The great escape to a tax-free zone

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Does anyone remember Billy Ocean? I do. A particular favourite of mine was his classic When The Going Gets Tough, The Tough Get Going.

Which brings me to a conversation with one of my mates, who told me over a beer that he was leaving for Dubai. He mentioned gold-paved streets and lifestyle but – and here’s the real reason – he also wouldn’t have to pay tax there.

From a tax adviser’s perspective, the conver­sation became all the more interesting when he told me his wife and kids wouldn’t be joining him, he’d be taking up an 18-month fixed-term contract in Dubai with his existing employer in New Zealand and would return to his current job here on completion.

It’s important to note that, just because you aren’t living in NZ, it doesn’t necessarily mean you don’t pay tax here on what you’ve earned elsewhere.

Tax residence is a fundamental concept to NZ tax law. If you’re a tax resident of NZ – and I stress resident for tax purposes, not to be confused with the right to reside, or residence, for immigration purposes – you’ll be liable for NZ tax on worldwide income.

Anyone currently a tax resident of NZ will only shuck off tax liability if they:

  • Are outside NZ for at least 325 days in any 12-month period.
  • And they don’t, or don’t any longer, have a “permanent place of abode” here.

Clearly it’s pretty black and white to work out whether you’ve been in this country for 325 days or more – but have you also lost your “permanent place of abode”?

This is where tax law can be very grey and gets a little tricky when applied to given situations.

Broadly, the permanent-place-of-abode test looks at a person’s ties with NZ. What was their previous association with this country? And their current association? How does the future look?

Factors to consider, and this list isn’t exhaustive, include the availability of a home, family ties, financial links to NZ, domestic arrangements, employment … the list goes on.

Even though in many cases this test can be grey, I think that in my friend’s situation it’s pretty conclusive as he has a home available to him here, his family lives here, and importantly will continue to do so, he’s coming back in 18 months and his employment is and will continue to be with a Kiwi employer on his return.

This is a convincing argument that he’ll continue to be a NZ tax resident during his absence, which means that although he’ll pay no tax in Dubai on his earnings, it’s probably payable in NZ.

While my friend was at first adamant he wouldn’t have to pay Kiwi tax on Dubai earnings, when it comes to taxation there’s no point in taking the “when the going gets tough, the tough get going” approach.

The onus is on you to prove that the tax position you took was correct.

And don’t forget the second part of Billy Ocean’s message: the “rough [can also] get tough” – Inland Revenue will collect what’s due to them, including penalties and interest.

Mark Lodder is a PriceWaterhouseCoopers tax specialist covering Queenstown. He’ll respond to your tax questions in his monthly column and can be contacted at vat@nz.pwc.com