolidated Mines Ltd – although the company was incorporated in South Africa, the board of directors were based in London. The control of the company from Great Britain meant that the company was a British tax resident; and
2. Vinelight Nominees Ltd – a Hong Kong company was used as an investment vehicle. Initially a New Zealand resident owned all of the shares and she and her husband (“H”) were the directors. After receiving professional advice, the shares were transferred to the couple’s three children based in Hong Kong. The three children became directors of the company. Later H resigned as a director but was retained as an “administrative director”. H was involved in the company’s day to day management. The High Court held that the centre of management and control were exercised from New Zealand. That is, the company was a New Zealand tax resident.

The application of tax law can be very fact specific. The comments above are of a general nature only and are not intended as tax advice.