Inland Revenue’s timing concessions due to COVID-19
Inland Revenue has released a public statement relating to the unintended and unprecedented consequences for tax residence rules due to COVID-19. These consequences are particularly relevant for people caught in New Zealand who had no intentions of becoming tax residents.
Company Residence: When the directors of a company are caught in New Zealand due to COVID-19, these corporate taxpayers will not become New Zealand tax residents. The law will look at how the company is managed, and where the real business is undertaken.
Fixed Establishments: The double tax agreement between most countries and New Zealand states that when a company has a permanent establishment (a fixed place where the activity is wholly or partly carried out) in New Zealand, they will have income tax consequences here. This must be somewhat permanent, regular, and not of a short/temporary nature. When determining this, COVID-19 will be considered, i.e. non-resident company did not have a fixed establishment in New Zealand before the Covid-19 emergency, and employees being present in New Zealand is short term and due to travel restrictions.
Individuals: Normally, an individual will become a tax resident in New Zealand if they are present in New Zealand for more than 183 days in total in a 12-month period. Covid-19 may cause people to stay longer than 183 days, when they intended to leave prior. These people will not become tax residents because of the day-count test, if they leave New Zealand within a reasonable time once the travel restrictions are lifted.
Short-term visits: The 92-day test provides an exemption for certain non-resident income derived by a non-resident person on a short-term visit to New Zealand. This is when the income is for performing personal or professional services in New Zealand. Usually, the income is taxed in New Zealand and PAYE is withheld by an employer after 92 days regarding all income derived from the time of arrival. When the visit is under 92 days, the income is exempt. The COVID-19 emergency may mean service providers have to stay in New Zealand longer than 92 days despite plans to leave. Extra days will be disregarded if they leave New Zealand within a reasonable time once the travel restrictions are lifted.
Schedular payments and non-resident contractors: the 92-day test excludes some payments from being schedular payments. These are payments for services provided by a non-resident contractor who has full relief from tax under a double tax agreement and is present in New Zealand for 92 or fewer days in a 12-month period. This is not schedular due to its short-term nature. Extra days when a person cannot leave will be disregarded if they leave New Zealand within a reasonable time once the travel restrictions are lifted.
Transitional residents: There is a 48-month test for transitional resident, and once exceeded transitional residents can be taxed on their world-wide income in New Zealand. Transitional residency begins on the first day of residence in New Zealand. It ends when the person either stops being a New Zealand resident, or on the last day of the 48th month after the month in which the person first satisfied the residence tests (whichever is earlier). Transitional residents who planned to leave New Zealand prior to this deadline will not be considered a transitional resident if they are stranded due to COVID-19. Extra days when a person cannot leave will be disregarded if they leave New Zealand within a reasonable time once the travel restrictions are lifted.
Student loans: Those outside New Zealand for more than 184 days will not be considered New Zealand based, and as such, are charged interest. This will not be triggered if they are stranded due to COVID-19. Extra days when they cannot return will be disregarded if they return within a reasonable time once the travel restrictions are lifted.
OECD Guidance: The OECD Secretariat has released a public statement on the implications of COVID-19 on cross-border tax matters, such as workers. They note that those stranded in a country they are not resident have created issues around taxing between countries. Usually this is covered by international tax treaty rules that outline taxing rights. The OECD has said that under double tax agreements between countries, individuals should not become residents of the countries they are stranded in. The OECD have also said that this covers companies, where management is carried out in another country due to the travel and quarantine restrictions
Late filing and time bar
Inland Revenue has recently advised that all late filing penalties for 2019 income tax returns will be waived if the tax return was filed late due to the impact of COVID-19. It is important that the tax return is filed as soon as possible and the Commissioner may need clarification on why there were delays in filing tax returns which must be due to COVID-19.
As of 31 March 2024, the Commissioner will close the review or any other compliance activity for any 2018/2019 income tax return which is:
- Due on or before 31 March 2020, and is furnished after 31 March 2020 but before 31 May 2020 due to the impact of COVID-19
- not subject to any existing exclusions from the standard four-year time bar, or
- not subject to a dispute commenced by a notice of proposed adjustment issued before 1 January 2023 and involving alleged tax avoidance or having tax dispute greater than $200 million.
GST and Zero-rating of exported goods
Inland Revenue has further advised that there is an extension on the period of zero-rating of exported goods. Usually, a supply of goods is zero-rated for GST purposes if the goods are exported by the supplier within 28 days of the time of the supply or a longer period if the Commissioner grants this.
The Commissioner can already extend the 28-day period through an application to the Inland Revenue when:
- – there are circumstances beyond the control of the exporter and importer preventing the goods from being exported within the 28-day period, or
- – it is impractical for the exporter to export the goods (or a class of goods) within the 28-day period due to the nature of the supply.
Customers affected by COVID-19 will have a three-month extension to the 28-day period for export without having to make an application to Inland Revenue. This extension starts on the day that the 28-day period ends and applies to a supply of goods up to an including 31 July 2020.
Further extension for more than three months can be done the usual way through application to the Inland Revenue and will be considered on a case-by-case basis. Inland Revenue will consider how COVID-19 affects the specific circumstances of the industry, and how that prevents them being able to export within the initial three-month period. Records should be kept to justify this.