Tax residence is a fundamental issue for individuals which can have a significant impact on an individual’s tax position. This appeal case provides guidance regarding the permanent place of abode test.
Case Law: Commissioner of Inland Revenue v Diamond 2015 – Court of Appeal of New Zealand
This Court of Appeal case looks at the correct interpretation of s OE 1 (1) of the Income Tax Acts of 1994 and 2004 which determines if a person has a permanent place of abode in New Zealand and is therefore a resident for tax purposes. Tax residency determines whether an individual will be taxed only on their New Zealand sourced income or on their worldwide income.
An individual is treated as New Zealand tax resident if:
- They have a permanent place of abode in New Zealand; or
- They are present in New Zealand for more than 183 days in total in a 12 month period (the individual is treated as being resident from day 1).
A person will generally lose their New Zealand tax residency if they are outside New Zealand for more than 325 days in any 12 month period and cease to have a permanent place of abode.
Inland Revenue’s interpretation statement on residence (IS 14/01) includes the following comments from the Taxation Review Authority on the meaning of permanent place of abode:
- A dwelling in New Zealand that a person could reside in is a prerequisite to having a permanent place of abode in New Zealand.
- A permanent place of abode can either be a place in which someone has lived or a place in which someone will live in the future.
- The place of abode does not need to be vacant or able to be occupied immediately.
- When determining whether there is a permanent place of abode, the focus is on whether there is a dwelling that is able to be used by a person e.g. it may be owned by a family trust rather than the individual, but available for their use.
Case Background: Commissioner of Inland Revenue v Diamond
Mr Diamond was a former New Zealand soldier and following retirement undertook security work around the world and now resides in Australia. Mr & Mrs Diamond separated while he was serving in the Army, they had four children together. Mrs Diamond wanted to purchase a larger property to accommodate the family which led to the purchase of the Waikato Esplanade property in 1996 with Mr Diamond agreeing to purchase in their joint names to facilitate the raising of a mortgage for the property. He then paid half of the mortgage in lieu of child support. They subsequently purchased another property at Waingaro Road whereby Mrs Diamond and the children subsequently relocated to. From 1998 the Waikato Esplanade property was rented to tenants on a periodic tenancy basis. During the tax years in question, Mr Diamond returned to NZ approximately every 6 months to see his children. Whilst in NZ he would reside with Mrs Diamond at her Waingaro Road home.
The Taxation Review Authority found that Mr Diamond was New Zealand tax resident for the period as he had a permanent place of abode in New Zealand. Mr Diamond appealed this decision.
The key issue raised on appeal was whether the approach of the Tax Review Authority as to the meaning of permanent place of abode in New Zealand was correct.
The Court of Appeal determined that in order to determine if an individual has a permanent place of abode is a question of fact which requires an overall assessment as to whether the tax payer has a permanent place of abode in New Zealand. Such assessment will be highly contextual and rely on the circumstances of each case. The following factors may inform the inquiry:
- The continuity or otherwise of the taxpayer’s presence in New Zealand and in the dwelling;
- The duration of that presence;
- The durability of the taxpayer’s association with the particular place;
- The closeness or otherwise of the taxpayer’s connection with the dwelling – the situation before and after a period or periods of absence from New Zealand should be considered.
- The requirement for permanency is to distinguish merely transient or temporary places of abode. Permanency refers to the continuing availability of a place on an indefinite (but not necessarily everlasting) basis.
- The existence of another permanent place of abode outside New Zealand does not preclude a finding that the taxpayer has a permanent place of abode in New Zealand.
The assessment of a case will be for the tax years in question, however evidence before or after those tax years could be taken into consideration.
The Court of Appeal determined that given the property had never been Mr Diamond’s home (and it was never intended to be his home) and was only ever used as an investment property, it could therefore not be accepted that the property could constitute his permanent place of abode. Mr Diamond did have other ongoing personal connections with New Zealand, however these connections did not alter the conclusion reached.
This contrasts with the Inland Revenue’s statement on residence IS14/01 which states:
“Whether (or the extent to which) a person has lived in a dwelling will be a relevant factor to take into account in assessing whether it is their permanent place of abode, but it is not essential that they have lived in the particular dwelling before.”
The takeout? It is wise to get legal advice if there is any doubt about your tax residency.