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The tax gypsies

By Deborah Hill Cone

Friday 9th May 2003

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First, take the M6 into the midlands, the heart of Shakespeare country.

When you reach the town of Nuneaton in Warwickshire, drive past the George Elliot Hospital, hang a right at the church and head down Avenue Rd. On your right you will see a low-lying smart new brick building with black mirrored windows surrounded by sculptured gardens of shrubs.

It is not picturesque ­ not many industrial complexes are ­ but it is very roomy, with 7500sq m to house the 50 scientists, designers and engineers who work there. This is the headquarters of Gibbs Technologies, the world's leading high-speed, wheeled, amphibious vehicle technology research company.

Aerospace gurus, racing car designers and world-class auto industry staff, poached from blue-chip companies such as Jaguar and Aston Martin, have gathered to make cutting-edge vehicles that travel on land and water. Since expat Kiwi Alan Gibbs started the company in 1996 it has filed applications for 60 patents protecting its unique technology.

Sound like an exciting company? Surely it's the kind of venture we would like to see based in New Zealand, employing local scientists and bringing international talent, cash and jobs to this country. We are a marine nation, after all.

Who knows ­ that might have happened, had its founder and chairman, Alan Gibbs, not fled New Zealand.

As part of his move, which began in 1996, Mr Gibbs cashed up his investments, resigned as a director from local companies and took his assets, know-how and, excuse the pun, drive offshore.

Mr Gibbs was one of the first of a group of passionate high-profile New Zealand businesspeople to make the dramatic and deeply symbolic move to desert the country.

It has become a familiar routine for many of the most successful New Zealanders as they attempt to safeguard their fortunes and escape the bitter, hate-the-rich attitudes fostered by this government.

Since Mr Gibbs' departure some of the country's brightest business stars have followed his path, many of them heading to the UK, effectively a tax haven for the world's wealthy.

There are now so many expat Kiwi businessmen in London they even meet for drinks at Motcomb's bar in Knightsbridge. (The determinedly untrendy watering hole is frequented by celebrities and billed as a place without deafening music and "not a sun-dried tomato or TV chef in sight.")

While the government has been histrionic about the brain drain of young professionals, it appears dismissive of the exiled executives ­ for example, kneecapping the McLeod Report's proposal to cap tax at $1 million without any serious consideration.

There has been little acknowledgement of the millions of dollars lost in investment or the loss to New Zealand in other ways ­ philanthropy, institutional knowledge, valuable networks ­ as a result of the exodus of our wise business heads.

"Apart from the direct tax loss, and these people would pay something like $100 million in tax altogether, they gave serious dollars to charity. They still do but of course it is less because they're not here," a merchant banker friend of the group said.

These are not people who have left to go and hang around on golf courses; most are still active investors, plugged into their international networks but passionate about New Zealand and feeling a sense of grief at being sidelined from their country.

They might be ambivalent about leaving but there is no doubt it makes financial sense.

In a nutshell, here's how it works: New Zealand taxes its residents on a worldwide basis. That is, if you live here you will pay tax on all your income, wherever you earn it, here or overseas.

But as soon as you break your New Zealand residence and become a resident of another jurisdiction, or a constant traveller, you get taxed only on New Zealand-sourced income.

To do this you have to be out of the country for more than 325 days in a 12-month period, known as the "day count" test.

But packing your bags and leaving the country is not enough. The killer is the permanent place of abode test which can trump the day-count test. And there are no hard and fast guidelines about what constitutes a permanent place of abode.

It is a broad concept covering economic, financial and personal ties ­ and the test is subjective. "There are no clearcut rules," KPMG tax partner Brahma Sharma warned.

Someone such as Eric Watson, for example might be able to retain a reasonable level of investment here because he has broken all his other social and personal ties.

Family ties to New Zealand are seen by the authorities as an important factor and Mr Watson has moved to London with his son: "Having kids in boarding school back here won't help," Mr Sharma said.

Chapman Tripp tax specialist Craig Elliffe's own checklist for his clients includes:

* accommodation ­ do you own, lease or have access to property?

* social ties ­ do you have immediate family here? do you have membership of clubs?

* economic ties ­ do you have bank accounts and investments here?

* employment or business ­ do you run a business, are you on leave of absence?

* personal property ­ do you have vehicles, furniture or other property here?

* intentions ­ do you intend to live in New Zealand after a time?

* benefits, pensions and other payments ­ are you receiving any other payments?

It is a balancing act for the IRD, weighing up these links ­ and the courts have not been much help, serving up seemingly contradictory judgments.

In one key case the Taxation Review Authority ruled a New Zealand professor who left the country for a year-long sabbatical and rented out his home had kept a "permanent place of abode" in New Zealand during his absence. That meant he was liable to pay tax here on all his income during that period. The professor had continued to pay into his super plan and kept his New Zealand health insurance and membership of New Zealand clubs and societies.

"You've got to give up your membership to the Northern Club, drop out of the Remuera Rackets Club. You can still have economic connections but you have them as a non-resident," tax specialist Denham Martin said.

In another tax case, a New Zealand businessman who moved to a job in Singapore but whose wife and children remained in the family home in New Zealand was found to have abandoned his New Zealand residency.

The fact that the taxpayer had kept assets in New Zealand was accepted by the authorities as it was deemed in his case to be part of the taxpayer's desire to provide for his family.

Property is one of the easiest things to get rid of to show you have moved ­ and all the high-profile people who have left have sold up their family homes, or at least put them on the market.

"If you left your family home, even if it is rented out, the tax department might say your ties with New Zealand are still strong and say you are still a resident," KPMG's Mr Sharma said.

"They want to know you can't get off the plane and go straight to your house. But you might get away with a beach house here."

Putting assets in a trust won't help you much when it comes to satisfying the test: "If the property is still available to you then it is still a strong tie," Mr Sharma said.

"Breaking residency is not as easy as it might sound. You have to have very minimal ties with New Zealand."

The hoops one has to jump through to satisfy the test are not as simple as some might think. "Physically it is possible to become a tax exile without too much fuss, although careful tax planning is required ­ emotionally it is much more difficult," Chapman Tripp's Mr Elliffe said.

Tax specialist Denham Martin: "It's not really practical for 'youngies' and people who have young families."

The UK has high tax rates but is essentially a tax haven for the wealthy because of the way its residency rules allow someone to be deemed "ordinarily resident" in the UK while keeping their tax domicile elsewhere.

"It allows you to suck it and see, which means you can stay outside the loop," Mr Martin said.

Using residence rules in the UK you can get into a position where you become part of the tax system but are liable for tax only on income earned in the UK ­ which for most New Zealand tax exiles is likely to be a minimal portion of their total wealth.

Assets held elsewhere, including low-tax jurisdictions such as Monaco or the Bahamas, are not taxed in the UK. This attractive situation can be maintained for up to 18 years before an individual becomes a full resident of the UK, Mr Martin said. "They are tax gypsies."

A warning: they could inadvertently find themselves being deemed a full resident if they show an intention to live in the UK permanently by putting down long-term roots such as making significant investments there ­ surely an issue for someone such as Mr Gibbs.

A lot of expats who live overseas for more than three years are also achieving the same end as the group of wealthy New Zealanders who have broken their residency.

The list of exiles published here (see accompanying story: Who's gone) is far from exhaustive, although there are no figures available on trends for high net worth individuals breaking residency. Other high-profile figures who have disappeared from the local scene include sportsmen Sir Robert Charles and Chris Dickson, property developer David Gaze and Sky founder Craig Heatley, who broke his residency during a year-long sabbatical travelling around the world.

Breaking residence in New Zealand gives wealthy individuals a window of opportunity to restructure their affairs more tax-efficiently ­ allowing them to shunt some assets out of the tax net even if they return.

Keep in mind a tax resident doesn't have to be a person but can be any entity such as a company or trust. In New Zealand it used to be easy to move assets into some other entity so you were not earning income in your own name and, at that time, were not taxed on it.

But the IRD wised up and in 1988 introduced sophisticated related-person tests to make sure it caught all the income a person gets the benefit of, whether it is in their own name or not.

Structures are now becoming more and more sophisticated, with the sequence now being: become a non-resident, shunt assets sideways into a trust and then be very careful about returning.

"The key is to remove from a structure the 'control' elements that result in the controller being treated as taxable," explained an international trust expert with a boutique practice providing structures for wealthy offshore clients.

It is very hard to separate the control from a company because if someone has reasonably large shareholding that company is deemed to be the same as the individual.

A trust is much more useful, particularly a New Zealand trust, as under New Zealand law a New Zealand-resident trustee can hold assets and does not have to pay tax in New Zealand as long as the income is left offshore. For example, if a New Zealand resident sets up a company or trust in the Bahamas that he controls, it will be treated as taxable in New Zealand because he is a New Zealand resident.

There are also ways to remit income from an offshore trust ­ you can make a loan or pay expenses.

If someone changes his residency he can set up structures offshore that will hold his assets wherever they may be. Or if he is in transit, not resident anywhere, he is tax neutral and falls off the IRD radar while he sets up a new structure. "A lot of people set up these structures while migrating," the trust expert explained. "It's more accurate to say, rather than tax exiles, that they have simply renounced personal liability to New Zealand tax. By renouncing New Zealand residency they have got opportunities to set up offshore structures."

The IRD says it does not keep data on individuals who become non-resident for tax purposes, other than this being noted as non-resident on their file.

People who follow this model are in good company. It's a system Rupert Murdoch and his companies have used to good effect. His assets are held by companies in the British Virgin Islands. Provided all the funding for all his domestic companies was from the UK he paid very little tax, because liabilities and interest were paid out to the low tax jurisdiction of BVI.

And investor supreme George Soros' assets are held in the Dutch Antilles in the Caribbean.

Tax experts warn if tax exiles return temporarily they must be careful not to come back as if they are putting down roots. The easiest thing is to continue to stay away for more than six months of the year.

It is a little riskier to come back and settle here ­ the individual must make sure he has no controlling interest in entities he has set up overseas that could qualify them as being New Zealand taxpayers.

"That is why a trust is so good. It is treated as an independent entity. It is harder to prove you have some sort of control of a trust," the trust expert said.

With the trust you could fulfil a consultative function as a trustee, which did not amount to a controlling function, so it did not make the trust a New Zealand entity for tax purposes, he said.

When restructuring assets, land is a problem as, unlike shares or other investments, one cannot pretend it is anywhere other than where it is.

So what about coming back?

"If you come back you are going to have to have a pretty good structure ­ people do not think of these things till they are caught," the trust expert said.

If you come back and spend more than six months here you automatically become a New Zealand resident again. And tax specialists warn it is crucial not to overstay the 183 days in the country within a 12-month period ­ which can be harder to work out than you think.

If you overstay one single day you are back to square one again, meaning you are liable for tax as a New Zealand resident on your worldwide income for that entire six-month period. And this does happen.

"Say you come back for a family funeral or you find you are stuck here longer than you expected, you trigger residence and are taxed on your worldwide income," one adviser with a large expat practice said.

Mr Sharma said international citizenship was not a tax concept. Each country had its own residence rules: "If you are hopping from country to country you are not resident anywhere."

But if there is any chance, New Zealand tax authorities will want to clip the ticket.

Mr Martin: "As a general proposition if you are moving from New Zealand to a low-tax jurisdiction, New Zealand wants to get in the game and exert its sovereign right to tax."

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