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New Zealand: High Court rules on residency test for individuals


Tim Stewart

Expatriates with residential investment properties in New Zealand can breathe easier after the High Court allowed the taxpayer's appeal in Diamond v Commissioner of Inland Revenue. The case concerned whether a residential investment property in New Zealand that Diamond had owned but never lived in could be his "permanent place of abode" such that Diamond was a New Zealand tax resident and, therefore, liable to New Zealand tax on his worldwide income. New Zealand has two main tests to determine if an individual is tax resident. A day-count test and the "permanent place of abode" test. It is only necessary to satisfy one of these tests. Diamond was not resident under the day-count test as he was absent from New Zealand for the required period of time during the relevant tax years.

The phrase "permanent place of abode" is not defined in New Zealand's tax legislation. Case law from both New Zealand and Australia indicates "permanent place of abode" has a broad meaning and that whether the test is satisfied is a matter of weighing a number of factors. The test looks at a person's connection to a country, town or city. It is not a matter of simply looking at whether a person has a dwelling available to them, although that is an important element of the test.

Inland Revenue argued that the "permanent place of abode" test is a two stage test. First, they argued, it is necessary to determine whether the taxpayer had an available dwelling in New Zealand during the relevant tax years. If the taxpayer had an available dwelling then, they argued, it is necessary to assess the taxpayer's other connections with New Zealand (without necessarily considering any relationship between the available dwelling and the other connections).

Diamond argued that the two stages are not independent. The test is not directed at whether New Zealand is the taxpayer's home but whether the taxpayer has a home in New Zealand.

The court rejected the argument that Diamond's residential investment property could be his permanent place of abode on the basis that the dwelling had never been Diamond's home and it was not intended to be Diamond's home. Rather, the property was only ever used as an investment. While Diamond did have other, and ongoing, personal connections with New Zealand, in the absence of an available dwelling having any of the characteristics of a permanent abode, the court held that those connections do not alter the conclusion that Diamond did not have a permanent place of abode in New Zealand (and therefore was not tax resident).

Another troubling aspect of the Taxation Review Authority's decision, at least from a taxpayer's perspective, was that Inland Revenue's imposition of a shortfall penalty on Diamond for taking an unacceptable tax position had been upheld. Under New Zealand's tax legislation a taxpayer takes an acceptable tax position if "viewed objectively, the tax position fails to meet the standard of being about as likely as not to be correct". Given that Inland Revenue's interpretation of "permanent place of abode" appeared to be inconsistent with Inland Revenue's public statements regarding that test, the imposition of penalties in this case seemed excessive.

As the High Court found that Diamond was not tax resident it was not necessary for the court to deal with whether shortfall penalties were correctly imposed. However, the court noted that it "... would have had little difficulty in concluding Diamond had not taken an unacceptable position".

Tim Stewart (

Russell McVeagh

Tel: +64 4 819 7527


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