Am I a tax resident in New Zealand?
Sometimes it is hard to answer a seemingly simple question. It is important to know the answer though as most New Zealand tax residents need to pay tax in NZ on income they have from any country in the world (their “worldwide income”) but non residents only need to pay tax on income that has a New Zealand source (source itself can be hard to determine in some situations but that is another topic!).
This article is about tax residence as it applies to people, the rules for entities like companies and trusts are different. Note that there is an exemption for new migrants to New Zealand for paying tax on most types of overseas income for four years from arrival but that exemption will be covered in a separate article.
Residence tests for individuals in the Income tax Act
Tax residence in New Zealand can be complicated as there are two different tests for residence included in our tax legislation that can apply at the same time. Also, New Zealand has a network of 40 double tax agreements (DTAs) which although are often similar to each other, they are not always the same. The provisions of the DTAs override the two tests included in our tax laws.
Below I will outline the two tests for tax residence that are included in our domestic legislation (the Income Tax Act 2007) as well as showing the impact of a double tax agreement.
1. Number of days test
This test is the easiest to apply as it is just a simple counting of days. So under this test if you are here in New Zealand for more than 183 days in any 12 month period then you are tax resident here from the first day that you came. Easy right!
And if you are leaving New Zealand then you need to be out of New Zealand for more than 325 days in any 12 month period to break that residency. Note it is possible to become non-resident under this test but still be resident because of the permanent place of abode test.
2. Permanent place of abode
This test is trickier for individuals and the IRD to apply. Individuals who have a “permanent place of abode” in New Zealand are tax resident here even if they have a permanent place of abode elsewhere. “Permanent place of abode” is not defined in the Income Tax Act however, which obviously makes it hard for people to know what this is. Currently the IRD says that it will look at all ties to New Zealand including how often you return here, how long you spend, family connections, economic interests etc.
Where cases of this nature have been to court, the courts have noted that in order to have a permanent place of abode here there must be an address for that place of abode. A house that has been lived in by the taxpayer would likely be considered a permanent place of abode however a property that is owned purely as an investment property that has not been lived in by the taxpayer or their family would not.
Impact of Double Tax Agreements
If there is a DTA with the country other than New Zealand where you frequently spend time then there is usually a “tie breaker” provision to make you a tax resident in one country or the other (but not both).
For example if you are from New Zealand and you move to Australia and buy a house to live in then as soon as you have been there for 183 days in the income year (their rules are similar to ours but not the same) then you would be a tax resident in Australia.
However if you have kept the family home in NZ or if you return frequently and for long enough that you are never out of NZ for more than 325 days then you can be considered tax resident here either under our number of days test or through our permanent place of abode test.
So without the DTA it is possible that you are tax resident in both places. I won’t go through all the provisions here but you might be pleased to know that in this case Article 4(2) of the NZ/Australia DTA provides a series of steps to take to determine which country you will be tax resident in.
So what do you need to do?
If you are new to New Zealand or leaving New Zealand or you spend some time in New Zealand and some in other countries then it is really important to understand your tax residence status.
Keen followers of pop culture and tax may have read that pop star Shakira is currently facing jail time in Spain for declaring her tax residency incorrectly on her tax returns there. As every situation is different I would recommend getting professional advice.