Inland Revenue has released guidance to address situations where individuals would breach tax residence thresholds due to travel restrictions and prima facie become subject to tax in New Zealand. The key requirement is that a person must leave New Zealand within a reasonable time after they can travel. If that is the case:

• Individuals here for more than 183 days will remain non-resident for New Zealand tax purposes.
• Individuals here for more than 92 days in a 12-month period because of travel restrictions, but otherwise satisfy the requirements for the short stay exemption, will continue to be exempt.
• Non-resident contractors exceeding the 92-day threshold but otherwise exempt from tax in New Zealand will not become subject to withholding tax.
• Transitional residents who planned to leave New Zealand prior to their transitional residence period ending will remain transitional resident.

Our observations

Inland Revenue’s guidance is welcome at this uncertain time. The guidance arises under the Commissioner’s care and management powers. It does not replace the 2013 Interpretation Statement on tax residence. Therefore, it is possible that Inland Revenue could choose to take a different tax position for a particular case. This is a novel question with no simple answer.

The usual effect of the 183 days count test is illustrated in this stylised example:

Rufus arrived in New Zealand from the United States on a five-month assignment that was due to end 31 March 2020. Due to the closure of New Zealand’s borders, Rufus and his family will now spend more than 183 days in New Zealand. Although income relating to employment services performed in New Zealand is New Zealand sourced income and prima facie taxable here, Rufus has not been subject to tax as the Double Tax Agreement between New Zealand and the United States allocates the taxing rights over his employment income to the United States.

Now that Rufus’ stay in New Zealand will exceed 183 days, the criteria set out in the Double Tax Agreement is no longer satisfied and Rufus should technically be subject to tax in New Zealand. His offshore employer should also withhold NZ PAYE from his earnings and this liability is backdated to the first date of Rufus’ arrival in New Zealand. 

The guidance changes this result. Rufus will continue to be treated as a non-resident of New Zealand for domestic tax law purposes and will remain a treaty tax resident of the United States. This means his employment income will not be subject to tax in New Zealand.

Further guidance on what “a reasonable time, after they are no longer practically restricted in travelling” means is needed. Does this include the limited availability of flights and potentially expensive flight costs and also personal safety concerns, if the home location is a COVID-19 “hotspot”? We are increasingly seeing situations where individuals are deciding to remain in New Zealand, notwithstanding existing (or new) foreign employment arrangements. As such there will be a question over when the days count commences for them.  As always, tax residence is a question of judgment and Inland Revenue will always have the benefit of hindsight.

The guidance issued by Inland Revenue also does not allow individuals who would otherwise have become non-resident (because they were planning to leave New Zealand) to be treated as non-residents while they remain here. Their individual tax and employer tax obligations will continue in these situations. For those who have taken up a new role during the lockdown period and who are now working for an offshore employer from New Zealand, PAYE and other employer tax obligations will need to be considered. (For the offshore employer’s own position see below). 

Tax residence is a complex matter and the scenarios are rarely as simple as those outlined in the Inland Revenue guidance. While the guidance provides some welcome clarification for individuals and their employers, it does not provide an automatic exclusion from tax simply because COVID-19 may have had some impact on travel plans. Therefore, it is important that individuals and their employers consider their New Zealand tax positions carefully.   

Inland Revenue’s residence guidance also confirms that COVID-19 will not cause foreign companies to become New Zealand tax resident simply because, for example, directors are stranded in New Zealand. The test is how that company is managed in reality. That is, if directors ordinarily do not exercise control from New Zealand, the fact that directors are not presently able to travel to hold board meetings offshore should not adversely impact this conclusion.

Similarly, it confirms that a foreign company will not have a fixed establishment in New Zealand, for example, due to the extended unplanned presence of foreign employees. The relevant consideration is whether any New Zealand presence is permanent (i.e. whether business is regularly carried on partly or wholly from a fixed place). The expectation is that the lockdown should not change the answer. If there was no fixed place of business prior to COVID-19, the effect of restricted travel should not create one.

Our observations

The guidance on corporate residence is helpful and follows the OECD approach to ensuring that COVID-19 restrictions do not displace existing tax residence arrangements. However, again, care needs to be taken to ensure that where COVID-19 travel restrictions or other disruptions result in stranded directors and employees (either in New Zealand or overseas), this is clearly documented as there may well be inquiries after the fact. 

Inland Revenue has released guidance on allowances paid to employees for expenditure incurred while working from home (WFH) due to COVID-19.

In December last year, the Commissioner issued a determination covering amounts paid to employees for use of their own devices (e.g. phones) and usage plans (e.g. electricity, phone, broadband) in their employment duties. This allowed a reimbursing payment of up to $5 per week, per employee, to be treated as exempt income. Above this amount, the exempt amount is 25% if the device/plan is used partly, 75% if used mainly, or 100% if used exclusively for employment purposes. Evidence needs to be kept of employment use and the employee’s costs (actual or estimated on a reasonable basis).

The Commissioner has issued a new temporary COVID-19 related determination for payments between 17 March and 17 September 2020 to reimburse additional WFH costs. This allows:

• An additional $15 per week, per employee, to be exempt income for “other” WFH expenditure.
• A tax-exempt payment for use of furniture or equipment when WFH to reimburse the depreciation of the item. The payment will typically be for the cost of the asset and the payment will still be deductible to the employer. The amount of the tax exempt reimbursement depends on the following: 

Furniture / equipment use case	Portion exempt (evidence required)
Total reimbursement is $400 or less (safe harbour option)	Full amount (no evidence required)
Used partly for employee’s job	25% of the cost (evidence of cost and use)
Used mainly for employee’s job	75% of the cost (evidence of cost and use)
Used exclusively for employee’s job	100% of the cost (evidence of cost and use)

Our observations

The additional guidance and safe harbours are welcome. For many employees, WFH will have become the norm during the Alert Level 4 and 3 periods. We expect that this will also continue during Alert Level 2 and beyond as physical distancing requirements remain in place. The statement will have application beyond Levels 3 and 4. Its usefulness will of course depend on employers’ ability to pay allowances or reimbursements.

The combined effect of the December and April statements is a safe harbour for payments of up to $20 per week. However, this must be a total payment for all WFH costs (other than for depreciation of furniture and equipment when WFH, for which an additional one-off safe harbour of $400 is allowed).   

For payments exceeding the safe harbour limits, evidence of use and cost and the need to work from home due to COVID-19 will need to be confirmed. We expect Inland Revenue will audit such claims over time, so documentation should be maintained.

Importantly, an employee is not able to deduct WFH costs. There is an existing prohibition on claiming expenses relating to employment. This means where an employee suffers the additional cost without recompense, there will be no tax recognition for this. As a temporary measure, consideration should be given to relaxing this prohibition on employee deductions. 

Inland Revenue has also clarified its position on “availability” of employer provided vehicles during the Alert Level 4 lockdown period.

Where an employee takes home a pool vehicle during the lockdown period and the vehicle is otherwise subject to private use restrictions (i.e. must otherwise be kept at work premises), the Commissioner’s view is that it is available for private use only for the days it is taken home and returned to work. And where an employee’s home can genuinely be considered an alternative workplace due to Level 3 and 4 restrictions, commute days will not be private use.

In the case of other vehicles, however, the Commissioner’s view is that they will attract FBT in the usual way during the lockdown period, if no private use restrictions were in place.

Our observations

Most employer provided vehicles will continue to accrue FBT liabilities during the lockdown period. This is unless explicit policies were already (or specifically put) in place to restrict private use prior to the lockdown. Confirming that such restrictions apply retrospectively will not be sufficient.  

The statement notes that the Commissioner is not able to accept such a variation.  However, it also notes further policy work is occurring with the focus on the March quarter FBT return. The March quarter return is not due to be filed until 31 May. There may be some welcome news before then.