Returning expats may be asked whether they are NZ tax residents
At this time of year, many expatriate Kiwis return "home" to catch up with friends and family.
Returning home may prompt the Inland Revenue Department to ask "are you still a New Zealand tax resident?".
I believe that Inland Revenue is beginning to take a hard-line approach to many expat Kiwis. For those expats living and working in countries with similar effective tax rates to New Zealand, the tax shortfall (if any) may not be significant, as taxpayers are generally entitled to foreign tax credits for tax paid overseas.
However, for expats living and working in countries with low effective tax rates, the tax shortfall, interest and penalties can be substantial.
Inland Revenue may well target expats from countries with low effective tax rates, often by tracking funds transferred from overseas into New Zealand bank accounts.
In a recent case it was decided that an expat Kiwi was a tax resident for the 2004 to 2007 tax years even though he was living overseas since 2003. The taxpayer lived in Papua New Guinea and then Iraq, working in the security sector, before settling in Australia. Although he was estranged from his wife, the taxpayer continued to support the family financially and was recorded as joint legal owner of property acquired by the wife.
In deciding that the taxpayer had remained a tax resident, the court noted the following:
A dwelling was available even though it was rented to a third party on a periodic basis;
The taxpayer had personal and economic ties to the region in which the dwelling was located;
The taxpayer returned regularly to New Zealand;
The taxpayer had a New Zealand superannuation fund; and
The taxpayer and his estranged wife did not formally separate until six years after he left New Zealand.
Further, the court decided that a shortfall penalty for taking an unacceptable tax position applied; this represents a 10 per cent penalty on top of the tax, interest and late payment penalties.
If the decision is not appealed, or is appealed unsuccessfully, I believe that the test for not having a permanent place of abode is a lot harder to achieve. Expat Kiwis should at least review their position, especially if they live in a country with which New Zealand does not have a double treaty.
If you are contacted by Inland Revenue in respect of tax residency, it is important you do not dismiss the questions as nonsense or an irritation. The outcome of Inland Revenue queries could be a significant tax bill. Ideally, you should obtain appropriate advice.
* Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm. Email firstname.lastname@example.org for contact. The above comments are of a general nature only and are not a substitute for specific advice.
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