Some of our clients live and/or work overseas, and have asked us about non-residency status with regards to tax.
The IRD has Double Taxation Agreements (DTAs) with a number of countries, meaning that tax paid in one country is counted when filing tax returns in the other country, so that you don't get taxed twice.
The IRD explains it this way: "You may be a tax resident in both New Zealand and another country or territory. This means that you are a resident in two countries or territories and subject to the tax laws of each. If both countries or territories tax their residents on worldwide income you could be taxed twice on the same income. Double tax agreements (DTAs) have been negotiated between New Zealand and many other countries or territories to decide which country or territory has the first or sole right to tax specific types of income."
Click here to see the current list of countries with whom NZ has a DTA. Note that the arrangements vary from country to country, so you need to check out the specifics.
Non-residency means that you are taxed as a non-resident on any income derived here in NZ. These rates are significantly lower than normal tax rates, e.g. the non-resident tax rate for the United Kingdom is 10-15%. See here for details
Working out if you are a resident or not for taxation purposes
It may not be as straightforward as you think (I'm not trying to rain on the parade here!!). Here's what the IRD says:
For tax purposes you are a non-resident if you are away from New Zealand for more than 325 days in any 12-month period, and do not have an enduring relationship with New Zealand.
So, how do you know if you have an enduring relationship with New Zealand? Happily, IRD has published a guide to help you work it out. As with virtually everything, this is self-assessed and honesty-based. Make sure that your conclusion is that of the hypothetical "reasonable person." See also this page at the IRD website, which contains a common example scenario, wherein someone lives in the UK but owns property in NZ
Let's say that you work out that you are not tax-resident in New Zealand, and you own rental property here:
Other helpful links
What is my personal tax residency?
What income is taxable in New Zealand?
New Zealand tax residents with overseas interests
Top 10 facts on international tax
Give us a call on 0800 890 132 or email us.
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Here's what the IRD says:
If you spend time travelling as part of your business you can claim business travel as an expense. A good way to prove the business portion of your travel expenses is by keeping a diary of your travels.
In addition to keeping invoices, receipts and tickets you should also keep details of:
How does that get you a free trip overseas?
Well, the first thing is to remember that there is no such thing as a free lunch - or a free trip - unless you win a competition or have a wealthy benefactor! However, there are such things as a tax-deductible trip, if not 100% at least in part.
If you'd like your LTC - which preferably already owns at least one investment property - to pay for your trip overseas, then you need to have the firm and very real intention of buying investment property overseas. This is not something to play around with or try to "rort the system." Not only would it be morally wrong, but cheats always get found out.
So, now that that's clear - and you would never think of being less than 100% honest anyway - you need to set up your business appointments, e.g. real estate agents, insurance brokers, accountants, lawyers etc, before you go on your trip. That makes it really clear why you are going. Plus, keep records as per the IRD-provided list above.
Then, your LTC can claim tax deductions for some or all of the trip and other necessary expenses: hotels, car, meals, travel etc. Note however that there are some gotchas:
That leather jacket is not tax-deductible
Let's say you are overseas, and you see a nice leather jacket. So, you buy it. The trip is 100% tax-deductible, because it meets all the criteria above. Can you claim the leather jacket? No. The guideline is "what is the nexus between this expense and the business activity?" If there is no clear link or nexus, then the item is not tax-deductible. In this case, what does a leather jacket have to do with your investment company? Nothing. So it is clearly not tax-deductible.
Don't go overboard with your expenses.
Always remember that tax concessions allowed are based on what the hypothetical "reasonable" person would do. A reasonable person would not eat out at the swankiest restaurant every night they were away. They might do that once, but not every night. So, don't get carried away.
Non-business parts of the trip are not deductible
Let's say that you arrive in the country where you are looking to buy rental property. You have a few days' worth of appointments set up, but you have planned to also take a few days to rest up as well. The total trip is 10 days, with 3 days' business pre-planned, and the rest being vacation. Therefore, you cannot claim the entire trip as a business expense. Instead, work out the proportion related to business (30%, in this example), and claim that percentage of the costs.
Can we claim for both of us then and the kids too?
Highly unlikely. Your children are likely not active working partners of your LTC, so you would have to make further adjustments to exclude costs related to their stay. What about your spouse or partner? Well, is your significant other a part of the business, e.g. a director of the company? Are they actively involved in the taxable activities of the LTC? Is the firm/professional you are meeting at your destination expecting to meet both of you? Then likely yes you can claim.
Questions? Please feel free to contact us. And for clients, before you go away, please please please contact us.
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Accounting for your rental residential investment property; general taxation advice.