If you travel or work abroad for any length of time, it may affect your tax residency status. Tax residency is important because it affects who can tax your worldwide income – however it’s also often highly complex.
With more and more people moving around now the borders are open, it’s important to understand how your income will be taxed if you move overseas or are returning to NZ.
We’ve broken it down to help you understand what situations you may be a tax resident of NZ – as well as what happens if you leave Aotearoa.
Why is tax residence important?
If an individual is a tax resident person of New Zealand, New Zealand has a right to tax their worldwide income. This is in contrast to a non-tax resident individual, where New Zealand has a right to tax their income if it has a New Zealand source.
What makes you a tax resident of New Zealand?
Contrary to common belief, tax residence is not the same as residence for immigration purposes.
An individual will be a tax resident of New Zealand if they meet one of two tests:
- You are physically present in New Zealand for more than 183 days in any 12-month period (the “Day Count Test”); and/or
- You have a “permanent place of abode” (“PPOA”) in New Zealand.
Note it’s an “and/or” test so only one test needs to be met for the individual to be a tax resident of New Zealand.
Day Count Test
Precision is required here - days of arrival and departure are included as a single day present in New Zealand, i.e. if you land at 11:59pm, that’s counted as one full day in New Zealand.
It’s also important to note that the test is retrospective. You might not be a tax resident on the day of arrival, but once you meet the 183-day threshold you are a resident from that first day of the count.
PPOA Test
This test is far more subjective. This test seeks to bring those individuals with strong ties to New Zealand as tax resident in New Zealand.
The relevant factors to consider in applying this test are:
- Whether the person has a dwelling (somewhere to live on a more permanent basis) available to them. It is irrelevant whether the dwelling is owned, leased, rented; each could equally mean a dwelling is available. This is a prerequisite to being a New Zealand tax resident individual. If you have no dwelling available then you can’t have a PPOA (regardless of the other relevant factors).
- Your intentions - do you intend to reside in New Zealand?
- Your history - have you lived in New Zealand before, and are you are frequent visitor?
- What are your ties to New Zealand? This includes family, personal belongings, bank accounts, social clubs, political membership/s (it’s always good to keep your options open…)
Note, you can have a PPOA in more than one country i.e. you are not precluded from a New Zealand PPOA if you think you have a PPOA elsewhere in the world.
What is a transitional resident and why is it relevant?
This is a concessionary rule and is a benefit to new tax resident individuals of New Zealand.
You qualify as a transitional resident if:
- You are a New Zealand tax resident individual; and
- You have not been a New Zealand tax resident individual in the last 10 years; and
- You haven’t qualified as a transitional resident before.
If you qualify for the concession, then it’s normally good news as you will be treated similarly to a non-tax resident individual and will not be subject to New Zealand tax on most foreign sourced income for at least 48 months following becoming a tax resident.
We say most foreign sourced income as the concession extends only to passive income. This means foreign sourced income from employment or providing personal services is excluded from the concession.
The transitional residence concession can be advantageous if you have income overseas that is not taxed overseas. It can be a disadvantage though if you would have a foreign sourced loss available as a deduction in New Zealand; therefore it is possible to irrevocably elect not to be a transitional resident individual.
Learn more about whether you qualify for transitional residency in our article here.
I think I’m a tax resident of more than one country, surely this can’t be correct?
It is correct, you can be a tax resident of more than one country depending on their respective domestic rules.
Ordinarily, this being the case a Double Tax Agreement (“DTA”) will be of relevance. New Zealand has entered into DTAs with a number of countries. The DTA will seek to remedy a number of scenarios, including where a person is a tax resident of both countries.
Where this is the case AND New Zealand has a DTA with the other country of tax residence, the DTA will apply a tie breaker test to determine the sole country of which you are a tax resident (for the purposes of the DTA), i.e. it will modify and treat you as a tax resident of only one or the other.
I’m leaving New Zealand, do I lose tax resident status?
If you are leaving New Zealand you will only be considered a non-resident if:
- You have not been physically present for at least 325 days in a 12-month period; AND
- You do not have a PPOA in New Zealand.
This test can be quite murky. It is often misinterpreted that the individual just needs to leave for at least 325 days. This is not correct and there is no rule of thumb as to how long you have to leave before you no longer have a PPOA in New Zealand. Inland Revenue historically applied an unwritten three-year rule, however this is not something you can necessarily rely upon now.
Common issues
Commons issues arise around when an individual becomes a tax resident of New Zealand, which can also impact upon the timing of when the transitional residence concessionary period begins.
Common scenarios include:
- (In recent times) Being trapped by Covid and prevented from leaving;
- Trips to New Zealand to decide if you want to move here (do these trips count?);
- Are your ties strong enough to New Zealand to warrant acknowledging a PPOA?
- What are my compliance requirements?
Please be advised that tax residence can be complicated, therefore the below is offered not as advice, but general information on the topic and is not to be relied upon. Get in touch with the team at BDO for more information and support.