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Diamond’s not the Commissioner’s best friend!
We all have heard the saying that diamonds are a girls’ best friend, but there is little doubt that the Inland Revenue will have any similar affections toward a Diamond after their second loss, this time in the Court of Appeal, in the tax residency case of CIR v Diamond (2015) NZCA 613 (18 December 2015).
The focus of the case is on whether Mr Diamond had a permanent place of abode (“PPA”) in New Zealand during the income years in question, with a finding in the Commissioner’s favour resulting in Mr Diamond’s worldwide income being subject to New Zealand taxation.
For those of you not quite up to speed with our domestic residency tests, the Commissioner considers you to be a New Zealand tax resident when either:
- You have a PPA in New Zealand;
- You are physically present in New Zealand for more than 183 days in any twelve-month consecutive period; or,
- As a New Zealand tax resident, you have then not been physically absent from New Zealand for more than 325 days in any consecutive twelve-month period.
The PPA test takes precedent over the two presence tests in the sense that as soon as you are deemed to have a New Zealand PPA, you are considered a New Zealand tax resident even if you have not yet exceeded the 183 day required presence period, and equally, if you have satisfied the required 325-day absence period, but still have a New Zealand PPA, then you will still be a New Zealand tax resident for as long as that PPA remains in existence.
If you also happen to be deemed a tax resident of another country at the same time as being deemed a New Zealand tax resident, then you do face a risk of double taxation on your worldwide income. This issue is however essentially eliminated where New Zealand and the other country have a double tax treaty agreement (“DTA”), as the provisions of the DTA, via the application of a tiebreaker test, will determine which country will gain the right to tax your worldwide income (usually allowing a credit for taxes paid in another DTA country) and which country will only have a source taxing right.
Unfortunately for Mr Diamond, during his periods of absence from New Zealand in the income years in question, he was based in Iraq. As New Zealand does not have a DTA with Iraq, our domestic residency rules in this case would not be superseded by the application of a residency test contained in any bilateral agreement.
The Commissioner’s contention was that a Waikato property owned by Mr Diamond was a New Zealand PPA, even though Mr Diamond had never physically lived at the address. This was in accordance with the two step approach promulgated in her interpretation statement (IS 14/01), the first step being to establish whether there is a dwelling situated in New Zealand in which the taxpayer could live in, and if so, the second step of determining whether the place of abode (the dwelling) is a PPA. The PPA analysis requires consideration of the person’s continuity and duration of presence in New Zealand and durability of association with the person’s place of abode.
The Commissioner submitted that the correct interpretation of section OE 1(1) of the Income Tax Act 2004 (now YD 1(2) ITA 2007) was that there only needed to be a place in which the taxpayer could abide, following which an assessment of the surrounding factual circumstances would determine whether that place was a permanent place of abode. There was no requirement for this place to constitute the taxpayer’s home, nor that he or she had actually lived there before.
Legal counsel for the parties agreed that the outcome of the case would be determined by which of the following interpretations of section OE 1(1) was correct in the Court’s view:
- A taxpayer must have a home in New Zealand in which he or she usually abides on a permanent basis (the taxpayer’s submission); or
- A taxpayer owns a dwelling in New Zealand, which was not his or her place of abode before leaving New Zealand, but in which he or she can abide on a permanent basis. That dwelling can then be assessed on the basis of the totality of the circumstances to ascertain its status as the permanent place of abode (the Commissioner’s submission).
The Court of Appeal dismissed the Commissioner’s submission, and stated that her suggested two-step process was an incorrect approach to follow in any PPA interpretation. Instead the Court decided that the correct interpretation of section OE 1(1) and whether an individual had a PPA, was a question of fact and required an overall assessment of the circumstances in each specific case.
The Court’s view was that the determination could not be separated into discrete questions and instead required an integrated factual assessment, directed to determining the nature and quality of the use the taxpayer habitually makes of a particular place of abode. While the assessment will require a factual enquiry with respect to the income years in question, evidence of the circumstances in the years both before and after the relevant period, should not be ignored to the extent those circumstances may provide assistance in answering the PPA question.
Additionally, the focus must be on the taxpayers PPA in New Zealand and not the PPA of family members. Consequently, the fact that a taxpayer sets up a home for their family in New Zealand, while they live elsewhere, would not necessarily be sufficient in itself to establish the taxpayer has a New Zealand PPA.
On the basis of its analysis, the Court found that since the Waikato property had never been lived in by Mr Diamond for the almost twenty-year period it had been owned by him, and had instead remained a rental investment property at all times, it could not be considered to be his PPA. As the Commissioner had not put forward any PPA arguments with respect to any other New Zealand situated property, in the Court’s view, Mr Diamond was not a New Zealand tax resident in accordance with section OE 1(1) during the income years in question.
In an attempt to assist with future PPA determinations, the Court concluded its judgement by providing the following non-exhaustive list of factors which should be considered:
- 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 Commissioner has advised that she will not be seeking leave to appeal the decision to the Supreme Court, so we should expect to see an amended interpretation statement issued by her in due course to incorporate the Court of Appeals findings into her policy on how any future PPA inquiries will proceed.
Watch this space.