Residency and source 1 March 2017

Residency - individuals

New Zealand tax residents 1 New Zealand tax residents are assessed on their worldwide income.

Non-residents 2 Non-residents are assessed on their New Zealand sourced income.

Transitional residents Transitional residents are assessed on their New Zeeland sourced income and foreign employment income. 3

Permanent place of abode test Individuals #1 183 day #2 Permanent place of abode test

Residence of individuals - tests Section YD 1: A person will be tax resident in New Zealand if they have a permanent place of abode (“PPOA”) in New Zealand regardless of whether they have a PPOA elsewhere in the world. A person will be tax resident in New Zealand if they are personally present in New Zealand for more than 183 days in a 12 month period. A person who is New Zealand tax resident by virtue of the 183 day test will cease to be a New Zealand tax resident if they are personally absent from New Zealand for more than 325 days in a 12 month period.

PPOA The dwelling requirement – a prerequisite “Permanent” is not taken to mean everlasting, but something more than temporary or transitory Even if a taxpayer’s stay outside NZ is only for a fixed period, a PPOA can still arise Need to consider the nature and quality of the use the individual habitually makes of a property in NZ C of IR v Diamond (2015) 27 NZTC 22-035

PPOA – factors to consider The continuity or otherwise of the taxpayer’s presence in NZ and in the dwelling The duration of that presence The durability of the taxpayer’s association with the particular place The closeness or otherwise of the taxpayer’s connection with the dwelling – the situation before and after a period or periods of absence from NZ should be considered Distinguish between transient or temporary place of abode The existence of another PPOA outside NZ does not preclude a finding that the taxpayer has a PPOA in NZ

Transitional residents Section HR 8: A transitional resident is a person who: Is a NZ tax resident; Must not have satisfied the PPOA test or the 183 day rule and not been resident in NZ for a continuous period of at least 10 years immediately before coming a resident; Must not have been a transitional resident at any time before the 10 year non-residence period; Must not have ceased to be a transitional resident after the end of the 10 year non- residence period.

Transitional residents An individual who meets all the requirements of section HR 8 is treated as a transitional resident for the period beginning on the first day he/she meets the tax resident tests and ending on the earlier of the day before the person ceases to be NZ resident or the last day of the 48th month (ie 4 years) after the month in which the person earliest meets the tax resident test. Benefit of being a transitional resident – all foreign sourced income is exempt (except foreign employment income). For example, interest from foreign banks, dividends from foreign companies would be exempt income and subject to tax in NZ. Aim of regime – encourage migration back to NZ by offering temporary exemption of foreign sourced income.

PPOA Example 1- Kate Facts: Normally a NZ tax resident Seconded to Canada for 3 years Intends to return to NZ at the end of the 3 year period, and her job will be available for her Partner and children accompany her to Canada House in NZ is owned by a family trust. Kate’s parents and solicitor are trustees. Kate and her children are beneficiaries House is rented out Furniture and belongings in storage Retains NZ investments and professional / sporting memberships Returns to NZ for Christmas annually

PPOA Example 1 - Kate Does Kate have a PPOA? What factors contribute? Yes What factors contribute? Has retained ties with NZ Infer that house can be available on her return Employment ties to NZ Although away 3 years, this is outweighed by other factors

PPOA Example 2- Melanie Facts: Melanie, her husband and their four young children live in Tauranga Family moves to London due to a lucrative job offer No intention to return to NZ in foreseeable future Family home is sold Melanie moves to London in October, the Husband and Children follow in November following the end of the school year and the sale of the house Children are enrolled in London schools by Melanie upon her arrival One bedroom rental property in Tauranga is retained Have a broker managed NZ share portfolio Retain NZ life insurance policies

PPOA Example 2- Melanie Does Melanie have a PPOA? No What factors contribute? Although she initially continues to have strong connections, her place of abode is no longer permanent No intention to return to live in NZ in the foreseeable future Maintaining life insurance is not a strong connection The rental property is not a place to which they would likely return (always used as an investment, small size)

Residency – companies

Residence of companies - tests Section YD 2: A company is a New Zealand resident if: It is incorporated in New Zealand; Its head office is in New Zealand; Its centre of management is in New Zealand; Its directors in their capacity as directors, exercise control of the company in New Zealand, even if the directors’ decision-making also occurs outside New Zealand.

Company Residency Example 1 Facts: Company A is incorporated in Hong Kong and manufactures clothes there A’s operations are managed from Hong Kong A has no NZ office All meeting of the Board are held in Hong Kong Directors in Hong Kong always act on the instructions of A’s New Zealand parent company The do not question the instructions from the NZ parent

Company Residency Example 1 Is company A a tax resident of NZ? Yes Under what test? Is not resident under the head office or centre of management tests The NZ parent is exercising control over the directors, so becomes a de facto director. As the instructions come from NZ, the company is a NZ tax resident under the director control test

Company Residency Example 2 Facts: F is incorporated in the Cook Islands Used as a financing vehicle for a group of NZ based companies G (incorporated in the Cook Islands) is the sole director of F F and G are both managed from the cook islands Neither has an office in NZ G acts on instructions received from a NZ resident company that is a member of the group G does not discuss or consider the instructions

Company Residency Example 2 Are companies F and G NZ tax residents? Yes Under what test? Both F and G are Cook Island residents under the centre of management and head office tests However, NZ Co is a de facto director and exercises control from NZ, making F and G tax residents under the director control test

Source

Classes of income treated as having NZ source Section YD 4: Business in NZ Contracts made or performed in NZ Personal services in NZ Accident compensation payments Pensions Income from land owned in NZ Income from use in NZ of personal property Royalties

Personal services income Section YD 4: Business in NZ Contracts made or performed in NZ Personal services in NZ Accident compensation payments Pensions Income from land owned in NZ Income from use in NZ of personal property Royalties

Business income Section YD 4: Business in NZ Contracts made or performed in NZ Personal services in NZ Accident compensation payments Pensions Income from land owned in NZ Income from use in NZ of personal property Royalties

Reading Textbook – pages 151-163 Inland Revenue Interpretation Statement – Tax residence (link below) http://www.ird.govt.nz/resources/9/2/9227e1f5-aaac-4bab-8bf1-5ef527fd4441/IS+1603.pdf

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