Taxwise: Liability over tax residency clear

By DENHAM MARTIN

Our son works for a British firm providing computer services to that firm's European clients. He is seldom in Britain. During his last visit home he told us that he did not have to pay income tax and that he had been advised by his work colleagues that both Britain and the Netherlands (where he has a base address) authorities had confirmed this. Can this be correct? Also, if he is in New Zealand over the Christmas period does he have to pay income tax in New Zealand on money earned overseas in that income year?

By way of background, most (but not all) countries that impose income tax do so on a dual basis. Usually, they impose income tax on the worldwide incomes of their tax residents (the residence basis) and on the locally-sourced incomes of non-residents (the source basis). New Zealand adopts this dual approach as do the other countries you mention.

Your letter does not provide sufficient information for us to determine whether your son is liable to pay income tax in Britain or the Netherlands, either on a residence or source basis. The source of your son's income would usually be determined by where his contract of employment is formed or his services are performed.

A person is a tax resident of Britain if physically there for six months or more. A person may also be a tax resident of Vritain if making "substantial and habitual" visits there or where intending to be employed in Britain for at least two years. The test of residence for the Netherlands is whether a person has durable ties of a personal nature to that country.

While in theory it is possible not to be a tax resident of any country, to achieve that position in reality would be highly unusual. Even if your son does not meet the residence requirements of Britain or the Netherlands, we have a concern as to the source of his income.

We suggest that your son take professional advice in the countries concerned, as simply relying on what his work colleagues tell him is unlikely to gain much sympathy from the revenue authorities if the position he has taken is wrong.

We note that while your son works in various places, it is possible that he may still be a New Zealand tax resident and, therefore, liable to income tax here on the money he earns overseas.

The key test of New Zealand tax residency for your son is likely to be whether he has a "permanent place of abode" here. This test is much wider than, for example, ownership of a property in New Zealand. Ownership of a property is not a requirement for the test to be met (it is merely a factor to consider).

The key factors are whether your son has a place available to him in New Zealand in which to reside (such as your home) and whether he has retained durable connections with this country (through immediate family, business interests and social connections).

Assuming your son was originally a New Zealand tax resident, to lose this status he must lose his permanent place of abode here.

Also, he will need to consider the amount of time he has spent back in New Zealand since moving overseas as there are two timing tests that relate to whether a person is a New Zealand tax resident.

The first is that a person is deemed to be a New Zealand tax resident if present in New Zealand for a period exceeding 183 days in any 12-month period.

The second test requires a person not to have a permanent place of residence in New Zealand. It means that a person can be in New Zealand for up to 40 days in a 12-month period - any longer and they will be considered a New Zealand tax resident.

Overall, we do not have enough facts to say in which countries your son would be liable to income tax. However, it is highly likely he has a liability in at least one, and possibly more than one country.

The fact that most countries adopt the dual basis of taxing income gives rise to problems of international double taxation. Should your son face double taxation, he should note that the incidence of this can be alleviated to varying degrees, by one or other of the countries giving relief.

This is usually in the form of a tax credit for tax paid overseas or a deduction for tax paid overseas.

* Denham Martin is the principal of Denham Martin and Associates, lawyers specialising in advice on taxation and related matters.