Decision date: 5 December 2013
Case: TRA 43/11;  NZTRA 10
Act(s): Income Tax Act 1994, Income Tax Act 2004
Keywords: Resident, permanent place of abode
This was a case about tax residency and whether the disputant continued to be a New Zealand tax resident in the four years after he left New Zealand to work overseas. The Commissioner of Inland Revenue ("the Commissioner") considered that the disputant was a New Zealand tax resident for the first four years he was working overseas because he had a permanent place of abode in New Zealand. The disputant argued that he did not have a permanent place of abode in New Zealand during this period.
The Taxation Review Authority ("TRA") found for the Commissioner and also found that the disputant was liable for a shortfall penalty in each of the tax years in question for taking an unacceptable tax position.
The decision is consistent with the Commissioner's view that in evaluating whether a person has a permanent place of abode, it is necessary to consider all the relevant circumstances, and that there must be a dwelling that can be the person's place of abode. It is also consistent with the Commissioner's view that someone with strong ties to New Zealand can have a permanent place of abode in New Zealand despite a lengthy absence (the taxpayer was absent for up to four years in the years in dispute in this case).
The Commissioner considers that the result in this case turns largely on the particular facts.
The Commissioner has been asked for her views about two particular aspects of this case. The Commissioner's comments on those aspects are as follows:
The Commissioner has published an Interpretation Statement on tax residence, which covers how to determine if someone has a permanent place of abode in New Zealand for the purposes of section YD 1 (see IS 14/01: Tax residence at www.ird.govt.nz/technical-tax/interpretations). Taxpayers and their agents should refer to this statement for the Commissioner's view on the tax residence rules.
The disputant is a former New Zealand soldier who left New Zealand in July 2003 to work as a security contractor. He worked 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 disputant did not pay income tax on his foreign earnings.
The Commissioner assessed the disputant as a New Zealand resident under section OE 1(1) of the Income Tax Act 1994 and Income Tax Act 2004 on the basis that he had a permanent place of abode in New Zealand. The disputant challenged this assessment, submitting he had been (and remained) a non-resident from the date he left New Zealand (July 2003).
The TRA noted that the phrase "permanent place of abode" is not defined in the legislation, and that case law provides guidance when determining whether a person has a permanent place of abode in New Zealand. The TRA observed that the test is an objective test and considers the totality of the circumstances.
Here the TRA examined, in considering the overall circumstances, the following points:
The disputant held an investment property in New Zealand owned through an LAQC in which he held shares with his ex-wife. The property was tenanted. However, both the disputant and his ex-wife recognised the property was beneficially the disputant's and that it was only held by the LAQC for tax reasons. The TRA found that it was unlikely the ex-wife would have refused to cooperate with the disputant if the disputant had wanted to obtain possession of it, and so accordingly it was available to him as a dwelling.
The TRA found that the fact the property was an investment property and was tenanted did not outweigh it being available to the disputant as a dwelling. The TRA observed that Judge Barber had decided in Case Q55 (1998) 15 NZTC 5,313 that an investment property could be regarded as a potential place of abode. The TRA considered that in the present case, notice could have been served on the tenants at any time if the disputant had wished to return to live in the property. As noted above, the TRA considered it unlikely that the disputant's ex-wife would have refused to cooperate.
The TRA considered it important that the property was situated in a locality where the disputant had continuing family and economic ties.
The TRA found that, while no contemporaneous documents were produced to show the disputant's intention to leave New Zealand permanently, the length of time he spent out of New Zealand supported the disputant's assertion that this was his intention. However, such an intention is not determinative.
The TRA accepted the disputant's employment involved carrying out security work in hot spots around the world and so had no association with New Zealand. His contract in Papua New Guinea had been for 12 months and there was no evidence of any right of renewal. His contracts in Iraq were 13 months each. There was no certainty of renewal at the end of each contract, though in the relevant period his contract had been renewed (as it had in the years after the relevant period).
The TRA noted the disputant was not continuously absent from New Zealand, but returned to visit family every five to six months, spending on average 42 days a year in New Zealand during the relevant period.
The TRA considered that the disputant's continuing relationships with his children and ex-wife were significant factors in favour of him having a permanent place of abode in New Zealand. The disputant tried to speak to his children every Sunday while in Iraq. He would spend time with his ex-wife and children while visiting New Zealand, and had holidays with the children in other countries. He also continued to pay child support and a substantial amount of other expenses for the children. This ongoing relationship distinguished this case from Case U17 (1998) 19 NZTC 9,174, in which the taxpayer was estranged from his children.
The disputant also maintained a close relationship with his ex-wife, who was in effect his financial advisor and business partner. She held powers of attorney for him and managed his affairs in New Zealand.
The majority of the disputant's income continued to be spent in New Zealand on child support, expenses for the children, and on his property investments. The disputant continued to invest in New Zealand after he left the country. The TRA noted that in Case U17, the taxpayer also kept assets in New Zealand. In that case the taxpayer also invested further in New Zealand, subsequent to his departure from New Zealand, to provide for his family and to finance his business in Singapore. However, the TRA considered that the disputant's property investments were more closely linked with New Zealand than that in Case U17 because of the disputant's on-going business relationship with his ex-wife.
The TRA did not place any weight on the fact the disputant maintained bank accounts for mortgage payments on his properties, that he had a superannuation fund and life insurance policy, or that he had tax obligations in New Zealand relating to his business interests. Nor did it place any particular weight on the fact the disputant transferred the ownership in his vehicles to his ex-wife two years after he left New Zealand. However, the TRA did observe that the taxpayer not selling his vehicles at the time of his departure did not support the view that he had at that time formed an intention to leave permanently.
The TRA did not place any weight on the fact the disputant had not established roots in Iraq and thought that understandable given the country's security situation and the nature of the disputant's employment.
The TRA found that looking at the circumstances overall, the disputant continued to have a strong and enduring relationship with New Zealand. In particular, he had an available dwelling and maintained close family and financial ties to the country. Accordingly, the TRA held that the disputant was a resident of New Zealand for tax purposes for the years in dispute.
Counsel for the disputant submitted that the line in terms of whether someone has a permanent place of abode is not clearly defined, and that it takes judgement and discernment to weigh the particular facts. The TRA accepted that it requires judgement and discernment to get residency status correct. However, it considered that the arguments supporting the disputant's position were not substantial when the circumstances were considered in their totality.
In arguing that the disputant's position was "about as likely as not to be correct", counsel for the disputant also referred to the Commissioner's public statements that an absence of three years would generally be enough for a person to be a non-resident. However, the TRA found there to be no evidence the disputant knew of those statements and relied upon them.
Accordingly, the TRA found that the tax position taken by the disputant was not "about as likely as not to be correct".
The disputant was liable to pay a shortfall penalty for taking an unacceptable tax position in each of the relevant years, reduced by 50% for previous behaviour.
The disputant has appealed this decision.