Liability does not cease with relocation overseas

Under various arrangements since the 1920s, there has been a free flow of people between Australia and New Zealand.

More importantly, the 1973 Trans-Tasman Travel Arrangement has allowed Australian and New Zealand Citizens to enter each other’s country to visit, live and work, without the need to apply for entry.

According to an estimate, about 425,000 New Zealand citizens were resident in Australia as on June 30, 2009.

Many New Zealanders, who have lost their job either during the current economic climate or in search of better opportunities, are moving to Australia or other countries.

Some of them are property investors and have held these investments in a Loss Attributing Qualifying Company (LAQC).

There are implications when a shareholder or a director of such a company moves overseas and either gives up his/her New Zealand tax residency or moves temporarily to maintaining his/her tax residency of New Zealand.

A company is treated as a resident in New Zealand if it meets any of the following criteria: (1) It is incorporated in New Zealand (2) The Company is controlled by its directors in New Zealand (3) It has its centre of management in New Zealand (4) It has its head office in New Zealand.

“Control” and “Management” are two different concepts.

Control is a function exercised by the shareholders and should not be confused with the control by the directors.

Management of a company is a function conducted by the directors.

Countries like Australia have similar provisions as above.

Therefore, in order to resolve the issue of residency of company, Double Tax Agreement (DTA) between countries are in place.

DTA between New Zealand and Australia provides that a company is a tax resident of a country where its place of effective management is located.

Based upon its effective management, such a company would be treated as a foreign company, and not resident in New Zealand.

A foreign company is defined as not resident in New Zealand or as resident in New Zealand but, under a double tax agreement, treated as not being resident in New Zealand.

A foreign company cannot be treated or maintained as LAQC.

The company will therefore lose its LAQC status.

Some of the advisors suggest that in such a situation, a new director who is tax resident should be taken on board of the company to avoid the company losing its LAQC status with Inland Revenue Department, where shareholders/directors have moved overseas for a temporary period and they maintain their tax residency in New Zealand. There is nothing which prevents a LAQC company having non-resident shareholders.

But there is a requirement for a company with 25% or more overseas shareholders to get its annual accounts audited by a Chartered Accountant in public practice, increasing further compliance.

Migrant shareholders who arrange to maintain the LAQC status of the company by appointing a local director will not be able to offset the LAQC loss against their foreign or overseas income and hence it is advisable to liquidate such companies.

Before exercising the option of liquidating the company, it is essential that its shareholders should revoke their elections to maintain the LAQC status of the company.

This is because the shareholder’s right and liabilities remain unaltered during the process of liquidation.

Vijay Talekar was an Indian Newslink Business Columnist several years ago. His article, Dubious Scheme to defraud fails, which appeared in our December 15, 2003 issue, enlisted widespread response. He has since completed his Chartered Accountant qualification and obtained a masters degree (Honours) in Taxation from the University of Auckland. He will also answer queries from readers. Email: editor@indiannewslink.co.nz

The above article should be considered only as a guideline and not as specific advice. Mr Talekar absolves himself, along with the management and staff of Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.

He can be contacted on 021-141-9112  Email: vtalekar@yahoo.com