Permanent place of abode and time bar

Summary

The High Court found that the appellant did have a permanent place of abode in New Zealand in the relevant years, applying the Diamond test (Commissioner of Inland Revenue v Diamond [2015] NZCA 613). The Court also concluded that time bar could be opened under s 108(2) of the Tax Administration Act 1994 (“TAA”) and that a shortfall penalty for taking an unacceptable tax position was appropriately imposed.

Impact

The decision confirms the application of the Diamond test for determining permanent place of abode. The decision also confirms that the wording of any time bar opinion is not important, but rather that an opinion has been formed. The Court also confirmed, consistent with the decision in Great North Motor Co Ltd (in rec) v Commissioner of Inland Revenue [2017] NZCA 328, that the Taxation Review Authority (“the Authority”) is required to consider the time bar decision de novo and not merely whether it was honestly held and reasonably available.

Facts

The appellant, Mr van Uden, is a master mariner who on average, is at sea for approximately eight months of each year. The Commissioner of Inland Revenue (“the Commissioner”) assessed the appellant for income tax in the 2005 to 2009 income years on the basis he had a permanent place of abode.

The appellant was born in New Zealand in 1957 after his parents emigrated from the Netherlands. During the 1980's, the appellant married his first wife and adopted her two daughters. In 1987, the appellant purchased a home in Mangere Bridge, Auckland for his family. In 1993, the appellant purchased a rental property in Auckland, which was the first of four rental properties that the appellant acquired.

By 1994, he and his wife had separated. In 1996, the appellant bought an apartment which he stayed in while in New Zealand. The appellant returned to New Zealand regularly to visit his son.

In 1998, the appellant met his current wife, Judith van Uden. Mrs van Uden had received a property at 27 Evelyn Road as part of an earlier divorce settlement from her previous marriage which she transferred to the Pink Dog Family Trust (“the Trust”). From 21 November 1998, the appellant stayed at 27 Evelyn Road with Mrs van Uden. The appellant and Mrs van Uden were married on 14 December 1998. In 1999 the appellant was also appointed a trustee of the Trust and included as a discretionary beneficiary. Between 1998 and early 2000, when the appellant was not at sea, he would return to New Zealand and stay at 27 Evelyn Road with Mrs van Uden. From early 2000, Mrs van Uden began sailing fulltime with the appellant. In March 2004 the property at 27 Evelyn Road was tenanted for $70 per month.

During early 2005 the appellant carried out deferred maintenance at 27 Evelyn Road. In August 2006, the appellant, Mrs van Uden, and her solicitor, as the trustees of the Trust, purchased 29 Evelyn Road. In June 2009, the appellant and Mrs van Uden commenced a new build project at 29 Evelyn Road, which was completed by early 2011. The property at 27 Evelyn Road was let in 2010. The appellant and Mrs van Uden moved into the property at 29 Evelyn Road and eventually sold the property at 27 Evelyn Road in October 2014.

The Commissioner assessed the appellant for income tax on his overseas income for the years ended 31 March 2005 to 31 March 2009 (inclusive) on the basis he was a resident in New Zealand. The appellant unsuccessfully challenged the assessment before the Authority and appealed that decision to the High Court.

Decision

Residency

The Court agreed with the Authority that the appellant had a permanent place of abode at 27 Evelyn Road. The Court applied the decision in Diamond and took into consideration the following factors:

1. The continuity or otherwise of the taxpayer’s presence in New Zealand and in the dwelling – While the appellant spent an average of at least eight months a year at sea, when he was not on the ship, holidaying or travelling, he returned to New Zealand and spent time here. When he did return, the appellant lived and based himself at 27 Evelyn Road. Apart from relatively short periods in the Netherlands as a child and during a period in the 1980’s, the appellant had a continuous presence in New Zealand.
2. The duration of that presence – the property at 27 Evelyn Road had been used as the appellant’s home for almost 10 years until June 2010.
3. The durability of the taxpayer’s association with the particular place – The appellant has maintained significant ties with 27 Evelyn Road, exhibited in both practical and financial ways. Firstly, the appellant returned to 27 Evelyn Road when not at sea. Secondly, the appellant and Mrs van Uden further committed to that address when they purchased the neighbouring property and undertook significant renovations. Thirdly, credit card statements in the relevant periods showed regular household expenditure at that location and a Sky television account maintained for several years suggested to the Court that 27 Evelyn Road was used for their residential purposes. Additionally, 27 Evelyn Road was the registered address for three motor vehicles that Mrs van Uden and the Trust owned from time to time, the appellant’s pay slips, and their electoral address. Lastly, the appellant regularly gave the 27 Evelyn Road address for bills, bank statements, insurance policies and investments.
4. The closeness or otherwise of the taxpayer’s connection with the dwelling – 27 Evelyn Road remained the property that the appellant and Mrs van Uden left from and returned to. It was their base in New Zealand. It was Mrs van Uden’s home, who the appellant was in a committed relationship with. While the appellant argued that he did not own 27 Evelyn Road, the Court noted that the parties committed to each other at an early stage in their relationship and that the appellant transferred his rental properties first to them both as a partnership and then from the partnership to the Trust.
5. The requirement for permanency to distinguish merely transient or temporary places of abode – 27 Evelyn Road was indefinitely available to the appellant when he and Mrs van Uden returned to New Zealand. Even when it was tenanted in 2004 that was at a concessionary rate and only for 10 months. Any use by the house sitter, friends or family was also dependent on the appellant and Mrs van Uden needing to live there.

FIF income

The Court held that the de minimis exception in s CG 15(2)(d) did not apply namely because the employer’s contributions were incurred “by or on behalf of” the appellant. Accordingly, the Court found that the appellant was liable to pay tax on his interest in his employer’s superannuation fund. The appellant’s unit trust investments were also aggregated to the income from the superannuation fund.

Time bar

The Court found that the Commissioner validly formed an opinion when an adjudication report issued by a Manager of the Dispute Review Unit, confirmed that the exception to open the time bar in s 108(2)(b) of the TAA applied. The opinion was the most recent opinion on the issue, was reasonably held and the assessments that followed were consistent with that opinion.

The Court confirmed that there is no significance in the form of wording used, just that an opinion needs to be formed. In any event, the Court confirmed that the hearing before the Authority was a de novo hearing so that the Authority was obliged to review the Commissioner’s time bar decision.

Shortfall penalties

The Court held that the appellant’s claim that he did not have a permanent place of abode in New Zealand during the tax years in dispute did not have the prospect of being close to a 50 per cent chance of success. He therefore failed to meet the standard of being about as likely as not to be correct.