Taxpayer did not have a permanent place of abode in New Zealand

Summary

This was an appeal by Mr Diamond against the Taxation Review Authority ("TRA") finding that he had a permanent place of abode in New Zealand and therefore was a resident in New Zealand for tax purposes for the years in dispute. The High Court on appeal found for the taxpayer and determined that he was not a resident.

Impact of decision

This decision is the most recent authority dealing with the issues of residency and permanent place of abode. The Commissioner of Inland Revenue ("the Commissioner") has appealed the decision. The Commissioner's view on the correct application of the permanent place of abode test is as set out in IS 14/01.

The Commissioner notes that the Court made some obiter comments about the operation of the day-count rules in s OE1.  The Commissioner's view on the operation of those rules is as set out in IS 14/01.

Facts

Mr Diamond ("the appellant") is a former New Zealand soldier who worked as a security contractor in Papua New Guinea and Iraq during the tax years in question (the tax years ending 31 March 2004 to 2007 inclusive). During those years, the appellant did not pay income tax on his foreign earnings.

The Commissioner assessed the disputant as a New Zealand resident under s OE 1(1) of the Income Tax Act 1994 and Income Tax Act 2004 ("ITAs") on the basis that he had a permanent place of abode in New Zealand. The appellant challenged this assessment, submitting he had been (and remained) a non-resident from the date he left New Zealand (July 2003).

In 2013, the TRA held that the appellant had a permanent place of abode in New Zealand under s OE 1(1) of the ITAs and therefore was a resident in New Zealand for tax purposes for the tax years ending 31 March 2004 to 31 March 2007. The TRA also found that the appellant had adopted an unacceptable tax position. The appellant appealed that decision to the High Court.

Decision

Clifford J stated that the TRA's approach to the issue relied on a two-stage test drawn from Case Q55 (1993) 15 NZTC 5,313:

• firstly, whether the appellant had an available dwelling in New Zealand in the relevant tax years; and
• secondly, a consideration of the appellant's other connections with New Zealand.

However, Clifford J considered Case Q55 to be authority only for the proposition that a person's permanent place of abode in New Zealand will not cease to have that character merely because that dwelling is rented out whilst the person is outside New Zealand. Clifford J considered Case Q55 proceeded from the factual matrix of that case, in that:

• the taxpayer and his wife had lived in the dwelling prior to their departure;
• their absence was always intended to be temporary;
• the taxpayer and his wife had always intended to return to New Zealand and to resume residing in their home here after their absence; and
• they retained a wide range of connections with New Zealand during their absence.

It was in that context that Judge Barber found in Case Q55 that despite the dwelling not being available while the taxpayer was overseas (because it was rented out), it nonetheless remained the taxpayer's permanent place of abode. Clifford J held that Case Q55 is not authority for the approach taken by the Commissioner or the TRA.

Clifford J then considered whether there was any other basis upon which the property might be considered the appellant's permanent place of abode in New Zealand. In doing so, his Honour looked to determine the correct interpretation of s OE 1(1) of the ITAs.

First, Clifford J considered the ordinary meaning of the words permanent, abode, place, in, and then the phrase as a whole; and found that the ordinary meaning of "to have a permanent place of abode in New Zealand" is "to have a home in New Zealand". Given that the appellant had never lived at the property, and only rented it out to others, Clifford J found that the Property is not, in the ordinary sense of the meaning of those words, a permanent place of abode the appellant has in New Zealand.

Clifford J then proceeded to examine the purpose behind the provision, and in doing so considered the section's legislative history. He noted the "permanent place of abode" test had replaced the previous "home" test. However, he could not identify any alteration in meaning which would support the Commissioner's approach.

At [75] Clifford J acknowledged that the appellant did have other, and ongoing, personal connections with New Zealand. However, he considered that in the absence of the property having any of the characteristics of a permanent place of abode, those connections did not alter his conclusion.

The Court allowed the appeal, concluding there is no basis for the proposition that the appellant had a permanent place of abode in New Zealand so as to make him resident for tax purposes.

On the issue of penalties, Clifford J stated at [76] that due to the outcome he did not need to consider whether the appellant had adopted an unacceptable tax position, but noted that had it been necessary, he would have found in the appellant's favour.