We often get questions from Australian employers on how to deal with the situation where an employee is looking to resettle in New Zealand or they are looking to employ someone who is based in New Zealand.
An Australian employer has an obligation to account for withholdings to Inland Revenue if they are carrying out business from within New Zealand and they have engaged the employee to assist them to carry out the business activity over there.
Therefore if the employee is based in New Zealand and receiving employment income from an Australian company who has no presence in New Zealand and does not carry out business there, the Australian employer will generally not have to account for New Zealand withholdings.
That will change if the New Zealand-based employee (who may be working from home) is doing or completing work in New Zealand to help the Australian company with their New Zealand business activity.
Of course, if the Australian company has its own presence in New Zealand by way of an office, a branch or even when performing contracts which require a personal presence in New Zealand, this in itself may be enough to generate an obligation to account for withholdings to the New Zealand authorities.
If the employee is in New Zealand by their own choice, and it is not a requirement of the job (nor essential to the Australian company’s New Zealand activity) then the Australian company probably won’t be required to account for employee withholdings either.
Furthermore, if the Australian company places someone in New Zealand for a period less than 183 days in a 12 month period then there will be no obligation on them to account for withholding payments to Inland Revenue.
The PAYE (withholding) rules are designed to apply to New Zealand residents. From a legal perspective this makes sense because Inland Revenue can’t compel an overseas company that has no relationship to New Zealand to do anything.
If the only connection between the New Zealand-based employee and New Zealand is the fact that the person chooses to live there, that will not on itself bring about an obligation for an Australian company to have to register as an employer and account for withholdings to Inland Revenue.
So, even if you have a team working in New Zealand that they are supporting the Australian company in the Australian activity, and the Australian company has no commercial interest in New Zealand, it is likely that you will not have an obligation to account for PAYE or other New Zealand withholdings to Inland Revenue.
So who pays the tax?
Clearly if the Australian company isn’t required to pay withholdings, it will be for the employee to do that.
The fact that the Australian company is not regarded as a New Zealand employer does not mean the arrangement becomes tax-free to the employee. The Australian company certainly shouldn’t be accounting to the ATO for withholdings because the employee isn’t based here.
So the employee will usually need to register themselves as an employer. We call this an IR 56 taxpayer where the employee accounts for their own PAYE withholdings to Inland Revenue in much the same way as a standard employer.
In saying this, there is nothing to stop an Australian company from registering as an employer if they choose to. The Australian company can register voluntarily as an employer and therefore make the required deductions and payments on behalf of the employee to Inland Revenue.
Employees can find the IR 56 system difficult, particularly if they have never been on the other side of the fence where they have been accounting for PAYE and other withholdings to a tax Department (be that the ATO or Inland Revenue).
What if the New Zealand employee returns to Australia?
If the New Zealand-based employee leaves New Zealand but continues to carry out work that is attributable to the New Zealand operations, they will still be subject to New Zealand withholdings.
Therefore the Australian employer would be required to continue deducting PAYE withholdings and accounting for them to Inland Revenue.
This is only likely to change if the employee relocates permanently and therefore the move impacts on their tax residency.
When it comes to moves between New Zealand and Australia, that’s a different kettle of fish!
The information in this article is indicative of NZ tax rules and changes and not intended to be complete for all intents or purposes and does not constitute advice. It is recommended that you obtain professional advice, suited to your particular circumstances, from us before acting on anything you read.