With many returning to remote working under increased alert levels across New Zealand, working from home is becoming the new normal.
Technology advances allow individuals to virtually connect with colleagues, attend meetings and essentially operate in business as usual conditions from their home offices – be that their study, bedroom, beach house, kitchen table or beyond.
With remote working becoming so accessible and acceptable, the geographic constraints which usually operate in an employment relationship no longer apply. Increasingly, we are seeing individuals operating from a completely different country and time zone to their employers.
Since the closure of travel routes and national borders in March this year, over 40,000 New Zealanders have returned home. Some to shelter in New Zealand temporarily, others on a more permanent basis, drawn back by the comfort, familiarity and lifestyle that home offers.
Many are continuing their employment, working from New Zealand for employers in London, New York, Beijing, Sydney and other locations worldwide.
Potential tax issues to be aware of
For those taking refuge in New Zealand temporarily, COVID-19 concessions applied by Inland Revenue have enabled them to live and work here until such time as they are practically able to return to their home locations, without needing to worry about New Zealand tax.
Individuals are usually treated as tax resident in New Zealand if here for more than 183 days in a 12-month period (including time accumulated over multiple trips, such as holidays, within this window). Tax residence is backdated to the first day, rather than day 183.
The concession for individuals stranded in New Zealand due to COVID-19 travel restrictions ignores additional time spent in New Zealand, if that would otherwise tip them over the 183-day threshold. But it does require a person to leave New Zealand as soon as it is practically reasonable for them to do so.
Now that the borders are reopening, where it is practically reasonable for them to leave, individuals need to return to their usual home, or risk being subject to tax in New Zealand from the first day of their arrival.
Individuals choosing to remain in New Zealand create a tax risk not only for themselves, but also for their foreign employers.
Impact on foreign employers
In New Zealand, employment income is taxed in two ways; if you are tax resident, or if the income is sourced here because you are physically working in New Zealand.
New Zealand’s tax system does not have any territorial limitation. This means that a foreign employer will have an obligation to comply with New Zealand employment taxes, including registration and payment of PAYE to Inland Revenue, for any New Zealand based employees who are New Zealand tax resident, or if their income is sourced here.
Inland Revenue has recently issued a draft statement which potentially removes the obligation of foreign employers, that have no connection to New Zealand, to register as an employer and withhold PAYE on behalf of any New Zealand-based employees. Instead the New Zealand-based employees will be responsible for meeting any New Zealand tax obligations directly with Inland Revenue.
If confirmed, keeping in mind the position is in draft only at this stage (so care should be taken if relying on it), it will be a big change from the approach to date for non-resident employers.
It will also have significant implications for the New Zealand tax system, including the ability for Inland Revenue to collect the tax. Certain types of remuneration, such as fringe benefits, may be tax-free, if provided by a non-resident employer where they no longer have registration and payment obligations in New Zealand. This potentially creates an advantage for non-resident employers over New Zealand based employers.
Impact on employees
Being responsible for managing PAYE can create several complications, especially if individuals are still being paid through their foreign employer’s payroll, with employment taxes also deducted in the employer’s location. New Zealand based employees could find themselves double taxed until such time as they are able to claim a tax refund from the offshore tax authority. We are also seeing many foreign tax authorities taking the view that employment income is sourced in the employer’s country, even though double tax treaties and OECD guidance dictates that the country where the work is being physically performed has the primary taxing right. This will also create double taxation risk, if unable to be resolved.
Prior to March 2020 most cross border travel by employees was at the behest of their employers, who would also take the lead in ensuring that tax obligations as a result of cross-border working arrangements were being met. Where remote working is employee led, including due to COVID-19, individuals are often left to their own devices to resolve the complexities of determining how, when and where their employment taxes should be paid without the benefit of timely tax advice.
Being mindful of this and seeking specialist advice is recommended to ensure there are no tax fish hooks for either New Zealand-based employees, or their foreign employers, from new working arrangements arising due to COVID-19.
Rebecca Armour is the National Leader for People Services and is a Tax Partner in the Auckland tax practice at KPMG. Rebecca and her team have a wide range of expertise in supporting employers providing global mobility compliance and advisory services, advising on national and international tax aspects of international executive remuneration, expatriate policy development and cost minimisation, employee share schemes, PAYE, taxation of superannuation including KiwiSaver, cross-border tax issues, holiday pay, and immigration. Rebecca is also the founder of the Corporate Mothers Network, a forum to support and inspire professional women balancing family commitments and a career.