Tax warning shot for expatriates

Kiwis with rental property and strong family links back home are being warned of a court decision that could have tax implications for them.

Rebecca Armour, head of KPMG's international expatriate services tax team, said a recent ruling from the Taxation Review Authority had found that a man who had been out of the country for 10 years was still considered a resident for tax purposes.

The case involved a former soldier who left New Zealand permanently in 2003 to work as a security consultant.

He had separated from his wife a decade earlier and later divorced, but continued to visit and financially support his children in New Zealand.

The authority has ruled that the man's family links and some property investments he kept in New Zealand counted against him.

He is now liable for the outstanding tax, 20 per cent penalties and "use of money" interest, in addition to the tax paid in the countries he worked in.

Armour said the penalties were a particular surprise, since a decade was generally considered long enough to sever all tax residency ties. "A pessimistic view is that New Zealanders now need to break all ties with New Zealand to be confident they no longer retain New Zealand tax residence when they leave to work and live overseas."

To be considered a non-resident, a person has to be out of the country for 325 days in a 12 month period, and have their level of connection to New Zealand assessed. This includes whether they kept a permanent place of abode in New Zealand.

In the security consultant's case, one of the houses he jointly owned with his ex-wife was rented out on a periodic rather than a fixed term basis.

The authority said that theoretically, the house was available for the consultant to live in at short notice, even though he had never lived there.

The judge also took into account the property's proximity to the man's family, his regular visits, and his lack of ties to other countries.

Armour said the case was a "worrying development". Many expatriates had close family ties to New Zealand and property that they rented out.

She said KPMG was not connected to the case but she felt sorry for the man who appeared to be trying to be a "good father".

"That financial support was one of the factors that weighed against him." He had also been unfortunate to be working in hotspots which were not covered by double tax agreements that would have limited his tax liability back home.

Armour advised those who had not left New Zealand to ensure they signed forms with Inland Revenue declaring they were leaving the country permanently, something that the man had failed to do.

"And for the people who are already away and who do own rental properties in New Zealand and have some family ties here, they really need to probably speak to an adviser and make sure that their position is clear.

She said there was "a ray of hope" that Inland Revenue's upcoming statement on tax residence might provide "some workable and practical guidance in this area".

The man had until the end of January to appeal.