There are hundreds of thousands of New Zealanders who live abroad. Many have lived away from New Zealand for decades. They have moved their families. They have established careers, business interests and possessions. Yet for some, they may still be regarded as New Zealand tax residents.A recent decision from the Taxation Review Authority (TRA) may have severe implications for thousands of expatriates. Tax residence just got trickier. The case concerned a retired New Zealand soldier who left the country back in 2003 to work abroad as a security consultant.A decade earlier, he had separated from his wife and later divorced. As a devoted father, he continued to financially support his children in New Zealand and visited regularly to keep in touch. He also owned a rental property here.
The TRA ruled that he is a tax resident and owes thousands of dollars in back taxes and penalties of 20%. The TRA considered that the fact that he owned a property in New Zealand meant that theoretically he could live here at short notice as the property was rented sporadically rather than on a fixed term. The judge also placed weight on the proximity of the property to his children and his regular visits back home.
Two things stand out from our analysis. The back tax is to be paid irrespective of any tax he has paid abroad. Perhaps more surprisingly, the judge imposed penalties. Given that this is new case law we believe that is harsh.
A decade away from the country has normally been considered sufficient to avoid any issues with residency. In the light of this new ruling, it would seem that expatriates must sever any ties to New Zealand to be considered safe from the tax net. Certainly disposing of any residential property interests may be necessary.
It is important to note that expatriates in countries with double tax agreements (DTAs) with New Zealand such as Australia, the UK and the USA do not have to pay tax in both jurisdictions. Expats in DTA countries should not be impacted.
This case has the potential to impact thousands of New Zealanders around the globe. The man has until the end of this month to appeal.