Questions we've been asked: Determination of residence
Is a person working overseas while on leave of absence for two years resident for tax purposes?
Issued November 1999
Section OE 1(1) Income Tax Act 1994 - Determination of residence of a person other than a company
A New Zealand resident has asked whether he will be tax resident during his two-year absence working for an international organisation in the United States. The person will not resign from his New Zealand job, but will take leave of absence. He says that he will consider employment opportunities in the United States and Europe at the end of the two years, as well as the option of returning to his New Zealand job.
The person's family will travel with him, and their Wellington house will be rented out while they are away. The person may terminate the tenancy by giving 42-days' notice in accordance with the Residential Tenancies Act 1986. Personal property will be disposed of or taken with him to the United States. Electrical equipment (unable to be used in the United States) will be stored in Wellington. The only investment (other than the house) remaining in New Zealand will be his interest in the Government Superannuation Scheme, to which he will continue making contributions for one year.
If a person is tax resident, he or she is required to pay tax in New Zealand on all income received, both from New Zealand and overseas.
The relevant legislation is section OE 1. An individual will be resident for tax purposes if the following provisions apply:
- Notwithstanding any other provision of this section, a person, other than a company, is resident in New Zealand within the meaning of this Act if that person has a permanent place of abode in New Zealand, whether or not that person has a permanent place of abode outside New Zealand.
- Where a person other than a company is personally present in New Zealand for a period or periods exceeding in the aggregate 183 days in any period of 12 months, that person shall be deemed to be resident in New Zealand from the first day within that period of 12 months on which that person was personally present in New Zealand.
- Where a person other than a company is resident in New Zealand and is personally absent from New Zealand for a period or periods exceeding in aggregate 325 days in any period of 12 months, that person shall be deemed not to be resident in New Zealand from the first day within that period of 12 months on which that person was personally absent from New Zealand and, subject to this section, thereafter.
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The person is not present in New Zealand for more than 183 days in 12 months, so he will not be resident under section OE 1(2) during his time overseas. Notwithstanding this, he will be resident if he has a permanent place of abode in New Zealand under section OE 1(1), because the permanent place of abode test applies regardless of anything else in section OE. For the same reason, a person will not be non-resident under section OE 1(3) if he or she has a permanent place of abode in New Zealand
The permanent place of abode test is a broad one. A person can have a permanent place of abode in New Zealand even though he or she might have a permanent place of abode in another country.
The test of whether someone has a permanent place of abode is a matter of weighing all the facts of a person's circumstances. The nature and quality of the person's connection with New Zealand is important. Cases that have discussed the permanent place of abode test are: FC of T v Applegate 79 ATC 4,307, Case Q55 (1993) 15 NZTC 5,313, and Case H97 (1986) 8 NZTC 664.
In the current situation, counting against a finding of a permanent place of abode are the circumstances of the person's absence; the period of his absence being of significant length, the fact that his family goes with him, and that they take most of their personal property.
On the other hand, the person has some strong associations with New Zealand throughout his absence. Most importantly, he has a job here ready for him to return to, and a house available for him and his family to live in. His intention is that he may come back to New Zealand at the end of his two-year contract. Some property is kept here.
Although the family's house is tenanted in their absence, it can still be seen as being available to family members to live in. In Case Q55, the Taxation Review Authority commented:
a "permanent place of abode" does not require that a dwelling be always vacant and available for the person to live in; but that there is a dwelling in New Zealand which will be available to the taxpayer as a home when, and if, that taxpayer needs it, and that the taxpayer intends to retain that connection on a durable basis, with that locality.
In conclusion, the facts that the person has a job in New Zealand and that he has a home potentially available to him, support a finding that the person has ongoing associations with New Zealand during his absence of sufficient strength to constitute a permanent place of abode, despite his two-year absence.
This means that the person is potentially subject to tax in New Zealand on his world-wide income. Whether or not he will be subject to tax in New Zealand will depend upon the operation of the New Zealand/United States of America double tax agreement. When a person is potentially subject to tax in two countries, a double tax agreement has rules for determining which country has the right to tax the person's income.
At the end of his contract with the overseas organisation, the person and his family may decide to stay overseas for an extended period. In that situation, he would no longer have sufficient ties with New Zealand to constitute a permanent place of abode in New Zealand.
If the person's leave of absence were for a period of three years, and the other facts were the same, the conclusion would probably be that he would not have a permanent place of abode in New Zealand. It should be noted, however, that an absence of three years will not on its own be determinative. The facts of each situation must be weighed up. In another situation, a person may have a permanent place of abode here, even though working overseas for three years, because of the existence of other ties with New Zealand throughout the period of absence.
In a recent case, Case U17 (1999)19 NZTC 9,174, it was held that a person who formerly lived in New Zealand did not have a permanent place of abode in New Zealand while he was overseas. This case is distinguishable from the facts in this item. The person was away from New Zealand for four years, and did not have employment in New Zealand available to him during that time (although he did have a business interest in New Zealand). He had separated from his wife and his old home was not available to him.
Observations on some relevant factors
Employment arrangements
The type of connection a person has with a New Zealand employer is a relevant factor in determining whether the person has a permanent place of abode in New Zealand. In the situation discussed in this item, the person's leave of absence arrangement represents a connection with New Zealand and a desire to retain connections.
Had the person instead been on secondment from a New Zealand job, that would indicate more strongly a connection with a New Zealand employer. A person on leave of absence may have some of the same connections, but not to the same degree.
If he had been on sabbatical leave and paid by a New Zealand employer during his absence, he would have a definite connection with New Zealand (see for example Case F138 (1984) 6 NZTC 60,237and Case Q55 (1993) 15 NZTC 5,313).
If he had given up his job in New Zealand, that would indicate a lack of connection with New Zealand in that respect, but other factors would also need to be considered. For example, in Case F139 (1984) 6 NZTC 60,245 a person returned to New Zealand to work for a previous employer. The Taxation Review Authority found the objector's loyalty to his employer a relevant factor in assessing the degree of the person's ties with New Zealand.
Another relevant factor relating to employment is whether an overseas position is for a fixed period, and if it is, the length of that period. A short-term overseas contract can indicate an intention to return to New Zealand, and therefore, that the person has an enduring relationship with New Zealand for the period of the contract.
Tenancy arrangements
The terms of a tenancy, particularly in relation to termination, may be relevant. A tenancy may be structured in a variety of ways: e.g. of fixed term set to expire on the owner's return (see Case Q55), or terminable on a period of notice (Case F138). A person may exchange the use of his or her house, fully furnished, with a person in another country for a set period (Case J98(1987) 9 NZTC 1,555), or allow friends to use the house rent free(Case J41(1987) 9 NZTC 1,240).
In this particular situation, the tenancy of the person's New Zealand house is terminable on giving due notice. If instead the tenancy were for a fixed term, that would suggest more strongly an enduring tie with the house. A fixed-term tenancy is consistent with an intention of the owner to live in the house at the end of the term, especially if other factors, such as temporary employment overseas, also point that way.
Of course, on its own, a fixed-term tenancy does not necessarily indicate a tie with New Zealand: it could also be consistent with someone who stays overseas for a long period. The significance of a fixed-term tenancy will be shown by the other circumstances applying to the particular person. Examples of further evidence of ties with the home are whether the house is rented out fully furnished, whether the person keeps the same telephone number (as in Case Q55), if the tenants are known to the person (Case J41), and whether the person lives in the house on returning (Case Q55, Case F138, and Case J98).
The relevance of these factors is not so much the apparent intention to return to New Zealand, but the indication that during the period of absence the person has retained ties with New Zealand.
The length of a fixed-term tenancy can also be a relevant factor. If it is for about a year (as in Case F138 and Case Q55) or for a lesser period, that is a persuasive factor indicating a continuing tie with the house whilst overseas and retaining a permanent place of abode in New Zealand. A fixed term of two years could also be consistent with an enduring relationship with New Zealand. After three years, although there is no case law on the point, it may be that a fixed-term tenancy is not a particularly revealing factor. Again, it must be stressed that all the factors must be considered together. A three-year, fixed-term tenancy, will not on its own be determinative.
The absence of a fixed-term tenancy does not necessarily point to a person not having a permanent place of abode in New Zealand. The owner can return to live in the house after giving due notice. So, even with a tenancy that is terminable by notice, as in the facts described in this item, the fact that the house is tenanted and not sold can indicate a tie with New Zealand. The same types of factors relevant to considering the importance of a fixed-term tenancy are relevant to a tenancy terminable by notice, e.g. the period of the tenancy, whether the house is rented furnished or the owners sell or store the furniture, if they know their tenants, if they live there on their return, etc.
In some situations, the nature of overseas accommodation might reflect on a person's intention regarding a house in New Zealand. Temporary overseas accommodation may indicate a continuing relationship with New Zealand.
Superannuation
Membership of the Government Superannuation Scheme might be seen as an investment that continues in New Zealand. However, the nature of a superannuation investment means that it cannot be viewed in the same way as other types of financial investments. A superannuation scheme is designed to give financial benefits when a person retires from the workforce. Usually, schemes are so designed that it is not a sensible economic decision to withdraw early. Continuing membership of a superannuation scheme may be consistent with a person returning to New Zealand at some distant point, and may not indicate significant ties with New Zealand during absence.
It is important to stress that no one factor should be viewed as more significant than any other. All of the facts should be viewed in context.
Additional information
More information on this topic can be found in the Commissioner's statements on residence in PIB 180 (June 1989) and TIB Vol.1, No.7 of July 1995.
Date published: 28 Mar 2006
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