COVID-19: Practical relief from consequences of travel restrictions for individuals

By Stephen Walker


The restrictions placed on the movement of people during the global COVID-19 pandemic may result in some unintended, and in some cases unfavourable, outcomes for some individuals from a personal tax residency perspective. This could be through no fault of their own.

Whilst the OECD has recently released guidance as to how the various treaty tax residency provisions should be interpreted in the context of COVID-19 as tax residency is initially determined based on domestic law and its application, it seems appropriate that COVID-19 travel restrictions should be taken into account when assessing domestic tax residency. However, without guidance from tax authorities, any interpretation of domestic residency tests in a COVID-19 context outside a plain reading of the relevant legislation would not be without risk.

It is pleasing, therefore, to see the New Zealand Inland Revenue release a public statement and Q&A document that deals with a number of individual New Zealand domestic tax residency issues that can arise inadvertently as a result of travel restrictions in place due to COVID-19.

The guidance now released by Inland Revenue addresses potential issues in applying the following New Zealand individual tax concepts:

• Individual tax residency;
• Employment income relating to short term business visits to New Zealand (i.e., the 92-day exemption rule);
• Transitional residency;
• Nonresident contractors tax; and
• Student loan repayments.
  

Individual tax residency

Under ordinary circumstances, a person will become resident of New Zealand if they are present in New Zealand for more than 183 days in a rolling 12-month period.

Inland Revenue is aware that, due to COVID-19 travel restrictions, some people may be unable to leave New Zealand before they breach this day-count threshold and so may inadvertently become a New Zealand tax resident, despite their plans to leave New Zealand. Therefore, Inland Revenue have stated that individuals will not become resident of New Zealand purely by reason of the day count as long as they leave New Zealand within a reasonable period of time after no longer being practically restricted in travelling. Extra days spent in New Zealand due to COVID-19 can essentially be disregarded when applying New Zealand’s day-count residency test.

This approach will also provide relief for any individuals who have to date been successfully managing their days in New Zealand so as not to trigger their one time opportunity to be a transitional tax resident. If they are currently stranded in New Zealand, without this concessionary treatment, they might otherwise inadvertently trigger the start of their transitional resident exemption period.

Short-term business visits to New Zealand

Ordinarily, there is a 92-day test that provides a tax exemption. Income tax is not payable and therefore PAYE does not need to be withheld for individuals who are present in New Zealand for less than 92 days and who are performing personal or professional services for a nonresident employer, provided their employment income is subject to tax in their home country.

Inland Revenue is aware that the current travel restrictions may mean that these individuals are inadvertently present in New Zealand for longer than 92 days. Without any form of dispensation, this could cause either the employer, or the individual, to have New Zealand income tax obligations in relation to the individual’s employment income, especially where there is no tax treaty to be applied.

In a COVID-19 context, where short-term visitors are stranded in New Zealand, Inland Revenue has indicated that, as long as the individuals leave New Zealand within a reasonable time after they are no longer practically restricted in travelling, then any extra days when the individuals were unable to leave and that are in addition to the 92 days will be disregarded. As a result, income tax liabilities should not arise for nonresident employers of employees deployed on short-term visits to New Zealand that are unable to leave within the 92-day window.

Transitional residents

First-time tax residents, and repatriating Kiwis who have been nonresidents of New Zealand for 10 years or more, and who have not previously been transitional residents, are able to be treated as transitional residents as from the date they trigger New Zealand tax residency. Transitional residency lasts for 48 months from the date an individual triggers one of the two New Zealand domestic tax residency tests, whichever is earlier.

Inland Revenue have acknowledged that some transitional residents may have planned to leave New Zealand before their 48-month transitional residency period ends, but they are now unable to leave New Zealand due to COVID-19 travel restrictions. The guidance issued by Inland Revenue suggests that such individuals should not be regarded as having lost their transitional residency status just because they are stranded in New Zealand. Similar to the residency test above, providing the individuals leave New Zealand within a reasonable time after they are no longer practically restricted in travelling, then any extra days spent in New Zealand when they were unable to depart will be disregarded.

Nonresident contractor’s tax

There is an exclusion from having to withhold nonresident contractor’s tax on payment to nonresidents where individuals haves been in New Zealand providing their services for less 92 days. This rule aligns with the 92-day short-term business visitor rule for employment income, as outlined above.

If COVID-19 travel restrictions mean that this day count is reached, Inland Revenue again have indicated that, if the individuals leave New Zealand within a reasonable time after they are no longer practically restricted in travelling, then any extra days when they were unable to leave and that are in addition to the 92 days will be disregarded for the purposes of applying the 92-day exemption from nonresident contractors tax.

Student loans

There is a 184-day test for student loan repayment obligations whereby days in excess of 184 outside of New Zealand will cause borrowers to incur interest on their student loan. Inland Revenue has stated that persons who are stranded outside New Zealand due to COVID-19 travel restrictions and who cross the 184-day threshold will not be subject to these repayment obligations as long as they return to New Zealand within a reasonable period after they are no longer practically restricted in travelling.

Deloitte view

It is pleasing that Inland Revenue have released guidance on the above individual tax matters, which appear largely consistent with the OECD announcements on treaty interpretations in light of travel restrictions imposed on individuals. However, as with all guidance, it does not cater to all circumstances and so judgement will need to be exercised in applying these statements from Inland Revenue to your personal situation.

Inland Revenue have not provided guidance as to what a reasonable period of time is or what “practically restricted” means from a travel perspective. These are obviously subjective tests, and so some degree of judgement will need to be exercised when applying them. This will likely require taxpayers looking to rely on this guidance to weigh up the situation in both New Zealand and their normal place of tax residency or intended destination. This may involve, for example, taking into account travel restrictions in New Zealand and the overseas destination, and travel demand and flight availability. What is unclear is how these rules might apply to individuals with, for example, a compromised immune system, who may not want to travel to their home country if the COVID-19 situation there means they are at greater risk, even though they may be able to physically travel there. We are seeking further guidance from officials as to what a reasonable time period would be, and what "practically restricted" means in the context of COVID-19.

Also, the guidance does not explicitly contemplate the impact of an extended stay on subsequent visits to New Zealand within a 12-month period. Whilst one could read the guidance to mean that additional days spent in New Zealand now due to COVID-19 could be disregarded when assessing day counts in relation to future visits, there is a degree of uncertainty around this interpretation, which would be good to clarify. We will monitor future announcements to see if this position is clarified by officials.

Practically speaking, transitional residents who had planned to leave New Zealand but can’t due to COVID-19 and who are wanting to rely on this guidance will likely need to have been planning and have been ready to leave New Zealand during the lockdown period and have been physically prevented from doing so due to the travel restrictions in place. Any transitional residents with a planned departure several months away who may now be delayed due to other commercial factors as a result of COVID-19 (i.e., not travel related) may be unable to rely on this guidance to effectively extend a person’s transitional residency period beyond what the current legislation permits.

One option to provide certainty for your tax position could involve seeking a short process ruling in relation to your situation and the application of New Zealand’s domestic tax rules in the context of COVID-19.

Content provided by Deloitte New Zealand.

The content of this article is accurate as at 22 May 2020, the time of publication. This article does not constitute professional advice. If you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.