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If you live and work overseas but rent out your New Zealand house, the IRD is proposing to change the rules to draw you back into a New Zealand tax liability. Your view?

Posted in Business

The IRD is proposing to change its interpretation of "residence" and the change is likely to have important implications for New Zealanders living and working outside the country.

It is likely to increase the tax burden for both employees and employers.

If you own a house here, the IRD now wants to make that a key reason why you should still be taxed as a New Zealand resident.

Previously, it was only one of a number of other tests to see if you had a New Zealand tax liability.

Many Kiwis working overseas will be familiar with the 183-day and 325-day rules, both of which are subject to the permanent place of abode rule.

“Under the proposed interpretation, many people currently overseas, who believe they are not taxable in New Zealand, may have an unfortunate surprise because of the change in approach and weight placed by Inland Revenue on property retained in New Zealand," said Murray Sarelius, tax partner at KPMG.

Three key changes are being proposed:

Permanent place of abode:

The new statement provides that to have a permanent place of abode in New Zealand a person must have a particular place of abode that is an "available dwelling". In contrast, the current position (PIB No 180) considered the availability of a dwelling as just one factor in assessing the durability of a person’s connection to New Zealand.

Permanent home:

The Commissioner’s new view, reflected in the statement, is that the term "available" in the context of the permanent home double tax agreement tie-breaker test is not based on mere occupation, or immediate availability for occupation. This is in contrast to the position in PIB No 180 which stated that where a person rents their house to non-related persons while they are overseas, that house will not be a permanent home which is available to them.

Habitual abode:

"The statement discusses Case 12/2011 (2011) 25 NZTC 1-012, [2011] NZTRA 08 and the application of the habitual abode double tax agreement tie-breaker test. Specifically, if the circumstances of a particular case require, periods outside the period of dual residence may need to be considered. Where this is the case, the Commissioner considers that such periods can only be taken into account so far as they assist in, and are relevant to, determining whether the person had an habitual abode in New Zealand during the period of dual residency."

These changes come hard on the heals of changes to employer-paid living-away-from-home accommodation, which has caused a storm of protest.

"There are some aspects of [this new] draft that go too far to treat people as tax resident in New Zealand," said Sarelius.

"Residence is an important area that impacts on many businesses and internationally mobile employees."

"In its current form, the Interpretation Statement will make it more difficult to determine whether a New Zealander working abroad is still taxable here, and will tax some people who should not be taxed."

These latest proposals are not yet the IRD's position. They have issued them 'for comment and discussion only' among tax professionals, although anyone may submit a view. The deadline for comment is January 31, 2013.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

29 Comments

Just another reason to use

Just another reason to use Trusts

or a LTD liabilty company

or a LTD liabilty company (the successor to the LAQC)

StanGoodvibes, you are

StanGoodvibes, you are referring to  a LTC company or Look Through Company. IRD treats these special companies as limited liability partnerships. You get to file a IR7 partnership tax return rather than a IR4, company tax return. However, physically the losses are still held by the company. Non residents have started to use this entity and claiming the tax credits in their Australian tax returns but I am wondering about the legitimacy of claiming costs in a Australian or foreign jurusdiction that does not recognise the existence of LTC. Theory says to me that as the LTC exists only in NZ any losses would not be available in that foreign country.

I think a practical, but

I think a practical, but hypothetical scenario might help readers understand the implications of this change.
Consider Sally Anne, a highly qualified nurse who has a home in Auckland that is rented out.  After mortgage interest it makes about $1000 per year.  In the past she has paid N.Z. tax on that $1000 as a non resident.
But Sally Anne earns the equivalent of NZD300,000 in Saudi Arabia and pays tax of 5% on her wages. 
With this change Sally Anne would pay tax on her world wide income, but get a credit for the tax paid in Saudi Arabia on that income.
The N.Z. tax on her salary would be about $90,000, less the $15,000 Saudi tax paid;
Net result; pay Peter Dunne $75,000.
Sally Anne and expatriates like her would be highly pissed off.

Yes given that I am in that

Yes given that I am in that hypothetical scenario if Peter Dunne thinks I'm going to be paying NZ tax for zero benefit to myself.... well, good luck with that.

Mind you, I also have a Euro passport, which came before my NZ one.

I'm shortly going to enact my masterplan of being tax domiciled in Costa Rica (no tax paid on income earned outside the country) and never being tax resident in NZ, Oz, or Europe long enough (185 days in any 2 year period) to ever pay any tax at all.

Gotta love that internet.

You miss the point, that

You miss the point, that under the proposals the 185 day rule doesn't apply.  If you are deemed to have a permanent place of abode in NZ then you do not even need to set foot in NZ.  You would be deemed to be a tax resident, and thus subject to tax on your world wide income (subject to double tax treaties etc).

As to the comment 'well good luck with that' then you'll be hoping that you have no equity in the house in NZ as the next step will be Peter Dunne selling off your house to repay your deemed income tax to the IRD.
 
There is merit to a discussion as to whether it is acceptable for the Nurse in your example to be paying no tax in NZ yet has the ability at any time to come back to NZ and use the taxpayer funded health system, education system etc.  If you are a US citizen you have an obligation to pay tax on your worldwide income regardless of residency (above certain limits) to provide for the benefits you receive through citizenship.  

No I got that. I don't own a

No I got that. I don't own a house in NZ, but I am a director of a limited liability company that does. IF they try and tax me in NZ even though I am living overseas I'll find a loophole like create a company offshore and transfer my house to that company etc.

There is some merit to a discussion on why the IRD thinks I should pay NZ tax when I am not costing the NZ government anything. IF the hypothetical nurse (or myself) choose to move back to NZ then we'll be paying tax when we get a job in NZ, which is fair (although I don't get any kind of rebate for never using the education system or the healthcare system, not having any kids nor ever being in hospital a day in my life, or on a benefit, or needing the justice system etc etc).

Unlike US citizenship there are very few benefits to NZ citizenship. There are tons of great places in the world to live, many of which are a hell of a lot more fun than NZ. I'd just bin my NZ citizenship if it meant being taxed as a kiwi no matter where I live in the world.

I disagree there are few

I disagree there are few benefits to NZ citizenship.  There may be not many tangible benefits whist you are overseas.
 
The intangible benefit is the ability to return at any time and access free services, mainly education and health, and just saying that there is an argument that Kiwi's overseas should pay for this intangible. 
 
If they are unwilling and give up citizenship then thats a choice that can be made, but I wonder how many would make that choice?

odessakiwi, there are a

odessakiwi, there are a million kiwis living outside of NZ. We also have a new migrant population of the equivalent number. For every kiwi that have left, NZ immigration have replaced with a new migrant. Fortunately for NZ new migrants do find Auckland a fantastic city to live in.

StanGoodvibes, not the best

StanGoodvibes, not the best entity to be using. The problem with a standard company holding capital growth assets is that the distribution of capital gains to shareholders from the eventual sale is taxable. Since investment properties run at a loss there is no tax payable and therefore no imputation credits to claim. If you are running at a profit then you are taxed at the company tax rate of 28% so you are likely structured incorrectly.
However if you are using an LTC or look through company the new tax proposals prevent double dip opportunities of your tax losses which is currently available as a non resident. If you are treated as a NZ tax resident then you are not able to accumulate your tax losses in NZ. Non residents currently have the advantage of being able to claim tax losses in Australia and then claim it again when you return to NZ in he future. NZ tax losses do not have an expiry and can accumulate indefinitely.
 
 

More money for the

More money for the Accountants and tax lawyers, certainly..

We could extend this analogy

We could extend this analogy to ownership of other NZ assets as well, and tax every one who has invested in NZ, in some way or other...It is only the ordinary individuals who will be penalised, others hiding behind companies and entities will get away scot free, always.

Have to agree with the

Have to agree with the comments - the ordinary person gets squeezed again.
Seems its ok for multi nationals to pay next to no tax in NZ, e.g. Google, & for the IRD to now also be chasing "free" accommodation given to workers working away from home.
 

When you are short of money,

When you are short of money, you go looking for it everywhere....and even create situation where there is no escape !!!
 
welcome to the ever rising Goverment Funding shortfall......property ownership is not going to be such a good idea after all.....there is nowhere to hide !!!
 
western economies will be facing deficits for the next decade or two....think where they will extract revenue the most from !!!

The maintenance of

The maintenance of infrastructure/services never seems to get a mention when people grumble about paying taxes. If you own a home here, the roading up to your drive has to be paid by someone. Access to your property is sustained by taxes, should you not share in that responsibility even if you are away? Regardless of whether it is a home or a business, you benefit from the common pool. It doesn't matter whether it is rates or income taxes, no one wants to pay it.
 
The emergency services that might show up at your place while you are away to put out a fire- they need to show up to work every day even though it might not be your house this time or the next. If they were not there, and you did happen to have a fire, would you be willing to coordinate the services from wherever you are, halway around the world, and pay the astronomical one-off fee yourself? If you could even find such services for hire in the absense of such publicly maintained services.  SO high are the expectations for public benefit, and so low is the willingness to contribute to the common fund, that the inevitable result is the constant degrading of both infrastructure and public services. If everyone thinks they are above contributing, then the great improvements that have been institutionalized around the world over the 20th century will be gone. They didn't magically appear and they won't magically keep going without constant support from everyone, not just the suckers who still believe in civic duty.
 
The USA expects every one of their citizens around the world to account for their income, no matter whether they hold property or business in the US or not. IRD is simply trying to get people with capital in NZ to pay a reasonable share for the maintenance of services which give that capital the value it has. Without the infrastructure and services provided by NZ, the houses, and businesses are not worth much. It isn't taxing people who live elsewhere and do not have property or businesses here. That seems pretty fair to me.

Ok... What if I'm overseas

Ok... What if I'm overseas having left NZ without owning a house, then after 5 years away I decide to buy a residential investment property. Now I'm taxed on my worldwide income and that is equitable? What about the intervening 5 year period? Why is this any different to someone owning a property at the time of leaving? It's not as simple as suggested. 

If you are a NZ citizen

If you are a NZ citizen working abroad and expect to retire back here then yes you should be paying some tax for the free healthcare and OAP and maybe WINZ you expect to get.
regards

Lets take these as they come

Lets take these as they come because you are simply wrong,
An overseas owner,
1) pays for roads, sewerage and water with rates, these are collected no matter what or where.  The overseas owner however probably consumes less services eg council library so is probably paying NET more than a resident.
2) Emergency services are paid for with a levy in the house insurance, you have to have insurance if you have a mortgage its compulsory.
USA, we dont live there so it doesnt matter.
In terms of services there are other ways to provide water and sewerage for yourself.....simply treat it and collect it on site....its sustainable.   Much of the services you are commenting on are seeing rate rises of 6% per annum, that is a doubling every 12 years....At that rate many of us wont be able to pay it when we retire.
Now in terms of Central Govn taxes and services the overseas owner isnt consuming much and is actually paying taxes in the country they are in already.  Also they are still paying GST on maintenance and other items consumed by the property so the NET may not be much loss.
What concerns me is really an individual working on an OE etc is facing a double tax bill, sorry but that isnt fair.  Now aiming to catch a foreign business that is profiting from doing business here but paying no NZ tax on that income, yes that needs to be changed, which I suspect is the real thrust of this.
regards
 

steven, you are wrong, double

steven, you are wrong, double tax treaties prevent double taxation. Tax already paid in Australia gets a tax credit in NZ, therefore there is no net gain to IRD. There is a net loss for IRD for those earning in excess of $180k where the tax rate is 45% in Australia. Since our top tax rate is only 33%. There is a net loss to IRD of 12%.The non resident ends up with a tax refund. Really dumb tax policy.

Well I dont see why ppl

Well I dont see why ppl should expect something for nothing.
Double atxes, if you are a US citizen working abroad and earn enough money then my understanding is the US IRS taxes you as a US citixen no matter where you are, Im not aware that the NZ IRD will credit that.
Now I can understand wht its not fair to double tax, but by the same fairness its unfair that a NZer spends his or her owrking life abroad and comes back to NZ expecting free pension and free medical care without contributing over their working life.
Now in the UK there is I think 4% taxed "seperately" for the national health service. So to get around double taxation, simple levy that 4%, if you dont pay it you dont get public healthcare. Even split out the OAP and treat that as a levy....say 5%, dont pay it, dont get OAP.
regards
 

steven, agreed. I have

steven, agreed. I have encountered kiwis that have lived and worked overseas most of their working life, gifted all their assets to their children and then returned to NZ for the Universal Super and free health care in their final retirement. Winston Peters should be more concerned about the million plus kiwis that have never paid NZ taxes that will one day return and expect free rest home care, health care and super provided by NZ. We need to replace our Universal retirement with a individualised plan. Those that have stayed in NZ and contributed to NZ taxes gets the care. The others can just go fund their own care and super.

What if the property is in a

What if the property is in a Trust?

Youv'e seen nothing yet, I am

Youv'e seen nothing yet, I am relaibly informed that Possum head has other tax plans:- Fly Air NZ  anywhere worldwide and you are deemed a NZ residnet taxable on your worldwide income, failure to pay will require Air NZ to repatriate you to NZ  and be held in custody on Auckland Island pending payment plus an accomodation cost of your stay.Next will be Fornication duty with a deemed minimum weekly indulgence of 7 at $10 each, politicians and beaurecrats will be exempt as they are all Eunuchs - result govt debt eliminated quick smart.
PS Father Christmas will be calling on us all 25/12.

Rumpole, You describe

Rumpole,
You describe politicians, such as the Queens' city's mayor, as Eunuchs.
You are out of touch.
By the way; I have been scrupulously careful on where I placed apostrophes above.

So you move to Oz and join

So you move to Oz and join the other 50,000 expats due to the dire employment situation in NZ,.You then contribute to the Australian tax system but unfortunately must hand back some of your hard earned ozzie $'s due to the repercussions of the governments inadequacies which have contributed to loss of tax receipts collected by Mr Key?
Simple solution for the government............penalize with new ex-pat property tax for having the audacity to leave Gods Own!
 

  I think this decision

 

I think this decision of the IRD will be a great blow to people who have rented their apartments. I totally do not agree with drawing the apartment holders to pay the tax. Hope the government eases the problem by introducing some new legal actions.
http://www.windows8installation.com

 

They should split by

They should split by citizenship.

You citizen here, you pay part your income's tax here.
 
sole NZ citizenship: 100% of income taxed at NZ rate.
2 countries citizen : 50% of income as defined taxable income by NZ rules, taxable here.
3 countries citizenship: 33% of income as defined taxable income by rules, taxable here.
etc

You the citizen, always your responsibility to file.
You no like, then renounce local citizenship & perks (pro rata).

We are no longer in the age of paper and snail mail.
These records are on file and not hard to record.

You want multiple citizenships, then that's the price; and no longer can the US/UK/Aus expect the tax kickbacks.

Same goes for franchises and multinationals.  Foreign fees (consultations etc) are profits made by NZ based companies and shouldn't be deductable for purposes of NZ tax.   The recovered cost will put them on a closer level playing field.
And again taxes for such businesses...the local profits mean local tax rates and rules.
 

The IRD's proposal  like most

The IRD's proposal  like most of these things is a drag net concept. They are aware of who they are targeting and just who is taking full advantage of the lax foreign ownership  loopholes by those claiming to be N.Z. resident.
 So here we go again, I'll say it. 
A Chinese National I am familiar with has residency status but lives and does his business in China. Now ,he bought Two townhouses back to back in Epsom, then two of a block of three in Epsom,then a ribbon block of thee......in Epsom, all within a radius of two kilometer.
 All the properties are occupied by Chinese persons, I can only assume organising their citizenship while their children are attending the local shool /s.
 Now ultimately where do you suppose the profits of his labours are being repatriated to..?
Or if he has geared them , he's operating a double bonus....thanks Olly..!
 So in a searh for some kind of rational solution to a problem of sucessive Administrations making through piss poor OIO / foreign investment policy, they are trying to close  the doors after inviting the  buglar in.
The irresponsibilty of our foreign investment policy , geared to maximise offshore money input (a lot of it dirty) is coming back to bite the short sighted greedy bastards in the ass.
 The downside is, it's a one pantsuit  fits all proposal as usual by the frustrated revenue collectors capturing genuine citizens  of N.Z. origin or those who really want to assimilate to become New Zealanders. 

Sadly it's only going to get

Sadly it's only going to get worse
 
During the week there was a post about the beauty and benefits and wonders of cultural diversity

Three weeks ago there were 100 bushfires raging up the eastern seaboard of NSW. It was on TV night after night after night. It was in your face.
 
Then they got to doing face to face snapshot interviews and meet-and-greet the usually nameless and faceless volunteers who turn out to save the countryside and the lives and the townships and property of the local residents.
 
It turns out that Tony Abbot, apart from being the number 1 member of the Manly Surf-Life-Saving Club is also a volunteer fire-fighter, and sure enough there he was on TV in his fire-fighting garb driving one of the fire trucks.
 
The main-stream-media were most concerned that he was putting his life at risk. His response was he had been a volunteer fire-fighter with the rural fire service for 12 years without incident so he wasnt going to stop helping his fellows now.
 
During the passing parade catwalk-show there were a number of volunteers with italian names and Greek names and European names. Mostly anglo. One surprising interview popped up of an Iranian refugee who had been in a refugee detention camp for 3 years, only 1 year settled into AU, and feeling a debt of gratitude, joined the Rural Fire Service to give back to the community for giving him the opportunity of a new life
 
What was noticeable was the absence asian faces. Not one