Sentry Page Protection
Financial Business Advisor Support Advice Resource New Zealand Compliance,Legislation,Tax,Employment,Finance

Quick Reference Guide

Chapter 3 – Tax Residence and Source of Income

3.1  OVERVIEW

“Tax residence” and “source of income” are central to determining liability for taxation in New Zealand. Residence determines the jurisdiction and source relates to where income is earned or deemed to be earned.

The vast majority of New Zealand taxpayers, whether individuals or businesses are tax residents of New Zealand. As a result, their taxation responsibilities are relatively simple. The term “tax resident” has a specific legal meaning which differs from the generally accepted meaning of residence (See 3.2.1 - 3.2.3).

New Zealand tax residents must file a New Zealand tax return disclosing their worldwide income. They are liable to pay New Zealand tax on this income, but can obtain credits for any foreign tax they have already paid on that income.

When a taxpayer is a tax resident of another country (i.e. not a New Zealand tax resident) they are only subject to New Zealand taxation on income that is sourced in New Zealand. For example, interest and dividends earned from investments in New Zealand have a New Zealand source.

In some cases, a taxpayer may be both resident in New Zealand and resident in an offshore jurisdiction. A “Double Tax Agreement” may exist with the taxpayer’s other country, which could simplify the taxpayer’s responsibilities and eliminate double taxation on their income.

3.2 - APPLICATION

(ITA Subpart YD)

3.2.1 - Tax Residence for Individuals

(YD 1)

Individuals are tax resident in New Zealand if they:

  • maintain a permanent place of abode in New Zealand (even if a permanent place of abode is also maintained overseas); or

  • are personally present in New Zealand for a period exceeding 183 days in any 12-month period; or

  • are absent from New Zealand in the service of the New Zealand Government.

In order to become non-resident, an individual must be absent from New Zealand for a period exceeding 325 days in a 12-month period. In addition, the individual must not be in the service of the New Zealand Government and must not retain a permanent place of abode in New Zealand.

Example

If a family arrives in New Zealand on 1 January, and remains in New Zealand for the rest of that year, they will be deemed to be a New Zealand tax resident from 1 January as they will have been present for more than 183 days.

A taxpayer will have a permanent place of abode in New Zealand if they own a home and have formed an enduring association with New Zealand. A long-term investment property or holiday home will normally not be considered a permanent place of abode unless overall circumstances dictate otherwise.

IRD interpretation statement (IS 16/03) – Tax Residence, based on the Court of Appeal decision in CIR v Diamond [2015], clarifies the “permanent place of abode” test in s YD 1(2) as follows:

The mere availability of a property in New Zealand is not enough to create a permanent place of abode (home). How that property is used or intended to be used is what is important. Providing a New Zealand home for one’s family, while personally living overseas, is not necessarily sufficient. It needs to be a home of the person concerned, who habitually resides there from time to time. Download guide, IR 292 on New Zealand tax residence from the IRD website.

Each case is considered on its own merits.

For double taxation agreements, an arm’s-length rental agreement will suffice to make the home unavailable to the landlord, causing the permanent home test to fail.

If there is not a dwelling in New Zealand that you could live in on an enduring basis, you would not be resident under the permanent place of abode test. However, you may still be a tax resident under other tests described at the beginning of this section relating to your presence in the country or service for the New Zealand Government.

3.2.2 - Tax Residence of Companies (YD 2)

A company will be resident in New Zealand for tax purposes if any of the following apply:

  • it is incorporated in New Zealand; or

  • it has a head office in New Zealand; or

  • it has a centre of management in New Zealand; or

  • control of the company by its directors is exercised in New Zealand, whether or not decision-making by the directors is confined to New Zealand.

In May 2019, the IRD and Australian Tax Office (ATO) agreed that most ordinary companies may “reasonably self-determine” their place of effective management (PoEM) for residency purposes.

3.2.3 - Double Tax Treaties and Residence

As different countries have different rules for who is taxed and how. It is therefore possible for some people to be treated as taxpayers in more than one country, each of which may seek to tax the individual or company on its world-wide income!

NZ has entered into a double taxation agreement (treaty) with most of our major trading partners to avoid such double taxation. Links to these can be found on our website.

3.2.4 - Doing Business Online

Tax law for selling online is similar to traditional sales. The IRD has provided four examples in relation to selling over the Internet. These are:

i)     NZ business with NZ based ISP: Your business is technically a New Zealand business for tax purposes

ii)     NZ business with overseas based ISP: Your business is technically a New Zealand business for tax purposes. As the website is hosted by an ISP overseas IRD considers this does not constitute a permanent establishment in that country. It is their view that no profit should be attributed to that country (although this may not be the view of the overseas authorities)

iii)    NZ business with own overseas based Server: Your business is technically not a New Zealand business for tax purposes as the business is conducted from an overseas site. You pay tax in that overseas country.

iv)   Overseas business with NZ based ISP: The overseas business is technically not a New Zealand business for tax purposes.

An IRD fact sheet (IR 1022) outlines your tax obligations if you sell goods or services online

3.2.5 - New Zealand Sourced Income

(ITA ss YD 4, YZ1)

Individuals and companies who are not New Zealand tax residents are only liable to New Zealand taxation on their New Zealand sourced income.

New Zealand sourced income is comprehensively defined and includes:

  • All salaries, wages and allowances earned in New Zealand in the service of an employer or principal (even where the employer or principal is a non-resident for New Zealand tax purposes)

  • Income from a business carried on in New Zealand

  • All income from land situated in New Zealand, derived by any person who is the owner of that land

  • All income in respect of shares or debentures issued by New Zealand resident companies

  • All income derived from the sale or disposition of any property situated in New Zealand

  • Income derived from contracts made or performed in New Zealand

The list of income deemed to be sourced in New Zealand is comprehensive and applies to most payments received from New Zealand.

Example

You are non-resident with a rental property situated in New Zealand. Your rental income will be subject to New Zealand taxation. You will be required to file a year-end non-resident tax return disclosing income and expenditure on your rental activity.

3.3 - Practical Hints

3.3.1 - Leaving New Zealand

If you are leaving New Zealand and intend to lose your New Zealand tax resident status, you should file a New Zealand tax return up to the date of your departure. This return should be filed before you leave New Zealand. In order to speed up the processing of this return, you should advise the IRD of your intention to leave New Zealand. Search for “Leaving New Zealand” on the IRD website for current information and forms.

3.3.2 - Tax Planning

If you intend to leave New Zealand for a significant period, say 3 years or more, we suggest that you obtain advice on the matter of your tax residence. In particular, a number of steps may need to be taken to confirm your non-resident status. For example, selling or long-term leasing your New Zealand home, disposing of New Zealand shares, closing bank accounts, and cancelling subscriptions and membership of clubs.

Significant care is required in this area because when you return to New Zealand and file your first post New Zealand residence income tax return, Inland Revenue are very likely to at least question you about income earned overseas. If there is any doubt at all about your residence status, Inland Revenue may well assess your foreign earnings as being subject to New Zealand Income Tax and may assess shortfall penalties.

3.3.3 - Doing Business and Investing in New Zealand

Are you living overseas and thinking of setting up business in New Zealand? Seek advice as to whether your business should operate as a New Zealand branch of a foreign company or as a New Zealand registered subsidiary. This has taxation, financial reporting and asset protection consequences. In addition, advice should be sought as to how this operation should be funded. Specific advice should also be sought on the appropriateness of charges made for goods and/or services supplied to the New Zealand operations. New Zealand’s transfer pricing and thin capitalisation rules need to be considered. For example:

The transfer pricing regime requires an arms length price to be applied to any supply of goods and services to and from New Zealand between associated parties.

Under the thin capitalisation regime, a business controlled by a single non-resident or non-residents acting together, may only deduct interest on borrowings to the extent that total debt does not exceed 60% of its total assets. The rule also applies to all resident trustees if 50% or more of settlements made on the trust were made by a non-resident, non-residents acting together, or other entities that would be subject to the rule.

3.3.4 - Migrating to New Zealand

Individuals migrating to New Zealand and who have not been a New Zealand tax resident for at least 10 years are entitled to a four-year limited tax exemption with respect to certain foreign sourced income such as rent received.

The exemption starts on the first calendar day of the month you qualify as a New Zealand tax resident and ends on the last calendar day of that month four years later.

The exemptions specifically exclude:

  • overseas employment income while living in New Zealand

  • business income relating to services performed offshore

Jump to chapter...
Chapter 1 - New Zealand Tax Framework

New Zealand taxation is imposed by the Income Tax Act 2007 (ITA). The basis for calculating tax is summarised in the following flowchart from the Core Provisions set out in Part B of the Act. This overview provides the context for details discussed in this quick reference guide.

Chapter 2 – Tax Planning

Tax rates have come down in the past several years, but rates still vary for different taxpayers such as individuals, companies and trusts. There are also special rules that apply to certain taxpayers and not to others. While this is so, opportunities will exist to structure your affairs to benefit from the different rules and tax rates.

Chapter 3 – Tax Residence and Source of Income

“Tax residence” and “source of income” are central to determining liability for taxation in New Zealand. Residence determines the jurisdiction and source relates to where income is earned or deemed to be earned.

Chapter 4 – Assessable Income

Not every gain received by you or your business is taxable. The Income Tax Act only imposes tax on taxable income.

Chapter 5 – Deductible Expenditure

The questions of what expenditure is deductible and when, are of prime importance in determining your tax liability. For most expenditure, the question of deductibility is straight forward. However, there are exceptions. This chapter looks at what you may deduct and when.

Chapter 6 - Depreciation

Expenditure on capital assets cannot be deducted immediately. The value of the asset depreciates over time and the cost is spread over its useful life. Costs are there- by matched against any income that the asset generates and the tax deduction occurs each year on a more gradual basis until the asset is fully depreciated.

Chapter 7 - Entertainment Tax

Entertainment expenditure must be for business purposes to be deductible and special rules exist to clarify what may be claimed for tax. The rules are slightly different for GST. There is a working party looking at simplifying the regime but in the meantime, the current rules apply.

Chapter 8 - Trading Stock (or Inventory)

Trading stock purchases are a regular and significant revenue expense for many businesses. However unlike many other revenue expenses, a tax deduction for trading stock is only allowed at the time the stock is sold.

Chapter 9 – Real Estate Transactions

This chapter distinguishes between taxable and non-taxable property transactions.

Chapter 10 - Financial Arrangements

The Financial Arrangements or Accrual Rules are a detailed set of rules relating to the tax treatment of debts and debt instruments and transactions including debt related aspects.

Chapter   11 - Business Structures

Your business structure can have a huge impact on taxation and the legal framework under which your business operates. Here, we compare the different business structures available to you. These are discussed in greater depth in following chapters.

Chapter 12 - Companies

Companies are a popular structure for doing business because they allow a degree of protection and flexibility. Companies offer business people the advantages of limited liability and may provide a beneficial structure for tax purposes.

Chapter 13 – Partnerships and Trusts

A partnership is formed by a contract between parties, to carry on business or commercial activities in common, with a view to making a profit.

A trust is a legal promise by a trustee or trustees to hold and administer property, sold or gifted by a settlor, for the benefit of identified beneficiaries.

Chapter 14 – Farming

Primary production in New Zealand forms a major part of our GDP. Not surprisingly there are specific tax provisions relating to this form of enterprise. Agricultural production is unique since it is the only form of production involving “natural increase”. As a result, special accounting and tax rules are required.

Chapter 15 – Forestry

A number of events in the forest life cycle give rise to taxable forestry income. Clearly, this includes the net proceeds of sales, including felled timber and thinnings etc. In addition, sales or transfers of forestry or cutting rights are also taxable. The forestry regime also contains special rules for deduction of forestry expenditure.

Chapter 16 – PIE and Offshore Investments

Being a small country, much of our investment is off shore. Although this accounts for a relatively small portion of New Zealand’s tax revenue, overseas investment is governed by quite a complex regime and affects a large percentage of the population either directly or indirectly.

Chapter 17 – Provisional Tax

Provisional tax is a means of paying tax on income, that is not fully taxed at source via PAYE or other withholding payments.

Chapter 18 – Withholding Taxes

In this chapter, we consider withholding tax obligations in respect of interest, dividends and royalties paid. We also look at Non- Resident Contractors Tax. Chapter 26 “Employment Responsibilities” discusses withholding tax obligations when you pay New Zealand resident contractors, including commission agents, builders etc.

Chapter 19 – Fringe Benefit Tax

Fringe benefit tax (FBT) was introduced to tax non-cash benefits provided to employees or associates of employees. These rules also apply to non-cash benefits provided to shareholder employees and their associates.

Chapter 20 – Goods and Services Tax

The application of GST to the majority of New Zealand business transactions is straightforward. GST can however give rise to difficult issues, especially in the area of “non standard” transactions. This would include the sale and purchase of real estate, financial services based transactions, GST on fringe benefits provided and GST adjustments for entertainment tax.

Chapter 21 – Accident Compensation

Accidents and injuries in New Zealand are covered by a publicly funded insurance scheme administered by the Accident Compensation Corporation (ACC).

Chapter 22 – Year-End Tax Planning

Year-end tax planning is an important part of managing your tax expense. Year-end tax planning should be undertaken prior to year end. For 31 March balance date businesses, this review should be conducted in February.

Chapter 23 – Tax Administration

Unless these matters are handled by a bookkeeper or dealt with efficiently, a considerable amount of your otherwise productive business time will be expended in complying with your basic tax obligations.

Chapter 24 – Penalties, Binding Rulings & Disputes Resolutions

Failure to meet tax obligations may result in civil penalties, criminal penalties (discussed below) or both. Further, the penalties are not deductible for taxation purposes!

Chapter   25  –  Business Legislation

The business laws addressed in this chapter have a huge bearing on how you can and can’t do business in New Zealand. In the documentation that you keep for running your business, it is well worth noting relevant legal matters and how you plan to ensure compliance.

Chapter 26 – Employment Responsibilities

This section summarises key points to help you fulfil your obligations as a good employer, reduce day-to-day problems and comply with the law.

Appendix – Tax Facts – A Brief Summary

Editor | FBA
Member Login
Welcome, (First Name)!
Forgot? Show
Log In
Enter Member Area
My Profile Not a member? Sign up. Log Out