TOPIC 7 (A) RESIDENT & NON-RESIDENT TAXPAYERS (B) TAX/INCOME YEARS. After studying the material for this week you should be able to :-

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1 TOPIC 7 (A) RESIDENT & NON-RESIDENT TAXPAYERS (B) TAX/INCOME YEARS LEARNING OBJECTIVES After studying the material for this week you should be able to :- Explain who is liable for NZ income tax; Apply the residency rules for tax purposes; Demonstrate the effect of residency and source on tax liability; Outline the rates of income taxes imposed on non-resident/resident taxpayers; Define income years and tax years, and explain the implications of them in the setting of income tax rates; Define standard and non-standard balance dates, and their effect on the allocation of income; Describe the advantages of using different balance dates; Discuss tax years in foreign countries. Page 1 of Topic 7

2 Supplementary Readings 1. Supplementary Readings in this Study Guide: Page: (a) Inland Revenue Dept. (June 1992). Balance Date Policy, Tax Information Bulletin, Vol. 3, No. 9, pp (b) Inland Revenue Dept. (June 2004). New Legislation: Income Tax Act 2004, Tax Information Bulletin, Vol.16, No. 5, pp (c) Inland Revenue Department Standard Practice Statement 08/04 Elections to Change a Balance Date Tax Information Bulletin, Vol.20, No.11, pp Additional Readings 2. Additional Readings: (i) Alley, C., Chan, C., et al. (2009). New Zealand Taxation [Chaps. 2, 12 & 17] Wellington: Thomson Brookers.. Page 2 of Topic 7

3 Topic Seven Outline A. Introduction to the determination of residence for tax purposes 1. Who must pay income tax? - person ; - the effect of residency upon tax liability; - residency rules; - where income is sourced? 2. Rates of taxes imposed on non-residents/resident taxpayers. B. Income Tax Years 4. Tax and Income years: - meaning - setting of income tax rates 5. Standard and non-standard balance dates. 6. Allocation of income. 7. Advantages of adopting different balance dates. 8. Tax years in foreign countries. Page 3 of Topic 7

4 Explanatory Notes A. INTRODUCTION TO THE DETERMINATION OF RESIDENCY 1. Who Must Pay Income Tax? Refer to NZT 2.3 and The concepts of source and residence are critical to determining the scope of New Zealand s tax base. In line with Sec BD 1 a person who is resident in New Zealand or who has assessable income from New Zealand is subject to New Zealand income tax. Broadly, the person referred to is a taxpayer (refer to sec YD 1-4) who is a natural person, and includes a company, a local or public authority and an unincorporated body of persons [refer to NZT ]. Summarising:- New Zealand income tax is imposed under two circumstances: (1) Any person resident in New Zealand at the time when the assessable income is derived; (2) All assessable income derived from New Zealand: a non-resident who does not derive assessable income from New Zealand is not liable for New Zealand income tax. From this it is evident that two questions are of vital importance: (1) Who is a New Zealand resident ; and (2) What income is derived from New Zealand. These are dealt with in Sections YD1-4 of the 2007 Income Tax Act (ITA). Also, effective from 1/4/06 these rules may not apply to a transitional resident even though the person may have a permanent place of abode in New Zealand.NZT Residence (Sec YD 1) Refer to NZT Page 4 of Topic 7

5 Two rules are contained in this section of the Act - one applies to individuals and the other to company taxpayers Individuals In general terms, an individual taxpayer (i.e. natural person) is deemed to be resident in New Zealand if that person s permanent place of abode is in New Zealand. The phrase permanent place of abode is not defined in this section, however case law establishes that the expression means a fixed habitual place of abode, not a substantial degree of permanency; merely transitory or temporary [refer to NZT 2.3.3]. In determining permanent place of abode the Department must take an objective view of the facts along with relevant factors such as taxpayer s family and financial ties, accommodation, etc. Hence the test takes into account a person s connection with New Zealand. While reviewing the concept of residency it is also necessary for students to be aware of the term absentee. Sec.YA 1 defines an absentee as a person other than a person who is resident in New Zealand during any part of the tax year. Frequently the term absentee is interchangeably applied to mean non-resident. The terms are not synonymous; they refer to different situations and for different purposes. Consequently it is important that students learn to distinguish them. Essentially, an absentee is a person who is a non-resident during the income year, who visits New Zealand, for less than 183 days. If the visit is for more than 183 days then the person will be a resident for tax purposes. A main point to note is that a non-resident is not entitled to any rebates whereas an absentee is entitled to limited rebates by Sec LC9 of the Income Tax Act To claim rebates an absentee must earn personal services income (wages and salaries) while personally present in New Zealand. A flowchart summarising the main points to the residency rules applicable to an individual, is provided on page Companies [NZT 2.3.4] Topic 10 looks into the rules governing the determination of the residence of companies. Page 5 of Topic 7

6 Residency Rules (Individuals) A flowchart summarising the main points to the residency rules applicable to an individual are as follows: Individual Person Resident [SecYD1] Non-Resident [Sec YA(1)] Liable for New Zealand income tax Worldwide income [Sec BD1] Liable for NZ income tax Income derived in New Zealand [Sec BD1] Classes of income derived from New Zealand [Sec YD (4)] Absentee [Sec YA(1)] Liable for New Zealand income tax Income for personal services in New Zealand Rates of Tax Individuals marginal tax rates Rates of Tax Non-resident withholding tax Rates per Double Tax Agreements Exemptions In certain classes of income [Sec CW19] Double Tax Agreements Reduction of tax liability Entitlement to rebates [Sec LC9] Page 6 of Topic 7

7 Income Source: Deemed to be Derived From New Zealand Refer to NZT 17.2 Under Sec BD 1 and Part C of the ITA 2007 all income (except those which are exempt or excluded) derived from New Zealand is taxable for New Zealand income tax, whether or not the person deriving that income is a New Zealand resident. Secs GC 6-14 and Sec YD 4 expands on Part C by setting out the various classes of income which are deemed to be derived from New Zealand. It boils down to the fact that all income resulting from any transaction taking place in New Zealand is caught in the net - including employment, business, money dealings (investment, lending, etc), royalties, etc. A person receiving income from a New Zealand based source can be liable for income tax as: (1) Residents - who are taxed on their world-wide assessable incomes; or (2) Non-residents - who are taxed only on their assessable incomes which have been derived from a New Zealand source: their foreign incomes are not taxed in New Zealand [Sec BD 1(4)]; or (3) Absentees - for whom special rules of assessment apply. These taxpayers are taxed on all income derived from New Zealand, but not on their foreign income. (2) Rates of Taxes Imposed Refer to NZT and 17.9 For resident taxpayers the basic tax rates applicable are set in Schedule 1, ITA [Refer also to Table 12.3 and 12.4, NZT p447] In the case of a non-resident, i.e. a person who has: (a) No permanent place of abode in New Zealand; or (b) Not been in New Zealand for more than 183 days in any 12 month period; or (c) Been absent from New Zealand for more than 325 days in any 12 month period. The rates of income tax New Zealand shall impose depends on: (a) The class of income derived/sourced in New Zealand; and Page 7 of Topic 7

8 (b) Whether a Double Tax Agreement exists between New Zealand and the country the taxpayer is deemed resident. The common rates of income tax non-residents are liable for, on some categories of income sourced in New Zealand, are: - business income to non-resident companies: 30%; - interest: 10% - 15%; - dividends and royalties: 15%; - directors fees: generally taxed in the country of residence. B. TAX YEAR & INCOME YEAR 4. Definition and Rates Setting Refer to reading:tib Vol 16, No 5 (June 2004) 4.1 Definitions Tax Year (Sec. 33, TAA 1994) Under Sec.33, Tax Administration Act 1994 (TAA 1994) a taxpayer is required to furnish a return of income for each tax year. Tax year in respect of income, is defined as a period starting on 1 April and ending on 31 March (Sec YA 1) Income Year (Sec 38, TAA 1994) However, under Sec 38 (TAA), a business taxpayer may, after obtaining the consent of the Commissioner, elect to file a tax return for the year ending with their accounting (also known as a nonstandard) balance date. The income derived during that elected period is referred to have been derived in the income year. To align the income year to a tax year balance dates between 1 April and 30 September (i.e. late balance dates) are taken back to the previous March 31. From October 1 to March 31 (i.e. early balance dates) they are taken forward to the following March 31. This is particularly significant when tax rules or tax rates change and become effective from the beginning of a new tax year. (Sec YA 1) Page 8 of Topic 7

9 4.2 Setting Income Tax Rates (Sec BB 1) Sec BB 1 provides that the rates of tax on income for a tax/income year are to be set by an annual taxing Act (defined in Sec YA 1). It no longer specifies (as it did prior to 1 April 1987) that the Act must be specifically passed for this purpose. Any Act will now do! The First Schedule to the Act sets out the basic rates of income tax for different taxpayers, as well as rates of miscellaneous taxes such as trustees incomes. Note: You should familiarise yourself with: (a) The 7 steps of personal income tax rates applying as from 1 April 2008 to 31 March $0-9, % $9,501-14, % $14,001 38,000 21% $38,001 40,000 27% $40,001-60,000 33% $60,001-70,000 36% Over $70,000 39% (b) Corporate income tax rate 30% Non-resident companies 30% (c) Rate applying to the trustee of qualifying trusts - 33%. 5. Standard and Non-standard Balance Dates Refer to NZT , TIB Vol.3, No.9 (in Supplementary Reading). When reading the Tax Information Bulletin Vol 3, No 9 (June 1992) ignore the legislative references just appreciate the principle. A standard balance date ends on 31 March. Non-standard (i.e. early/late) balance dates generally are available to business taxpayers and not to taxpayers whose sole or principal source of income is from salary and wages. The Commissioner of Inland Revenue has no power to accept a return to a date other than 31 March. However, provisional taxpayers deriving salary or wages may return the salary or wages to 31 March even though they have a different balance date. The PAYE on the salary or wages should also be returned to 31 March in these cases. Page 9 of Topic 7

10 6. Allocation of Income When a taxpayer s accounting balance date falls outside the standard balance date, i.e. 31 March, the gross income for that accounting year should be aligned to correspond with the tax year as provided by Sec.38, TAA Advantages of Adopting Different Balance Dates By adopting different balance dates these taxpayers may have a certain advantage over those with standard balance dates. The nature of advantage to be derived shall depend on the category of taxpayer and type of business operation. For instance, some of the advantages to be gained are: (i) Any new provisions to the income tax legislation relating to a particular income year for any taxpayer, will start on the first day of their income year as determined by their balance date. If a piece of legislation is passed and becomes effective on a certain date, any return of income prior to that date is not affected; (ii) Furnishing of tax returns; a taxpayer with an early balance date (e.g. 31 October) furnishes a return of income by 7 July after the balance date, i.e. approximately eight months after balance date compared to a taxpayer with a standard balance date; (iii) Payment of provisional taxes; an advantage may exist here. 8. Tax Years in Foreign Countries In New Zealand the standard tax year for tax purposes commences on 1 April and ends on 31 March. While the concept of a tax year applies in most tax systems such concept, in foreign countries may not align with New Zealand. For instance, in Australia the tax year is from 1 July to 30 June, while in Malaysia the tax year begins on 1 January and ends on 31 December. For New Zealand resident taxpayers who derive foreign income from countries with different fiscal years they may elect to return that foreign income as if it were derived to New Zealand balance date. This rule applied up to 31 March As from 31 March 1989 or equivalent balance date, apportionment is necessary of foreign income and tax credits. Page 10 of Topic 7

11 Work Preparation Read and study the material required for this week. Review the following questions. 1. Residency Rules In each of these situations state whether the person is liable for New Zealand income tax, for the period they are present or absent in New Zealand. Justify your answers. (a) (b) (c) (d) (e) Karen Black has a permanent place of abode in New Zealand. At present she is working overseas on a two year contract for her New Zealand employer. Sue Water is not a New Zealander. She works in New Zealand between 3 September and 4 April. She does not have a permanent place of abode in New Zealand. Jill King lives in New Zealand with her parents. She has no permanent place of abode of her own in New Zealand. She has been working overseas for the past six months, and has recently returned to New Zealand. Bill Tate is a New Zealander. He has no permanent place of abode in New Zealand. He has been working overseas for past 18 months. Mike Willis is an Australian. He comes to New Zealand and he works for three months during the summer season. 2. John Mathews is an Australian who is currently in New Zealand, carrying out a market research, on behalf of his Australian employer. The research is for a total period of up to 90 days. He has two months leave due to him and he is considering spending that time in New Zealand, as soon as his work is completed. The two months can be extended to four months if John decides to prolong his stay here. Discuss John s status for NZ income tax purposes for the different circumstances outlined above. Page 11 of Topic 7

12 3. Income Years and Return Due Dates Assume you are an Accountant for many business taxpayers who have approved balance dates other than 31 March. For each of these approved balance dates state: (a) (b) (c) The income year in which the business profits are to be returned; When the accountant must furnish the tax returns; The amount of the profit to be declared in the tax return. (Please disregard the special dispensation given to accountants for furnishing clients tax returns). Balance Dates Profit for 12 Months to Balance Date Income Year Tax Returns Due Date Profit to be Declared February 2008 $100, June 2008 $55, October 2008 $-10, December 2008 $120, September 2009 $20,000 Page 12 of Topic 7

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17 Inland Revenue Dept. (June 2004). New Legislation: Income Tax Act 2004, Tax Information Bulletin, Vol.16, No. 5, pp Page 17 of Topic 7

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19 Inland Revenue Department Standard Practice Statement 08/04 Elections to Change a Balance Date Tax Information Bulletin, Vol.20, No.11, pp Page 19 of Topic 7

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