In brief, the Taxation Review Authority decision on 30 September 2011 involved a New Zealand resident who shifted to Fiji for work, and was there for almost five years. The TRA's decision was that he remained taxable in New Zealand on his Fiji salary, as he was solely a tax resident in New Zealand.
At first brush, this is something of a surprise outcome. Similar scenarios are played out in numerous companies every day. In most cases, the individuals and their employers would reasonably expect, and Inland Revenue would accept, that tax residence and PAYE obligations would fall away if the employee is away for at least 2 or 3 years.
So what caused this case to be different? Essentially, the decision was that the taxpayer’s time in Fiji was temporary and his ties closer to New Zealand. The main reasoning revolves around the fact that the taxpayer’s wife remained in New Zealand for much of the time because of medical needs, and the taxpayer’s family home was held to be available – despite being uninhabitable due to renovations.
Broader application
Although the facts of the case are quite specific, there were also a number of comments made by the Taxation Review Authority (TRA) that could have broader applications. For example, the conclusion that the taxpayer’s permanent home is in New Zealand and not Fiji turned on the fact that the taxpayer’s accommodation in Fiji was provided by his employer. This conclusion draws an artificial distinction between an employer providing accomodation and reimbursing an employee for it.
The TRA also commented on the taxpayer’s habitual abode. A person’s habitual abode is one of the tie break tests used when two countries have a right to tax income of a dual resident. The TRA interpreted this by looking to the entire working life of the individual. This takes New Zealand out of step with international commentary and guidance.
There is significant support to limit the test to where a person usually lives while they are dual resident, that isthe period in which a tie-breakis needed. The consequence of the judgement is uncertainty for both the individual, inrespect of their tax liability, and their employer for PAYE and FBT obligations. If this case is not appealed, it is likely to lead to more tax disputes in this arena and instances where New Zealand isinterpreting its double tax agreements differently from its treaty partners.
Importance of good policies and planning
Most people are not keen to have the rude shock of an unexpected tax bill. So a retrospective change to their taxresident status is unwelcome. Similarly employers prefer to avoid surprise changes to their PAYE, FBT and tax obligations.
Remembering Inland Revenue always has the benefit of hindsight, the taxpayers’ first line of defense against this risk needs to be good policies and planning.
Small factors can influence the tax outcome but are often overlooked when an assignment occurs. There are simply more important things on people’s minds – like starting the job, finding somewhere to live, and getting kids into schools.
The fact that tax might not be the centre of attention means it is important to plan in advance, and establish sound policies. Policies should cover matters like which entity will employ expatriate staff, what benefits are provided and how they are delivered. Policies should also act to protect the employer’s corporate tax position, as expatriates can create corporate tax liabilities for their employers.
How will Inland Revenue react?
The decision outlined in the case above is specific to the facts of the taxpayer involved. However, a number of the TRA’s comments could be interpreted more widely. The worst case scenario would be if Inland Revenue chooses to take this decision as signaling the start of open season on expatriates. Such an approach would be unhelpful.
It would create uncertainty and disputes amongst the very group of businesses that Government is trying to nurture – those looking to increase export earnings and expand into offshore markets. Unfortunately, we are starting to see queries from Inland Revenue focusing on the issues raised in this case– suggesting it might be viewed as having value as a precedent.
Taken literally, the judgement could see many New Zealand expatriates treated as taxable in New Zealand on theiroverseas income, despite living outside of New Zealand for an extended period.
Equally, employers could continue to have PAYE and FBT obligations. For this reason, we have to hope that Inland Revenue takes great care before accepting this decision as having any general application. Ideally, it should be taken for what it is, an unhelpful decision based on specific facts that should be applied restrictively, not expansively.
In the meantime, employees and employers need to protect themselves from being inappropriately swept up in the fall out from this decision. This can be done by ensuring that they have good documentation, good policies and make good decisions.