Relief for ‘non-residents’
Inland Revenue (IRD) is likely to soften its position on how it determines if a taxpayer is a New Zealand resident as a result of a recent Court of Appeal decision.
Broadly, a person is a NZ tax resident if they are either in NZ for more than 183 days in a 12 month period or if they have a ‘permanent place of abode’ (PPoA) in NZ. In 2013 the Taxation Review Authority (TRA) issued a decision that resulted in an individual, Mr Diamond, being deemed to be NZ tax resident.
Mr Diamond had worked for the NZ Army for 25 years, retired in 2003 and left NZ with no intention of returning to live. He then worked in Papua New Guinea on a 12 month contract providing personal security; subsequently he spent approximately four months living in Queensland, before he began working in Iraq. In Iraq he also provided security services, completing a number of contracts up until April 2012, when he moved back to Australia.
Mr Diamond maintained close family and financial ties to his ex-wife and his four children who remained in NZ. He provided financial assistance to them, regularly visited and owned rental properties in NZ with his ex-wife (personally and then through a company).
Despite such a lengthy absence, the TRA found Mr Diamond to be a NZ resident (and liable for tax on his worldwide income) because, in brief, he had an investment property that was ‘available’ to him in New Zealand and an on-going ‘enduring relationship’ with his family and ex-wife. This was enough for the IRD to believe he had a PPoA in NZ.
The TRA decision appeared to lower the threshold for individuals to be classed as NZ tax residents and had a flow on effect generally for individuals who own property in NZ, as they could potentially be captured as tax residents of NZ.
Following the TRA decision an Interpretation Statement (IS 14/01) was issued that came into effect from 1 April 2014. The statement took into account the TRA case, stating that if a person is able to use a property as a place to live on an enduring basis, then it can still be their permanent place of abode irrespective of whether the property is rented to someone else. This approach is complex to apply and would have resulted in substantial uncertainty.
The case was appealed to the High Court and the TRA decision was overturned in favour of the taxpayer. IRD was quick to appeal that decision to the Court of Appeal (CoA) and again the decision was decided in favour of the taxpayer. The CoA ruled that the mere availability of a dwelling is not sufficient to deem a PPoA to exist. Whether an individual has a PPoA is a question of fact and requires an overall assessment having regard to a range of factors.
The CoA considered the Commissioners approach to determining whether Mr Diamond had a PPoA, to be in error. The key issue with the Commissioner’s interpretation was that, once a dwelling that is merely available is identified, extraneous factors establishing a connection or remote ties to NZ could then be invoked to artificially assign to that dwelling the status of a permanent place of abode.
IRD is expected to update its Interpretation Statement to take into account the decision or comment on how the case will apply to residency determinations going forward.