In brief - Inland Revenue's releases

Tax Watch: Edition 1, 2014

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Tax residence rules

Inland Revenue has released Interpretation Statement 14/01 to explain the residence rules set out in the Income Tax Act 2007. The statement focuses on the residence of individuals in particular the relationship between the domestic rules and New Zealand’s Double Tax Agreements, the taxation of transitional residents and the residency of companies and trusts.

Individuals

One of the residency tests for individuals is the permanent place of abode test, under which an individual will be held to be a New Zealand tax resident for the period that they maintain a permanent place of abode in New Zealand. The statement provides the following clarification on the test:

  • A ‘place of abode’ means a specific dwelling in which a particular person could live rather than a just a general locality. Having a ‘dwelling’ in New Zealand is a pre-requisite to having a permanent place of abode.
  • A ‘dwelling’ is not limited to a property an individual owns, rents or controls but also includes a place that is objectively able to be used by the person. It therefore includes a family member’s dwelling or a place that is currently rented out and is not immediately able to be occupied.
  • The existence of an available dwelling however, is not determinative of whether a person has a permanent place of abode. There will also be consideration of the continuity and duration of the person’s presence in New Zealand and the durability of the person’s association with their New Zealand place of abode. The second factor will be assessed by considering the nature and use of the dwelling, the person’s intentions, their family and social ties, their employment, business interests and economic ties, their personal property and any other relevant circumstances.

In respect of the relationship between the residence rules in the domestic legislation and New Zealand’s Double Tax Agreements, the statement clarifies:

  • Where, under the domestic laws of two countries, an individual is a dual resident, the relevant Double Tax Agreement applies to resolve the issue through a series of ‘tie-breaker’ tests. The statement clarifies the meaning of terms commonly used in the tie-breaker tests.
  • The residence articles in Double Tax Agreements are only relevant for the purposes of that Agreement and a person remains a dual resident of two countries for other tax purposes, such as GST.

Companies and trusts

The statement provides examples to illustrate the application of the residency tests for companies as set out in the Income Tax Act 2007 and addresses the effect tax residence has on various regimes such as company imputation and the financial arrangements rules.

The statements also clarifies how trust income is taxed as either beneficiary income or trustee income and addresses the impact of the settlor and beneficiary tax residence on these rules.

The interpretation statement can be viewed in full here.

Requests to amend assessments under section 113

Inland Revenue has released a draft Standard Practice Statement for consultation outlining how the Commissioner will exercise her discretion under section 113 of the Tax Administration Act 1994 to amend assessments in order to ensure their correctness or following the application of the disputes resolutions process.

The draft statement can be accessed here and submissions on the draft statement are due by 11 April 2014.

Approval of third party providers for offshore storage of taxpayer electronic records

In February this year Inland Revenue approved a list of offshore storage providers for electronic records for which taxpayers do not need to obtain approval under the Tax Administration Act 1994 to store their business records outside of New Zealand.

While taxpayers are allowed to use third parties to store records, they remain responsible for their tax obligations, including the obligation to retain business records for the correct retention period (generally seven years).

Historical Inland Revenue internal circulars

A public item released by the Inland Revenue this month, Status of historical Inland Revenue internal circulars, advises taxpayers that they should not rely on historical internal circulars or similar publications as representing Inland Revenue’s current practice or interpretation of tax law.

Instead, taxpayers should source current practice and interpretation materials from here which publishes all current binding rulings, interpretation statements, standard practice statements, Inland Revenue guides and Business Tax Updates.
 

Deductibility of a companion’s travel expenses

The Inland Revenue has released a Question We’ve Been Asked QB 13/05, which states that where a taxpayer takes a business trip accompanied by a companion, in the majority of cases the companion’s travel expenses will not be deductible by the taxpayer.

The QWBA considers that a deduction may be permitted however, where the companion supports the taxpayer in the business being undertaken, to a “reasonably substantial degree”. Although the companion does not need to be an expert in the business’ affairs, they must have some knowledge of the business or possess some special skill or expertise so as to provide material support.
A detailed explanation of the circumstances of deductibility, with accompanying examples can be accessed here.