The Court of Appeal has ruled in favour of the taxpayer in Commissioner of Inland Revenue v Diamond, concluding that the taxpayer was not resident in New Zealand for tax purposes. The Court dismissed Inland Revenue's appeal against the High Court Judge's decision, and rejected Inland Revenue's argument that Diamond's New Zealand residential investment property was a "permanent place of abode".
New Zealand has two tests to determine whether an individual is a tax resident. It is necessary to meet the criteria of only one of the tests. The first test is a day-count test, which Diamond did not meet as he was absent from New Zealand for the required period of time. The second test requires a person to have a "permanent place of abode" in New Zealand. The phrase "permanent place of abode" is not defined.
Diamond is an expatriate who had never lived in the investment property and had lived overseas for the period in dispute. He returned to New Zealand periodically to visit his friends and family.
Inland Revenue argued that the correct interpretation of the 'permanent place of abode' limb of the test requires a two-step approach. The first step looks to whether there is a dwelling available to the individual in New Zealand. On Inland Revenue's view, this will be the case if the individual owns a dwelling in New Zealand in which he or she could live on a permanent basis, even if the individual has not previously lived in that dwelling. If the first step in the test is met (that is, the individual has an available dwelling) the second step requires an assessment of the individual's overall connections with New Zealand to determine whether the dwelling is a "permanent place of abode".
This two-step approach was rejected by the Court of Appeal on the basis that neither the plain meaning of "permanent place of abode" nor the legislative history of the phrase support that approach. The Court held that only the individual's connections to a particular dwelling would make the dwelling a "permanent place of abode" and not general financial, cultural and personal ties to New Zealand more broadly.
The Court of Appeal held that "permanent place of abode" means something more than mere availability of a place to stay and implies actual usage of the property by the individual for residential purposes. Whether a dwelling is a permanent place of abode will depend on the nature and quality of the use the individual habitually makes of that dwelling. The mere availability of a dwelling is not sufficient by itself. The Court listed several factors to be considered which include the continuity of the individual's presence in New Zealand and in the dwelling, the duration of that presence, the durability of the individual's association with the particular place and the closeness of the individual's connection with the dwelling before and after the individual's absence from New Zealand.
The Court concluded that as Diamond's investment property had never been his home and was never intended by him to be his home, it could not be a dwelling with which he has enduring and permanent ties. In the absence of any other property having the characteristics of a permanent place of abode, Diamond's extraneous ongoing personal connections to New Zealand would not create one. The Court therefore concluded that Diamond did not have a permanent place of abode in New Zealand and therefore was not New Zealand tax resident.
The Court of Appeal's decision is to be welcomed. As the Court itself remarked, Inland Revenue's approach would have given rise to uncertainty. On Inland Revenue's approach, the mere ownership of a residential property in New Zealand, along with ongoing family or other connections to New Zealand, could result in a person being tax resident even if the person is in no sense living in New Zealand, but rather visits New Zealand only periodically.
It is possible that Inland Revenue could seek to further appeal the decision, although a further appeal to the Supreme Court requires leave of that Court, and leave may not be given, especially if that Court sees the question of tax residence as a largely factual one. In the meantime, the Court of Appeal's decision confirms the orthodox approach to determining when an individual will be tax resident in New Zealand.
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