Expats owning property and having family ties in New Zealand face a strict residency test following a tax ruling.
An appeal court decision looked at how the income of a New Zealand national who has lived overseas for more than a decade should be taxed.
The unnamed taxpayer was a former soldier who left the country in 2003 to work as a security consultant in Papua New Guinea, Australia and Iraq.
After leaving, he and his wife divorced but retained jointly owned letting property.
He also visited New Zealand every six months or so to see his children.
Judges support Inland Revenue arguments
The Inland Revenue challenged his tax payments on the grounds that although he spent much time overseas, he was still tax resident.
The appeal court judges agreed with the revenue’s argument and ordered that he should pay tax on his worldwide income.
The grounds for the decision were that the taxpayer had a permanent home and strong family ties in New Zealand. The home was considered available to him, even though the property was rented to tenants.
The ruling leaves the taxpayer owing tax on his income earned overseas since 2003 plus a 20% tax penalty and interest on the outstanding amount despite that he has already paid tax the same money in other countries.
Tax experts were shocked by the ruling, as they felt a decade away from New Zealand was enough to prove non-residence.
Testing tax residence
However, the case follows similar rulings in the UK, where one taxpayer had spent more than 10 years out of the country but was still deemed tax resident.
Rebecca Armour, head of KPMG’s international expatriate services tax team, explained the implications of the case.
“New Zealanders and expats considered tax resident now have to break all ties with the country when they depart for overseas,” she said.
“As a non-resident, they have to be out of the country for 325 days in a 12-month period and have their connections with the country assessed, especially if they own or have access to residential property even if it is let to tenants.”
Armour also noted that the taxpayer had worked in places without double taxation agreements with New Zealand, which would have mitigated his tax liability.
