If you are in New Zealand and are a director or key staff member of an offshore business, Julia Johnston, Senior Associate and Tax Specialist at Saunders & Co Lawyers, advises how to prevent a nasty tax surprise.
Did you know that your presence in New Zealand as a director or key staff member of an international company might cause it to be liable for tax in New Zealand?
There are a number of ways a company is deemed to be New Zealand tax resident:
• incorporated in New Zealand;
• head office in New Zealand;
• centre of management in New Zealand; or
• control of the company by the directors is exercised in New Zealand.
The first three tests are reasonably obvious, but the fourth test can lead to a number of unsuspecting companies being caught in the New Zealand tax system. A common scenario is an investor spending time in New Zealand. If they remain a director of an overseas company and continue to act as a director and fulfil their director duties while in New Zealand, then this can mean that company is considered a New Zealand tax resident.
Inland Revenue are keen to find these companies and ensure New Zealand tax is paid. In most cases, had the migrant known that they were creating a taxing presence in New Zealand for their foreign business, they would have structured things differently. It is vital to seek tax advice up front to ensure there are no hidden tax consequences. There are often multiple ways to achieve a commercial outcome but the tax consequences can differ for each.
In addition to New Zealand law, there is a wide network of DTA’s which can provide relief against double tax in certain circumstances. When a company is considered to have a ‘permanent establishment’, it will be liable to pay tax relating to the profit attributable to the permanent establishment in that country.
I have seen cases where a key staff member of a foreign company operating in New Zealand has a New Zealand phone number and business card. The staff member had an office within a New Zealand business. These were all relevant when considering if that employee’s foreign employer had a permanent establishment in New Zealand. While there is a taxing impact for the company, this can also lead to different taxing outcomes for the employee. If a company has a permanent establishment in New Zealand, then all employees are subject to PAYE in New Zealand.
Tax advice is always very fact specific, and the full nature of the business and the connections with New Zealand should be considered by an international tax expert in order to ensure there are no adverse consequences when migrants continue to act as directors or work for an overseas company. I work closely with our immigration team and other advisors to ensure migrants are structured correctly from the time they enter New Zealand, to ensure there are no nasty surprises when Inland Revenue starts digging.
Rumour has it the Beatles got taxed at 94 percent in the UK in 1963, rousing George Harrison to write the heartfelt lyrics, ‘Now my advice for those who die, declare the pennies on your eyes…. yeah, I’m the taxman, and you’re working for no one but me’.
We haven’t reached 94 percent in New Zealand, but according to Jason McFadden of McFadden Accounting, the New Zealand system is so complex, “people are often paying more tax than they need”.
Take Portfolio Investment Entities (PIE) and KiwiSaver, taxed at a discounted rate determined by your income band. People nominate the tax rate at the outset: if you set your tax rate too high and pay too much, you won’t get the excess tax back; set the rate too low and you have to include your PIE or KiwiSaver income in your tax return – you’ll be taxed in your income band and lose the discounted rate. “A rate set too high or too low sees you penalised. It is quite a prevalent problem,” Jason says.
Buy a new mortgaged home and rent out your retained mortgage-free house, then no claim on mortgage interest payments is possible. However, sell the renter into a company which raises the mortgage, and that company can claim a tax deduction for the interest. Jason says you will incur conveyancing costs, but you can be better off longer term.
With 26 years’ experience, Jason offers a competitive service, travelling to you to see where, why, and how you operate. Jason can see you promptly throughout Christchurch and North Canterbury.
Mark Twain once quipped, “What is the difference between a taxidermist and a tax collector? A taxidermist takes only your skin.”
In reality of course, getting organised to pay your tax is no joke and, after 27 years as an accountant in Christchurch, Jason McFadden of McFadden Accounting finds that because our system is complex, few people are getting it right.
Unlike IRD however, easy-going Jason won’t get cantankerous if you’ve got in a muddle or got behind. In fact, after working in a big accounting firm, Jason decided to specialise in helping small businesses and ‘mum and dad’ investors. Enjoying the personal service his role brings, Jason will meet you, look at your accounts and records and give you a cost-competitive estimate or quote. You can visit his home office, but Jason enjoys travelling to your workplace and doesn’t charge for travel time.
He’s happy to help with local investments, or overseas interests requiring assessment under the Foreign Investment Fund (FIF) regime. For small businesses he understands that being audited, paying GST, managing employees with PAYE, Kiwi Saver, child support, or other deductions can be stressful and are a burden when you are passionate about focussing on your business.
If the problems of provisional tax based on your previous year’s results are a headache, Jason can help with new IRD option: the Accounting Income Method (AIM) enabling payment of Provisional Tax every one or two months based on actual profit. Happily, a loss made during a period attracts an immediate refund.
Visit Jason’s website at www.mcfaddenaccounting.nz.