Tax Residency and a permanent place of abode

Tax Residency and a permanent place of abode

The Inland Revenue Department have recently clarified their view on tax residency in New Zealand for natural persons.

Some of our more frequent blog readers might remember that we alerted you to a case that was proceeding through the courts regarding tax residency. This particular case involved a New Zealander who had lived abroad for many years. He still owned a rental property in New Zealand and visited New Zealand regularly to see family. The IRD maintained he was a tax resident. The case went through the Taxation Review Authority (TRA) and the judge agreed with the IRD. You can read more about that case here.

The TRA ruled in favour of the IRD and the case was appealed to the Court of Appeal. The Court of Appeal sided with the appellant and the IRD had to go back to the drawing board.

The IRD’s position was originally set out in 2014. They set out a two step test to determining whether or not an individual was a tax resident. First, the individual needed a permanent place of abode in New Zealand available for their use. Assuming that there was such a dwelling, the second test was to consider how often the individual visited New Zealand, the length of those visits and their association with the available dwelling.

The Court of Appeal argued that the two step test not valid. The judges said that any determination of tax residency could not usefully be condensed into two rules. The Court believed that there had to be an integrated assessment to assess the facts along with the nature of the use the taxpayer habitually makes of the place of abode. Specifically it found that “the following (non-exhaustive) factors may inform the inquiry:

(a) The continuity or otherwise of the taxpayer’s presence in New Zealand and in the dwelling;

(b) The duration of that presence;

(c) The durability of the taxpayer’s association with the particular place;

(d) 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.

(e) 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.

(f) 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.”

As a result of the ruling, Inland Revenue has now released a new Interpretation Statement to clarify the rules.

The IRD’s Interpretation Statement states that “a person must have a place of abode (ie, a dwelling) in New Zealand to have a permanent place of abode here. This is because, as pointed out by the Court of Appeal …, “abode” means a “habitual residence, house or home or place in which the person stays, remains or dwells”. But simply having a dwelling is not sufficient. The dwelling must be the person’s permanent place of abode.

Deciding if someone habitually resides at a dwelling such that it is a permanent place of abode for them requires an overall assessment of the person’s circumstances and the nature and quality of the use the person habitually makes of the place of abode. It is not just the situation during the person’s absence from New Zealand that is relevant. The situation before and after periods of absence from New Zealand should be considered in assessing how close the person’s connection with their place of abode is”.

So it would seem on the face of it that sanity has been restored.

Again from the IRD Interpretation Statement, the department states that “…(in the Court of Appeal case) the taxpayer had never resided, or intended to reside, in his dwelling in New Zealand. The dwelling had only ever been used as an investment property. In those circumstances, the court considered that the dwelling could not be the taxpayer’s permanent place of abode, irrespective of any of the ties he had to New Zealand. Because there was simply no question about whether the taxpayer habitually resided in the dwelling before he left New Zealand (he did not), there could be no question about whether he continued to habitually reside there during the tax years in question (the first four years of his absence from New Zealand). As such, the court did not need to analyse and weigh up the nature and extent of each of the connections the taxpayer had to New Zealand. No matter how strong the taxpayer’s connections to New Zealand were, because he did not have any residential connections to the dwelling at all, none of his connections to New Zealand could indicate that the dwelling was a permanent place of abode for him. On any overall assessment of the taxpayer’s circumstances, the property was not a permanent place of abode for him before or after his departure.”

You can read the full document here.

Of course in the case of a taxpayer who has a New Zealand property they live in for part of the year as well as a property abroad, these rules would probably not apply. They would be deemed to be a New Zealand tax resident. Similarly, someone working abroad for a fixed period of, for instance, one year would also likely be a tax resident.

Tax residency is complex and this article discusses only one area that helps determine tax residency. This article is by its very nature general and anyone seeking advice on tax residency should seek professional advice specific to their own circumstances. We are very happy to help.

Angus is the CEO and founder of Generate Accounting.

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