Chapter 4 - Residency and GST
4.1 This chapter deals with the interaction between the Income Tax Act 2007 (ITA) residency rules and section 11A(1)(k) of the GST Act. An issue specifically arises when the ITA residence rules backdate a person’s residence status to a time before services are performed, which can result in services being incorrectly zero-rated.
Application of the income tax residency rules
4.2 This issue concerns the first requirement of section 11A(1)(k) of the GST Act:
The recipient of the supply must be a non-resident at the time services are performed.
4.3 For the purposes of section 11A(1)(k), whether or not a natural person is a resident for New Zealand tax purposes depends on one of two tests being satisfied:
- the 183-day test; or
- the permanent place of abode test.
4.4 The satisfaction of either test results in a non-resident becoming a New Zealand tax resident. However, the 183-day test is the relevant test in regard to this issue, and is located in section YD 1(3) of the Income Tax Act 2007. The rule states that a person is a New Zealand tax resident if that person is personally present in New Zealand for more than 183 days in total in a 12-month period. Furthermore, section YD 1(4) states that in these circumstances, a person is treated as being a resident from the first of the 183 days.
4.5 The retrospective application of this rule can mean that although a non-resident may not qualify for New Zealand tax-resident status until after services have been performed, the person’s actual residence status is backdated to the first day of their arrival in New Zealand. This could be before the services were performed. This would mean that a previously correctly zero-rated supply would now have to have been standard-rated as the consumer is considered to be resident for tax purposes for the period during which the services were performed.
4.6 This situation is illustrated below:
1 January 2013 David lives in Canada and decides to visit New Zealand for three months (91 days).
1 April 2013 David returns to Canada and decides to migrate to New Zealand. He engages an immigration adviser to obtain a visa. David remains outside New Zealand for the entire time that the services are performed. The immigration service fees are zero-rated as they are provided to a non-resident who is located off- shore.
1 August 2013 David is granted a visa.
1 October 2013 David arrives in New Zealand to live on a permanent basis.
1 January 2014 David has been present in New Zealand for more than 183 days in aggregate in the last 12 months and is deemed to be a resident for tax purposes from 1 January 2013. This now means that the immigration adviser has incorrectly zero-rated their services to David.
4.7 In example 3, the GST treatment of the supply will need to be revisited. This does not appear to be an appropriate outcome given the fact that the service provider is unlikely to be aware upfront of whether or not the non-resident will become a resident after the services have been provided. This leads to unnecessary uncertainty for the supplier.
4.8 Officials’ preferred solution to this problem is that the retrospective application of the tax residence rules be switched off in relation to the application of section 11A(1)(k) of the GST Act. This would mean that the recipient’s residence status would still be based on the 183-day rule, but the recipient’s status as a New Zealand tax resident would apply on a prospective basis (from day 183 as opposed to day 1).
4.9 If the suggested solution is applied to example 3, for the purposes of section 11(A)(1)(k) of the GST Act, David would be deemed to be a resident from 1 January 2014. Consequently, the immigration consultant would no longer be required to revisit the zero-rated immigration fees.
4.10 Officials would like to get a better understanding of whether this issue is a problem in practice, and if so, whether the suggested solution is appropriate to resolve the issue.
12 A “non-resident” is defined in the GST Act as “a person to the extent that the person is not resident in New Zealand”. Consequently, the definition relies on the definition of “resident” in the GST Act, which in turn relies on the meaning of “resident” in the Income Tax Act 2007 under sections YD 1 and YD 2.