Welcome to the Hotel California

GEORDIE HOOFT
Last updated 05:00 12/08/2014

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OPINION: There's a line in The Eagles' hit, Hotel California that says "you can check out any time you like but you can never leave".

I was reminded of that when reading through the 88-page Inland Revenue Interpretation Statement on tax residence, which was released earlier this year.

The length of the document shows how complex working out someone's tax residency can be.

Its length also highlights the importance of tax residency. If you're not a New Zealand tax resident, you'll generally only be taxed here on income that has a New Zealand source.

If you are a New Zealand tax resident, you will generally be taxed on your worldwide income.

Anyone going off to work in a low or no-tax country could well come home to see their tax-free savings disappear in a tax bill.

People often focus on the "183-day rule". It says a person will become a New Zealand tax resident if they're here for more than 183 days in a 12-month period. To lose residency requires being out of the country for more than 325 days in a 12-month period.

Relatively straightforward stuff, although there can be some quirks in how the days are counted.

Overriding the day count rules is the "permanent place of abode" test. It's not defined anywhere in the Income Tax Act, so reliance has to be placed on case law - as well as Inland Revenue statements.

One broad definition is that it means "a lasting or enduring place where one usually lives".

Inland Revenue states that all that is required is that there is a dwelling that can be used as a place of abode.

That means renting out your house while away may not be enough to lose tax residency. In certain circumstances, even owning a rental property that you've never lived in may be considered a permanent place of abode.

Inland Revenue's interpretation means it can be difficult to shake off New Zealand residency. In an example, Ronan moves to Ireland to work for two years. After one year, his partner joins him after selling their apartment.

The result: Ronan remains a New Zealand tax resident because he and his partner kept a rental property here that they could use as a place to live - even though they have never lived in it and it is already tenanted.

In a tax case reported earlier this year, a former soldier who had been out of the country for 10 years was found to still be a New Zealand tax resident due to his family links and property investments here.

He is now liable for overdue tax, plus penalties and interest, on income he earned overseas as a security consultant.

It's important to understand tax residency status - especially if you're looking to travel with dreams of a tax-free life. Get it wrong, and you may get an unwanted tax bill.

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- The Press

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