The New Zealand Tax Podcast – Beware the difference between residency for immigration purposes and for tax purposes, Mainzeal and GST, and capital flight and the Norwegian wealth tax

One of the key measures of the current Government's economic programme was opening up immigration to attract investment. This was to be done through the refreshed Active Investor Plus visa programme from 1st April 2025. According to Immigration New Zealand, this programme has already attracted a total of $5.15 billion of committed and pipelined investments as of late September. This is from some 949 applications involving over 3,000 individuals and 50 nationalities. Of note is that more than 300 applications, nearly a third, have come from the United States. 

I frequently explain to clients the difference between tax residency and immigration residency. Getting it wrong can have expensive tax consequences. Inland Revenue, to be frank, doesn't care if you're here legally or not, as long as you pay your tax. What I find often in discussions with clients is that they confuse the two definitions. You therefore have to talk through it carefully when you want to determine when exactly a person became tax resident, because more often than not, it's not the same time as when they acquired permanent residency for immigration purposes. 

Understanding the distinction between immigration and tax residency

When considering tax residency in my experience most people are aware of the greater than 183 days present in New Zealand residency test.  Fewer are aware that the primary test of tax residency is whether a person has a permanent place of abode in New Zealand. It’s a very important distinction. 

As noted, the Active Investor Plus (AIP) visa program has been a big success. One of its attractions is a visa holder doesn’t have to spend many days in New Zealand to eventually qualify for permanent residency. But as I noted above the criteria to be a tax resident is different. A person here under an AIP visa but not yet a permanent resident for immigration purposes may actually have a permanent place of abode in New Zealand and is therefore, for our purposes, tax resident. 

To help clarify the position Inland Revenue issued for consultation (now closed) a question we’ve been asked” (QWBA) on whether an AIP visa holder can potentially become tax resident under the permanent place of abode test which is our primary test of a person’s tax residency.

What is a permanent place of abode?

One of the main considerations of the permanent place of abode test is whether or not the person has got available accommodation in New Zealand available to them. But as the QWBA notes “simply having a dwelling is not sufficient to meet the test”, it also requires examining “The durability of the person's association with their place of abode in New Zealand.”

This is a fairly routine question because as noted above defining whether a person has permanent place of abode is the primary test of residence. It’s probably of greater import applying for permanent residency under the AIP visa category, because as I noted earlier, the number of days present that you have to be in New Zealand is substantially lower. 

It's good to see Inland Revenue specifically addressing the question of these visas and whether a holder can have a permanent place of abode, even if when you examine the QWBA, it's largely a restating of the principles set out in previous interpretation statements on residency. (This is why the draft QWBA runs to 26 pages).  

But what about Mongolia?

The key thing to always remember about tax residency is a person is deemed tax resident if they have “A” permanent place of abode, even if they also have a permanent abode outside New Zealand. This means applicants under the AIP visa can be dual tax residents which leads into tricky questions about which country has the global taxing rights. This can be resolved by applying the relevant double tax agreement. 

As noted above applications have been received from persons in 50 countries, most of which do have a double tax agreement with New Zealand. There are a few, however, including Mongolia, that don't. This means there's a risk for those Mongolians without the benefit of a double tax agreement to be potentially deemed tax resident in both countries and then taxable on all global income both here and in Mongolia. 

Remember Mainzeal? 

A special episode with guest Allan Bullôt recently covered the 40th anniversary of the introduction of GST.  It’s now become a hugely important part of the Government's tax take. As Allan mentioned GST is thought to be a “simple” tax, but it has hidden complexities. One of these emerged in a recent court case involving Mainzeal Limited and GST which Inland Revenue has covered in a handy little case summary. 

The facts are that Mainzeal (or rather its liquidators) received an insurance payout of just under $20 million from its insurer QBE after four directors were held liable for the nearly $36 million of damages for quote, “reckless trading in breach of the Companies Act and failing in their directors' duties. 

Mainzeal filed the GST return and actually reported it as subject to GST but then opened a dispute with Inland Revenue by subsequently filing a Notice of Proposed Adjustment which argued that the insurance payout was not subject to GST. The dispute reached the High Court which was asked to determine whether or not this payment was in the course or furtherance of Mainzeal's taxable activity. Mainzeal's argument was that the payment was not made under a contract of insurance, Inland Revenue, naturally enough, were of the opposite view. 

Justice Tracy Walker found in favour of the Commissioner of Inland Revenue and noted that Section 5(13) of the Goods and Services Tax Act 1985 did impose a liability on the actual recipient of a payment made under a contract of insurance. Walker J concluded 

“the loss to which the payment relates is the loss of Mainzeal as an injured third party because of the actions of its directors and it was incurred in the course or furtherance of Mainzeal's taxable activity.” 

Do Wealth Taxes cause capital flight? New evidence from Norway

Finally, this week, tax or the threat of it has featured heavily in the election campaign, I spoke to both 1News and RNZ’s Morning Report about one of the more interesting proposals, ACT’s suggestion to exempt KiwiSaver funds from taxation. 

The potential tax drawing most fire is the wealth tax proposed by the Greens and Te Pati Māori. One of the main arguments against a wealth tax is the risk of capital flight. An extremely interesting paper on the whole question of capital flight has just been published by the American National Bureau of Economic Research titled Taxing Entrepreneurial Wealth Evidence from Norway 2021 to 2025. https://www.nber.org/papers/w35854

Those who follow this topic will be aware that Norway increased its wealth tax in controversial circumstances, which prompted a great deal of lamentations and some capital flight. What this paper, 68 pages of it, is examine the Norwegian tax records to determine the effect of the increase. How much revenue was raised, as much as hoped? And was there capital flight?  What also makes the paper particularly interesting is Norway’s wealth tax doesn't apply to non-residents. This means non-residents act as a form of control group. 

The results are in “…at most 100 individuals left due to the reforms”

Assistant Professor Marius King, the report’s author and a Faculty Research Fellow at the NBER concluded 

“My results indicated at most 100 individuals left due to the reforms. I find no evidence of significant out-migration or reduced inflows of startup founders or inventors. I estimate that absent any out-migration, wealth tax revenues would have increased by 75% from 2021 to 2024. But because of migration, the revenue gain was 71.5%. And further, out-migrating owners’ firms remain economically active and do not reduce investment.”

This is an extremely interesting and comprehensive paper. Assistant Professor King not only looked at the impact of the increase in wealth tax but also the related increase in dividend tax rates and the removal of migration-related capital gains tax loopholes. His primary finding of limited capital flight will, of course, greatly encourage supporters of a wealth tax. But I would add a huge caveat to that, because in our case, a close association with Australia and freedom of movement, does, in my view, mean we probably carry a higher risk of capital flight than comparable jurisdictions in the Northern Hemisphere. 

The influence of Australian on tax policy

Australian tax policy has had some effect on New Zealand tax policy and vice versa. For example, after Queensland abolished its estate duty in the late 1970s, that probably accelerated the further decline of our Estate Duty as policymakers started wondering whether an estate duty could be sustainable here if there was no such comparable tax in Australia. Queensland’s abolition of its estate duty was before Australia introduced capital gains tax in September 1985 which effectively rendered the issue of estate duties moot. 

But one thing about current Australian tax policy, which is of incredible importance in relation to the implications of wealth tax and capital flight, is Australia’s temporary residence exemption. This exemption allows someone with a temporary residence visa to live and work in Australia, and their non-Australian income tax and capital gains are exempt from Australian income tax. (Remember, Australia’s top tax rate is 45%). The exemption is available as the temporary resident does not become an Australian citizen or permanent resident or cohabit with, or marry an Australian citizen or permanent resident. It's very much like our transitional residence exemption, but rather than being limited to 48 months, generally speaking, it's open-ended. 

The risk of capital flight to Australia

What the Australian temporary resident exemption means is wealthy New Zealanders have an opportunity to move to Australia which not only offers greater investment opportunities, but they can also protect their non-Australian wealth from Australian capital gains tax. That is potentially quite an attractive offer. 

Now if we introduce a capital gains tax or wealth tax, how capital flight is countered will depend on the design. What I would say that people should be very mindful that according to this research, it does appear that maybe wealth taxes are not such a huge driver of capital flight. In fact, the argument that wealth tax results in capital flight is perhaps most down to the noise that's made by those most affected. This is a very, very small group of people who also, as some papers have noted, happen to have an incredibly large political impact or are able to make their views felt. (The UK Wealth Tax Commission from 2020 has a very interesting paper on the political economy of the abolition of wealth taxes in the OECD).  

How to counter capital flight will be a critical design feature of any potential wealth tax together with the issue around valuations, which is the key problematic practical issue in my view. Anyway, this is a very interesting paper with plenty to digest. 

And on that note, that’s all for this week I’m Terry Baucher and thank you for listening. Please send me your feedback and requests for topics or guests. Until next time, kia pai to rā. Have a great day.