New Zealand Inland Revenue has initiated a public consultation on a draft Interpretation Statement (IS) regarding Tax Residence, which clarifies the tax residence rules under the Income Tax Act 2007 for individuals, companies, and trusts.

The deadline to submit comments on the draft Interpretation Statement is 11 December 2024.

This draft interpretation statement will update and replace IS 16/03: Tax residence.  It has been just over 10 years since the tax residence interpretation statement had a full refresh.

As there have been numerous legislative and other changes, it is timely to fully update the statement.  Accompanying the draft statement are three draft fact sheets – one each in respect of tax residence and individuals, companies and trusts.  There is also a reading guide to help readers understand, at a high level, the changes that have been made.

Part 1 – Tax residence of natural persons (individuals)

•         The discussion has been redrafted in plain English style and repetition removed (in particular in relation to the permanent place of abode test).
•         Attention has been drawn to the fact an application for Working for Families tax credits is treated as an election to no longer be transitional resident.
•         The discussion of the government service rule has been taken out of the draft statement and included in a separate publication (consultation reference: PUB00495).
•         We have clarified the date at which transitional residence ends if it ends due to a person or their spouse or partner applying for Working for Families tax credits. A new example (Example | Tauira 18) illustrates this point.
•         In relation to the habitual abode double tax agreement (DTA) tie-breaker, we have included further guidance on how far beyond the period of dual residence it may be necessary to consider where the period of dual residence is relatively short.

Part 2 – Tax residence of companies

•         A new example (Example | Tauira 29) in relation to a foreign-incorporated, sole director personal services company has been included.
•         The discussion has been updated for legislative changes in relation to imputation and loss grouping, following the Australian High Court decision in Bywater Investments Ltd & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45. The loss grouping examples have consequently been removed.
•         Discussion has been added about: o how the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) may modify the residence article in New Zealand’s DTAs; o Australia and New Zealand’s administrative approach to art 4 of the MLI; and o the potential of dual residence if central management and control is exercised in Australia, and a new example (Example | Tauira 30) has been included to illustrate this.

Part 3 – Tax residence and trusts

•         The discussion has been updated to reflect changes in the trust rules.
•         Discussion has been added about: o the taxation of distributions (and a new table); o the new foreign exemption trust and domestic trust disclosure rules; and o dual resident trusts, DTAs, the MLI, and the fact Australia and New Zealand’s administrative approach to art 4 of the MLI does not apply to trusts.
•         The discussion is more fulsome about the impact of changes of residence of persons connected with the trust (that is, settlors, trustees and beneficiaries).