How to: Residency for individual tax purposes

Introduction

The issue of residency is central in determining a person’s liability to income tax in New Zealand. A New Zealand resident is liable to pay tax on all gross income derived either in NZ or overseas, whereas a non-resident is liable for income tax only on income derived in NZ.

The IRD applies two tests to determine a person’s residency – the "permanent place of abode" and the "quantitative" test. You will be a resident for tax purposes if you satisfy either of these tests.

The "permanent place of abode" test

Under this test you are a New Zealand resident if you have a permanent place of abode in NZ, regardless of whether you also have a permanent place of abode in some other country.

In establishing whether you have a permanent place of abode here the courts may take into account factors such as the length of time spent in New Zealand, your employment history, financial ties, where your immediate family lives and where your children attend school.

The "quantitative" test

If you don’t have a permanent place of abode in New Zealand, you may still qualify as a resident under the "quantitative" test, which considers the number of days you spend in and out of NZ.

• Under the 183-day test a person who is present in New Zealand for more than a total of 183 days in any 12-month period is deemed to be a resident from the first day in that 12-month period on which he or she was personally present in NZ. If this test is met, the person will be a NZ resident even if his or her permanent place of abode is overseas.
• Alternatively the IRD may apply the 325-day test, which is used to determine whether an existing resident has ceased to be a resident. If you are absent from New Zealand for a period or periods totalling 325 days in any 12-month period, you are no longer a NZ resident. Your non-residence begins on the first day of your absence within that 12-month period.

However, the "permanent place of abode" test takes precedence over all the other tax provisions and quantitative tests, and therefore even if you are out of New Zealand for more than 325 days in total you will still be a NZ resident if you have a permanent place of abode here.

Cautionary notes

• Not only is residency important in determining a person’s liability for income tax, it is also critical in a number of other tax-related matters, such as dividend imputation, non-resident withholding tax, double tax treaties, tax rates and foreign losses.
• The rules relating to the residence of companies involve different tests and different considerations.
• As is typical of taxation matters generally, the law governing the issue of residence is complex and technical. The implications of residency are particularly far-reaching and it is strongly recommended that you seek the services of a person who specialises in taxation.