Yahoo Finance What is Tax Residency?
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Many of the questions that were submitted last week mentioned overseas situations. The advice I always give is to obtain professional advice before you travel or move. This advice may need to come from more than one adviser in more than one country.
Most people think of residency as ‘where you live’. ‘Tax residency’ is not as simple to define. The general idea is that time is a factor and also the concept of ‘a permanent place of abode’ is another factor.
The time factor basically says that if you have been in NZ for more than 183 days in aggregate in a 12 month period then you will be deemed to be NZ tax resident. Note that part days are counted as whole and it is any 12-month period and does not need to be continuous. In order to lose NZ tax residency you have to be out of NZ for at least 326 days within a 12-month period.
Regardless of the time factors above, you will be deemed to be NZ tax resident if you have a permanent place of abode in NZ. Unfortunately this term is not defined in tax law, but there have been many cases and IRD policies that guide what may constitute this factor. Some of the items that IRD will consider are
- Home and property ownership, including vehicles and furniture;
- Accommodation arrangements;
- Family connections;
- Financial connections, such as bank accounts and superannuation;
- Memberships of clubs and associations.
There are many other factors that could also be taken into account, especially anything of a continuing nature with NZ. Every person has different circumstances that should be looked at separately.
It is possible that due to other countries’ tax residency rules that a person can be tax resident in more than one country at a time, such as using the time rules alone. The weighting of permanent place of abode items will normally determine the country that has tax jurisdiction.
The reason why countries want tax residents is the ultimate taxation of those residents. Generally each country will tax income that has originated in that country, but a country will tax all of its tax residents on their income regardless of where it is earned. For example a New Zealander who has an Australian bank account that earns interest will probably be liable to pay withholding tax in Australia on this income, and then also have to include this income in their NZ tax return because this is where the person is tax resident. This leads onto the issue of double taxation.
Generally the idea is that a credit for tax paid on overseas income (up to the maximum tax payable in NZ) will be allowed in the NZ tax resident’s return. To clarify many of the issues of types of income to be taxed, provide relief from double taxation, and to exchange information between countries, NZ has entered into Double Tax Agreements with more than 30 of our main trading partners including Australia, China, the United Kingdom, and the United States.
While each agreement aims for clarification, they can be different. For example, UK pensions (including state pensions) that are taxed in the UK will not get tax credit in NZ. Therefore if these have been taxed overseas a refund from HM Revenue and Customs would have to be applied for by the taxpayer.
There are also rules for non-individuals such as companies and trusts. Tax residency that I have referred to in this article relates to income tax. There may be other rules for other taxes and tax credits. For example, Working for Families Tax Credits relies on where you reside, which means you might live in Australia and not be eligible for WfFTCs, yet still be NZ tax resident for income tax. There are also some transitional rules for people who arrive in NZ, and some special rules for New Zealanders who move to Australia. Special rules even apply to certain occupations such as in the service of the NZ Government.
As you can see there may be many factors that need considering before filing a tax return if you have been moving significantly between countries. The area of tax residency can be complex and professional advice should be sought preferably before travel (which may give you the opportunity to structure your affairs first), or at least as soon as possible to determine any tax consequences.
Disclaimer:
Any views the writer has expressed are his own and not necessarily those of Accountants On Elliott LP. The information supplied has been written in general terms only. This information should not be relied upon specifically without also obtaining appropriate professional advice after detailed examination of your particular situation.
