NZ TAX UPDATE : FEBRUARY 2007

The playing field has changed. Exposure and liability to NZ tax has become user friendly. The changes benefit migrants, returning expats and those with business activities outside New Zealand.

The changes relate to:
• determining when one is a NZ tax resident
• providing an exemption for foreign sourced income for a limited period after attaining NZ tax residency
• new overseas tax rules to level the playing field for business investors
• taxation of foreign equity investments.

Migrants to NZ and returning expats who have been absent from NZ for 10 years, qualify for an exemption. On arriving/returning to NZ, the exemption applies to foreign sourced income received for a period of 48 months after attaining a permanent place of abode in NZ. The exemption applies to most foreign sourced income with the exception of income from personal services or employment income.

Further, if qualification is met, the test of NZ tax residency no longer includes the dreaded 183 days personal presence test in NZ. The only test of tax residency is the “permanent place of abode” (effectively the date from which you establish your home in NZ).

Government has grappled with the taxation of foreign investments held by NZ tax residents. Initially the proposal was to tax unrealised gains on offshore shares. Legislation has now been passed to apply a fair dividend rate [FDR]. The FDR has been set at 5% and applies to portfolio investments in offshore shares and will apply to the market value [MV] of such shares. It applies from the first day of a taxpayer’s income year commencing on or after 1 April 2007. Australian investments are excluded from the FDR regime. The FDR is deemed to be the return (including dividends) from the investment in the offshore shares on an annual basis.

Assume you hold offshore shares with a MV of NZ$100k at 1 April 2007. During the year you acquire another NZ$20k, which is held at 31 March 2008. During the year ended 31 March 2008 you receive a dividend of NZ$3k. Shares have a MV of NZ$121k at 31 March 2008. Under FDR you would be taxable on NZ$5k (5% of NZ$120k). However, if you can show your actual return is less than NZ$5k, you will be taxed on that lesser amount. In the above illustration, you have received dividends of NZ$3k plus gain of NZ$1k equals NZ$4k. As you result you would be taxed on NZ$4k (in the 2008 income year).

For business investments by NZ residents outside of New Zealand, there is currently a strong foreign tax regime. It acts as a disincentive to NZ exporters. It does not differentiate between active and passive foreign sourced income (compared to that in Australia). As an example an NZ company with a manufacturing subsidiary in China is exempt under Chinese tax law from tax in the first and second profitable years and attracts a 15% tax in the third, fourth and fifth years. However, the NZ company has to pay NZ corporate tax (33%) on total global profits. Under a proposed change, the subsidiary in China would not be subject to tax in New Zealand and would continue to enjoy the tax benefits in China. The proposal places the NZ company on the same footing as other foreign investors in China and removes the distortion of the tax regime and any encouragement for the New Zealand company to leave NZ.

Whilst there has been talk of reducing both corporate and personal tax rates in NZ, no actual numbers have been produced by either the Government or Opposition. Company profits continue to attract tax at 33% and individuals continue to be taxed in New Zealand on total worldwide income at the rate of:
• 19.5% on the first NZ$38,000
• 33% on income between NZ$38,000 and NZ$60,000
• 39% on income in excess of NZ$60,000.

There remains however several options for minimising one's exposure and liability to NZ tax in quite legitimate ways. Such options should always be considered well prior to migrating or returning to NZ.

NZ PROPERTY ACQUISITION/INVESTMENT

My name is John Doe. I have lived in Hong Kong for 10 years. I intend returning to New Zealand in the next 2/3 years. I have recently traveled to New Zealand to meet land agents to purchase property. I looked at a residence, a residential investment property and some retail shops.

I have funds in Hong Kong and New Zealand. I have used these funds partly as a deposit against each property and the rest will be available for settlement. I will need to borrow to meet the full purchase price.

One of the properties needs extensive maintenance. Another needs some renovation to the interior. I might add an extra room on to the investment property. Prior to moving permanently to New Zealand, I will have my partner and children visit to check on the selected family residence, schools, transport plus cultural and sporting opportunities for the kids. I will also follow to once again meet with agents and professional advisers after the properties have been acquired and tenants found.

Tax Questions:
1. Should John buy the property in his name, joint names of he and his partner, a company or trust?
2. What part of the travel costs down to New Zealand can be claimed against rental income?
3. How should John allocate funds he has against each of the property purchases?
4. Is it better to borrow in New Zealand or offshore?
5. Are the maintenance, renovation and addition costs tax deductible?
6. Can depreciation be claimed on the total purchase price?
7. If John receives an offer for either of the residential investment or retail commercial properties within two months of ownership, will any gain be taxable?
8. Does the ownership of the properties accelerate New Zealand tax residency.

MY HOME, MY CASTLE, MY SUPERANNUATION

Property investment in New Zealand continues to produce returns. The return is affected by:
• location
• funding options
• taxation

It is true that ignoring funding options and taxation for the present, the three most important ingredients of a successful property investment are location, location and location.

Get it right (e.g. the worst house in the best street) and the returns are almost guaranteed.

On the funding option side, decisions to be made include whether to borrow locally or offshore; interest charges and currency risk. If the property purchased
(residential/commercial/industrial) is by way of investment (rental return), then all borrowing costs can be claimed against rental income. If borrowing offshore, the deduction against rental income has a tax benefit of up to 39%. If the funds are loaned from Hong Kong for example, the interest flowing back to Hong Kong is not subject to tax. It does however attract a withholding tax in New Zealand (currently 15%). Thus there is a marginal benefit of 24% adopting the maximum personal tax rate in New Zealand.

The taxation side has two major elements:
• the expenses that can be claimed against rental income
• whether the ultimate sale of the property generates a liability for tax

If there is a tax attracted to the gain on ultimate sale, then of course that substantially reduces the net return on capital outlaid. This is where I refer back to my article (Edition 71) which commenced: “New Zealand does not have a capital gains tax. Yeah right!”

Get it right at the beginning, and a tax free gain follows. A failure to attend to appropriate paper work and pre acquisition correspondence can be fatal. How one can get it wrong will be part of the presentation in Hong Kong (May 23, 2005).

Thus to get it right focus on:
• location, location, location
• the level of debt to fund your purchase
• documentation and correspondence to ensure that on sale does not attract tax.

THEN your home, your castle can be your superannuation.

TAX PLANNING v TAX AVOIDANCE

The distinction is important. The cost of getting it wrong can be painful. It is illegal to evade a tax liability. It is not illegal to avoid a tax liability. However, if tax avoidance is even one of the purposes or intentions of entering into a transaction, then tax legislation allows the Commissioner of Inland Revenue to disallow any tax benefit, with a potential to add on a penalty.

Of course if the Commissioner is of the view, that the position taken by a taxpayer is an abusive tax position, he can impose penalties of 100% of the tax benefit sought. I illustrated the effect of this in Issue No. 70 (December 2004), when dealing with the so called Trinity case (forestry losses).

Whilst technically, the Act appears to allow the Commissioner to offset any tax planning arrangement, where one successfully avoids a tax liability, in practice that does not occur when one adopts normally accepted tax planning practices. Even the Privy Council used the words tax mitigation as a halfway house between tax planning and tax avoidance.

When commencing a business or investing in property, there is nothing to prevent one from deciding whether ownership ought to be in ones own name, a partnership of family members, an ordinary company, a loss attributing company (potentially the best of both worlds where limitation of liability is matched with the ability to use any tax loss), or a family trust. There is no point in paying the top marginal tax rate of 39% (personal) if the same income can be distributed around family members, at rates as low as 15% (taking into account child rebates).

That is simply commercial (and acceptable) tax planning. In contrast, registering your car as a company vehicle and claiming 100% of ownership/operation costs, when in fact the vehicle is used 80% privately, is an example of tax avoidance.

Whilst the distinction between tax planning, tax mitigation and tax avoidance is important, to date the Courts have still not been able to accurately define the boundaries of each. One benefit is that it keeps Tax Consultants very busy.

Property Tax Cheats in IRD Sights

New Zealand does not have a capital gains tax. Yeah, right!

The above headline appeared in the New Zealand Herald on Thursday (January 27, 2005). It was followed by a sub headline stating: “Investigators reap extra NZ$52m in Auckland blitz on house buyers and sellers”.

I dealt with taxation issues relating to property transactions in Issue No. 68 (November, 2004) of the NZCCHK News publication. Given that property investors are now the subject of a major blitz by the New Zealand tax office, it is appropriate to consider what to do/what not to do, if you really do wish to maximise your return on any property investment in New Zealand.

It is true that New Zealand does not have a capital gains tax as such (unlike most western democracies). However, there are certain categories of property investment, which if they fall squarely within specific taxing provisions, a gain from the ultimate sale of that investment will attract New Zealand tax (up to 39% if the gain is made by an individual and 33% if made by a company).

I suggest that the NZ$52m “reaped” by IRD, results from the tax boys satisfying themselves, that the property sold at a gain, was acquired for the purposes of on selling at a gain. When you and I buy a property, there will always be a hope (if not an expectation) that the property can ultimately be sold at a gain. The “what not to do” is to advise a bank manager (when applying for finance), that the property has an immediate potential for on-sale at a gain and thus the bank should have no problem in lending the money. Thus documentation and pre acquisition correspondence is somewhat critical for both “what to do” and “what not to do” where one wishes to clearly convince the tax boys, that there was not an intention – at the time the property was acquired – to on sell at a gain. What then was the intention? The property could have been acquired for the purposes of deriving income by way of rental. It could have been acquired for long-term residential occupation.

The above covers the first of seven categories of property transactions that could invite a tax liability on any gain made on sale. The other categories relate to not only builders, property dealers and developers, but you could be caught if you “get into bed” with any of those classes of taxpayer. Thus if you own some shares in a property development company, you could be liable for taxation on a property deal, even though in your own right you are not and have never been involved in property dealing or development. The “associated person” test is most complex.

It is probably appropriate I deal with those other classes in subsequent articles.

If you are caught by the tax boys, it is not just the tax on the transaction that you face. The penalties imposed can be as high as 100% (abusive tax position) or 150% (tax evasion).

Let me quote from IRD in relation to these property investigations. “Of the extra NZ$106.6m gathered in tax on property deals nationally, NZ$62.4m was gathered in the year to June and a further NZ$44.2m came in the last 6 months.”

The above figures do not include penalties imposed for taking an abusive tax position or evading ones tax liability.

Thus the message is “get it right the first time”.

A Christmas Present ?

(First published in the NZCCHK newsletter dated January 2005)

Investors in a forestry scheme received a much unwelcomed Christmas present on Wednesday 22 December 2004.

In brief, 200 investors in a scheme referred to as Trinity, bought a 50-year licence to grow Douglas Fir trees on land owned by the Trinity Foundation Company. They agreed to pay a licence fee of $2m a hectare in 2047 when the trees were harvested. Investors then depreciated the $2m fee, which was challenged by Inland Revenue. The scheme also involved an insurance policy with a British Virgin Island – based company, the cost of which was also claimed as an upfront deduction.

In a judgment of Venning J delivered to the Court on 20 December 2004, the Judge ruled in favour of Inland Revenue who considered that the scheme was one not only of tax avoidance, but that the investors had taken a tax abusive position. In addition to denying the tax deductions that were claimed, Inland Revenue Department has sought a tax penalty of 100% of the tax benefit sought.

Certainly this is the Inland Revenue’s largest ever tax litigation result. The potential tax benefit to the investors was over NZ$3b – eclipsing the former biggest New Zealand tax case, NZ$226m against Acton NZ software scheme, which Inland Revenue won last year.

However, unlike other investment schemes, that have resulted in success for Inland Revenue citing tax avoidance in the Trinity case, there was considerable reality. Land was purchased, trees were obtained and planted, and maintenance of those trees continues to be ???. The Court confirmed in fact, that the transaction was commercial and further, the insurance scheme itself, had it not been for the tax avoidance, would have also maintained an appropriate deduction for taxation purposes.

Naturally, the media has been quick to use the old trite saying that: “…if it sounds too good to be true it probably is”.

The decision of the High Court, reflecting earlier decisions, still does nothing to clarify the issue of what constitutes tax avoidance. However it is unlikely that there will ever be any certainty on where the line can be drawn between arrangements that are acceptable and those which are not.

Avoidance is not capable of exact definition nor is the view on avoidance static.

Christmas comes but once a year; but for investors it is hoped that this is a Christmas that won’t be repeated.

Property Investors Take Note

(First published in the NZCCHK newsletter dated November 2004)

The tax climate is changing somewhat for those investors in New Zealand property. Here, I am not talking about property dealers and developers, but properties acquired either for ultimate residence of the owners, or as an investment (commercial or residential).

The New Zealand Tax office has been somewhat active in recent times to the effect that they have launched a search of property registers to identify taxpayers who have entered into five or more property transactions in the last three years. As a result of that search, it is generally believed that the Tax office has identified in excess of 10,000 taxpayers for future “follow up”.

A number of these have already received letters requesting an explanation behind property purchases/sales. This clearly to identify whether there is evidence indicating that the taxpayer acquired such property or properties with the intention of on selling at a gain.

Remember New Zealand does not have a capital gains tax as such. However, if it can be shown that a taxpayer acquired any property (in its wider sense), where the ultimate sale generated a profit, that profit is taxable. That applies to land, motor vehicles or shares simply by way of example.

It is for that reason, I have emphasised the critical need, to adequately document property transactions, where such a property is acquired purely as an investment (to derive rental income). I repeat, if finance has been obtained (which gives a very healthy deduction for interest paid), but the bank manager’s notes indicate that the purchaser believes he can make a quick gain on sale, then the taxpayer has little argument against the tax office assessing any such gain.

Another impediment against future property investment, is the changing of rules in connection with the claiming of depreciation. The tax office believes, and it is somewhat difficult to argue against, that investment property does not in fact depreciate. The opposite is the case, where the property (whether that be land or improvements) will generally appreciate. Thus there is a move to deny deduction for depreciation in respect to future property investments. Of course depreciation (being a non-cash expense), does have its tangible reward in reducing a tax liability or generating a loss that can be used against other taxable income.

The message remains the same. Do your homework before you make a purchase.

Checking Your Property Investment End of Year

(First published in the NZCCHK newsletter dated October 2004)

Members will be planning their annual holiday trip/return to New Zealand. It is a time to focus on whether any of those costs might be claimed for tax purposes against New Zealand property investment rentals.

It is thus opportune to restate a few principles of property investment before addressing expenses that can be claimed against rental income.

If one owns New Zealand property that is rented, there is a statutory obligation to lodge a taxation return, regardless of whether the investment produces income for taxation purposes. Expenses directly related to the derivation of rents can be claimed as a deduction. The exclusion is where that expense is of a capital or private nature. This is where your holiday/return to New Zealand comes in to account.

It has been common for investment property in New Zealand to be highly or negatively geared. This is where an owner will borrow the maximum given that interest is deductible. There are some specific restrictions but in general, borrowing costs are the major deduction against rental income. Thus it is important that one takes steps to ensure a full deduction of the interest cost. By way of example it is no use of borrowing in the name of an entity that does not own the property and then making those funds available (interest free) to the property owner. Remember also, that if borrowing occurs outside New Zealand, the interest claimed as a deduction against New Zealand rental income, will generally suffer a withholding tax liability (15%) when paid to the offshore lender. That withholding tax liability does not apply if the lender has a branch in New Zealand (e.g. Westpac). The 15% withholding tax can be reduced down to a 2% approved issuer levy, if the borrower and lender are not associated.

Standard expenses such as repairs, rates, insurance, will be claimed against rents received. It does not matter that the property is untenanted for part of an income year. As long as the property is available for renting, then all directly related expenses can be claimed as a deduction.

There is always a fine line between revenue and capital expenditure when it comes to renovations. It pays to obtain advice before carrying out renovations. Many a taxpayer has missed out on a deduction, where an existing tenancy has been terminated and the renovation/repairs carried out after rents have ceased. In that situation no deduction is available.

Turning now to the question of claiming travel costs. I have addressed this issue previously. In brief, if the dominant purpose of ones visit to New Zealand is to check on investments, meet with professional advisers or check out existing or potential new tenants, then the travel costs are deductible. If the dominant purpose of the visit is private, then what one can claim is a proportion of the travel costs relative to the time in New Zealand spent on checking ones property investment.

Can the costs of both partners be claimed? Yes, if the property is jointly owned.

The best advice that can be given is to Plan well beforehand. If there is a dominant or secondary purpose of ones visit, to check on ones property investment, then exchange correspondence before you come down to New Zealand. The tax office has a tendency to accept the written word far more than the spoken word.

Generosity Can Be Costly

(First published in the NZCCHK newsletter dated September 2004)

Giving away money shows one's generosity. But what if there is a cost? Protecting one's assets. A civil claim could result in a substantial cost.

This is because New Zealand has a gift duty regime. The duty is charged at a progressive rate which maximises at 25% value of any gift over NZ$72,000 in a 12 month period.

You can gift whatever you like to charity without gift duty being imposed. You can make small gifts to family and friends without being exposed to gift duty. Then there are exemptions coupled with tax planning opportunities that legally avoid gift duty.

Liability for gift duty is imposed on:
+ any property situated in New Zealand that is subject to a gift; or
+ the person making the gift (donor) has a domicile in New Zealand

I have dealt at length with the issue of domicile in previous articles. Briefly, every person must have a domicile, which commences at birth. However, anyone can then acquire a domicile of choice, where they are not already domiciled in a country but are resident in that country and intend to live there indefinitely.

Where a gift is made, there is a statutory obligation to lodge a gift statement with the New Zealand tax office where:
+ the value of the gift is over NZ$12,000; or
+ the value of the gift takes the total value of all gifts by that person in the last 12 months over NZ$12,000

Thus if you wish to make a gift to your children or you wish to take action to protect your assets, think first about any exposure to New Zealand gift duty.

If the full gift duty is payable, there is an exemption of NZ$27,000 in respect to each individual, which applies to total gifts made in a 12 month period. Thus duty is only chargeable on gifts that exceed $27,000 in any one year by any one person. That exemption does not affect the statutory obligation to file a gift statement whether the value of any gift exceeds NZ$12,000.

If you or your spouse want to make a gift of NZ$54,000 to one or more of your children, then no duty is payable. The exemption of NZ$27,000 would apply to each donor. There would be no gift duty liability. If you are liable for New Zealand gift duty, and you want to give your children NZ$100,000, then you would loan them that amount and then progressively forgive (donate) that debt at a rate that allows you to use the NZ$27,000 exemption.

If you want to transfer property (situated in New Zealand) to a family trust for asset protection purposes, you would not gift that to the trust. You would sell the property to the trust in consideration of a debt. You would then progressively forgive that debt to take advantage of the exemption. If however you (the donor) have not retained a domicile in New Zealand, then there is opportunity to forgive the total debt on the property transaction without being exposed to any New Zealand gift duty. This relates to where the debt is deemed to be situated, as opposed to the sight of the property itself.

I have given examples on how this can be achieved in previous articles.

Thus the message is consider the cost before deciding to be generous. Plan ahead.

Summer Holiday

(First published in the NZCCHK newsletter dated June 2004)

I understand a number of you will be taking a summer break back to NZ during July/August. Thus this article will focus on your NZ holiday retreat.

I will incorporate into the article an extension of the previous report suggesting on how to safeguard a capital gain made on the sale of any property, including the holiday home or the bach as it is commonly called in NZ.

Of course, many of you are now scared to come to back to NZ, in case such a visit is within 6 months of returning permanently. The sooner Hong Kong concludes a double tax treaty with NZ, the better off we will all be.

If the holiday home is rented while you are absent, then you will be claiming all costs associated with deriving that rental income. If your vacation is simply that, then there is no way you can claim return airfares. If on the other hand, you were to put a fair amount of planning into your trip, so that you decide to take a small vacation, during a period in which you checked the condition of the holiday home, met with professionals who are looking after your property and affairs and attended to some maintenance, then arguably there is an entitlement to claim at least part of the return airfare as a deduction against rental income.

It is all a question of the degree of planning.

On the expenditure side, it does not matter that the property has not been let over a full annual period. As long as the property is available for letting, then there is entitlement to claim 100% of related expenditure. If you occupy the holiday home for say two weeks, as part of NZ vacation, then you would make an appropriate reduction in your claim for expenses (claiming only 50/52 of total costs). Remember there are differing rates for depreciation. As an example of the spread, buildings will generally be subject to a 4% depreciation claim. On the other hand carpets are subject to 40%.

BUT remember I flagged possibility of Government looking at depreciation. The 2004 Budget delivered a warning of a withdrawal of depreciation as a deduction for tax purposes.

The sale of your holiday home ought to produce a gain that is not subject to tax. However, if there is evidence that the property was acquired with the intention of selling it again, the gain will be taxable. Have you borrowed to fund the purchase? Do the notes retained by your Bank Manager, indicate that the bank risk is minimal, because you believe you can “flick on” the property at a reasonable gain within a short period? Do you have a history of buying and selling properties within a reasonably short timeframe? Are you – or anyone with whom you are associated – in the business of property dealing or development? These are all issues that could convert your tax free capital gain into a taxable income.

The message in this article then is appropriate planning, and attention to keeping written records.

Beware the Tax Man

(First published in the NZCCHK newsletter dated May 2004)

Do you own property in NZ? Is it your intention to invest in NZ property in the future?

The tax man has recently taken a much closer interest than normal in the purchase and sale of property (mostly residential but in one particular area, commercial). The main problem (from the view of the tax man only!) is NZ does not suffer from a capital gains tax.

The recent surge in house prices (a little quieter at the moment) has seen substantial gains made by those investing in residential property. No more so than in Wanaka (a gem in the South Island). This has been a wake up call for the men from the team from Inland Revenue (most of whom I suspect have missed the property investment boat). But the attention is not limited to Wanaka. The lack of a capital gains tax complemented by the ability to claim depreciation against rental income, does allow for tax efficient investment.

This can be both in respect to pure investment properties as well as the purchase of ones home which is rented pending return to NZ.

What about depreciation? It is not a cost; rather an allowance. It is however deducted from rental income before tax is charged. If the deduction of depreciation creates a loss for tax purposes (which it often does), that loss is available for carry forward without any time limit. Thus it can be deducted against any other form of income at any time. But the tax man is considering to withdraw a deduction for depreciation. In the meantime, the value of the property generally increases. Thus on sale, whilst there may be the requirement to give back the depreciation previously claimed, the gain above original cost is tax free.

A further benefit for non-residents purchasing residential property in NZ, is tax effective funding from offshore (ignoring the exchange risk of course).

But is the capital gain benefit carte blanche?

Some would be investors have had their fingers badly burnt. There is still provision within the tax act, that if someone purchases an asset for the purposes of on sale, the gain is taxable. So not all people who thought they were going to make a capital gain when buying and selling property have done so. Some have faced a rather large tax bill.

There are many safeguards to put into practice to ensure the retention of a capital gain. These and others relating to property investment will be one of the subjects at the tax seminar in Hong Kong scheduled for May 19th.

Avoiding (Legally) the New Zealand Tax Net

(First published in the NZCCHK newsletter dated April 2004)

Once an NZ resident, you are taxed on worldwide income. I have discussed tax residency rules on every visit to Hong Kong. Recently I attended an NZ seminar where more than one speaker gave a very confusing account of what constituted residency for NZ tax. That was a preliminary to advising on exposure to NZ tax when setting up a business in Hong Kong or Mainland China.

It is worthwhile re-stating the tax issues but using examples.

You return to New Zealand for Christmas 2003 to be with your closest family. You intend to permanently return to NZ on the 1st June 2004. Under that scenario, you will be considered tax resident from the day you set foot in New Zealand for your Christmas get together. Foreign sourced income (including salary/wages/holiday pay/superannuation entitlement/fixed income) received from Christmas 2003 will be subject to NZ tax.

This on the basis that you will have breached the timing test by Christmas 2004. You will have been in New Zealand for 6 months in the 12 months between Christmas 2003 and 2004. You are thus deemed tax resident from Christmas 2003.

That will be the case if you have resided in Hong Kong prior to coming to NZ.

If on the other hand you resided in Mainland China, the rules are somewhat different. NZ has a double tax agreement with China. The provisions of that agreement provide inter alia that despite breaching the six month rule, if you maintained residence in Mainland China until the 1st June 2004, you will not be deemed an NZ tax resident until the day you arrive permanently (1st June 2004 in the example given). Hong Kong has not concluded double tax treaties with any country at this stage.

I will address the distinction and options to avoid accelerating tax residency at the tax seminar scheduled for May 19th.

A person operating a business in Hong Kong or making investments through Hong Kong must recognise NZ foreign tax rules. The same applies to a resident of Hong Kong returning to NZ and leaving behind a business or an investment.

Having a Hong Kong company own that business or investment will not avoid NZ tax. Under foreign tax rules, where NZ residents own or control more than 50% of such a company, they must report their share for NZ tax purposes.

Australia adopts an active/passive income distinction. NZ does not.

By way of example, if the suggested Hong Kong company was manufacturing/distributing jewellery then the net income of the company would be reported for NZ tax purposes but not for Australian tax purposes. If the same company was in the business of investing money, then the net profit share (of resident shareholders) would be reported in each country.

A foreign trust is outside NZ foreign tax rules. In contrast, such a trust is within Australian foreign tax rules. Thus such a trust if it were to own the shares in the suggested Hong Kong company, the profits of that company would not be reported for NZ tax purposes. The shareholders of the company are not resident for NZ tax purposes. The beneficiaries of the trust may be, but the trust itself is not. Again examples and distinction between ownership options will be discussed at the May seminar.

NZ foreign tax rules have been subject to much criticism. This to the extent that the government has listened to cries for change. These rules will apply to your superannuation and pension entitlements. If you draw down any entitlement prior to returning to NZ, there are no NZ tax consequences. If on the other hand where entitlement/maturity occurs after attaining NZ tax residency, then domestic and foreign tax rules can apply.

If the suggested changes are legislated prior to May 19th, they will be included in the tax presentation. If there has been no change, existing tax consequences will be discussed.

Are You Forgiving ?

(First published in the NZCCHK newsletter dated February 2004)

By far and away the majority of questions raised of me by NZ ex-pats relate to NZ tax residency. However, lately the issue of gift duty has been rather prominent.

In brief, NZ imposes gift duty on all property situated in New Zealand. Gift duty is also imposed on any person domiciled in New Zealand in respect to the gift of any property wherever situated.

Duty is imposed at a graduated scale. There is no duty on the first $27,000 of any gift. After that, duty is imposed at rates commencing at 5% and maximising at 25% in respect to gifts over $72,000. The duty relates to gifts made in any 12 month period. Like tax residency rules, the period is like a moving goalpost. When looking at residency for tax purposes you consider the number of days one has been in New Zealand within any 12 month period. Likewise with gifting, you look at gifts made within any 12 month period.

Thus gift duty can be avoided where property is not situated in NZ and the donor is not domiciled in New Zealand.

Thus there is a need to focus on what constitutes domicile and what is deemed to be “property in NZ”.

I will deal with the issues separately and then give examples of transactions that fall within and outside the gift duty net.

Every person adopts a domicile at birth. Every person becomes capable of having an independent domicile on attaining the age of 16 (domicile of choice). By way of example, if you were born in New Zealand then under the Domicile Act 1976, you acquired domicile at birth. If you subsequently moved to Hong Kong and intend to live there indefinitely then Hong Kong becomes your domicile of choice and you no longer have domicile within NZ.

If on the other hand, your move from NZ was not for an indefinite period then you would have retained your domicile of birth. Thus even if you have been in Hong Kong for 10 years and have not effectively severed your total relationship with NZ, you will be considered to have retained domicile in New Zealand.

A person’s intention or attitude to a particular country will be considered in determining domicile. As indicated, it is presumed that a person’s domicile is that of origin (birth) unless there is sufficient evidence that one has been acquired by choice. There is a presumption against changes of domicile and clear evidence must be produced to show a persons intent if it is alleged that the domicile of origin has been abandoned.

Certainly a person’s domicile is the country where his/her permanent home is located. The courts have interpreted the word home as having its every day meaning and not merely a person’s dwelling.

Where does that leave you as an ex-pat. You have accumulated wealth in NZ (through property ownership) and in Hong Kong (pension/superannuation entitlement and perhaps managed funds). You intend returning to NZ and do not wish that accumulated wealth to be at risk to:

► Possible reintroduction of estate duty or introduction of a wealth or inheritance tax by the New Zealand Government.
► Action by creditors should you be in the unfortunate position of having a failed business
► A substantial civil suit against you (e.g. as a medical practitioner).

There is an opportunity of carrying out a form of asset protection prior to returning to New Zealand (and adopting NZ as your next domicile of choice). That is where you then must address the issue of what constitutes “property in NZ”.

Important Note:
The above articles were provided by Des Trigg of BDO Spicers, Auckland. The contents of each article are for information only and should not be acted upon without specific and proper professional advice. Neither NZCCHK, the author nor BDO Spicers accept any liability to any other party. Des Trigg may be contacted via the following: Tel: + 64 9 308 1867 Fax: + 64 9 303 2322 or E-mail: des.trigg@xtra.co.nz