August Tax Alert

Article

Are you remote working in New Zealand for a foreign employer?

Tax Alert - August 2020

By Andrea Scatchard and Mihiri Nakauchi
 

We know that over 20,000 Kiwis have come home to New Zealand in the last 5 months, and many of them will be competing for a decreasing number of local jobs. But a select few will be lucky enough to be able to continue working remotely for their foreign employer. Level 4 lockdown showed many employers that remote working can be very successful, and in many cases it does not really matter whether the home an employee is working from is close to their usual workplace, or on the other side of the world.

The technology that allowed remote working to be so successful during Level 4 lockdown and beyond has been available for some time now. Even before COVID-19 we had seen a rise in the number of Kiwi employees who have been able to negotiate contracts that allow them to work from home in New Zealand for overseas employers.

It is fair to say that this will only increase in future because, as we know, New Zealand is a great place to be right now. As with most things, it is best to get the finer details of such arrangements nailed down from the start so there are no unexpected outcomes. One area that can be easily overlooked is the New Zealand tax obligations that arise from cross border employment arrangements, and we address these below. So if this is you, or if you know anyone in this situation, keep reading.

 

Is my income from my offshore based employer subject to tax in New Zealand?

Employment income that an employee earns from services provided in New Zealand is New Zealand sourced income and therefore is taxable here, subject to some limited exemptions for visits under 93 days. It does not matter whether the employment income is paid by a New Zealand or foreign employer, whether the foreign based employer has a presence in New Zealand or not, or whether any PAYE type tax has been deducted in the foreign employer’s country. It also does not generally matter if the employee is a tax resident or non-resident of New Zealand, although there are some exemptions available under double tax agreements (DTA) for non-residents – refer to our article on tax residence in this edition of Tax Alert. However, the rule of thumb is - as the employment income is earned in New Zealand it will be taxed here.

So the employee will need to file an income tax return in New Zealand. Generally a New Zealand tax resident is subject to tax on their worldwide income and any tax that has been deducted by a foreign employer and paid to the Inland Revenue equivalent overseas may be able to be claimed as a credit in the employee’s New Zealand tax return.

But beware - just because tax has been paid in the other country does not mean a foreign tax credit is automatically available in New Zealand. There must have been a requirement for the individual to have paid tax in the other country, and in many cases where there is a double tax agreement the foreign country will have no ability to impose tax on the New Zealand sourced income if the individual is tax resident in New Zealand. The solution in such cases is to stop the foreign PAYE deductions in the first place.

 

What other tax implications might there be?

Ordinarily any non-cash benefits provided to an employee in New Zealand, such as health insurance, availability of a motor vehicle and amounts paid into a non-New Zealand pension scheme, would create a fringe benefit tax (FBT) liability for the employer. ED0023 acknowledges that where the foreign employer is not required to account for PAYE no FBT will be payable on non-cash benefits as there is no mechanism for FBT to be paid by the employee in place of the employer.

Generally employers are required to pay KiwiSaver employer contributions in relation to their employees and an employee who is present in New Zealand and entitled to live in New Zealand permanently will be eligible to join a KiwiSaver scheme. However, while an IR 56 taxpayer may voluntarily elect into KiwiSaver and pay personal contributions from their tax paid income, they are not able to require a compulsory employer contribution.

All employees in New Zealand must pay the ACC earner’s levy to cover the cost of non-work related injuries. This is withheld from earnings and as part of the PAYE amount, and this is no different for IR 56 taxpayers. IR 56 taxpayers also are required to pay additional ACC levies as an employer, which will be invoiced by ACC after the end of each employment year.

 

Are you affected?

These rules can be quite complicated and we have seen many instances where the employer and the employee did not fully understand or consider the New Zealand tax implications of their remote working arrangements. Rectifying this can be quite costly, especially if the employee has been present in New Zealand for an extended period of time. While Inland Revenue has been able to exercise discretion in a number of areas for COVID-19 related tax oversights, we expect this will be lessening as travel and other restrictions ease, so now is the time for your, or your employer’s, tax affairs to be sorted out if you are working in New Zealand for your overseas employer.

Please contact your local Deloitte advisor if you would like further information.

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