Tax Alert


Life after Diamond - the new era begins

Tax Alert - October 2016

By Jayesh Dahya 

In September 2016, Inland Revenue released an updated interpretation statement  on tax residence. 

The statement has been updated for the Court of Appeal’s decision Commissioner of Inland Revenue v Diamond [2015] NZCA 613.

Tax residence is an important tax concept as it determines whether a person is assessable for New Zealand tax on their worldwide income or only on New Zealand-sourced income.  Tax residence is often overlooked when a New Zealand tax resident leaves New Zealand to work or live overseas as it is generally assumed that by leaving New Zealand, there is no longer a requirement to pay tax in New Zealand.  This is not the case.  If a person remains New Zealand tax resident during their absence, they have a requirement to pay New Zealand tax on their overseas income and New Zealand sourced income.   

Fundamental to the concept of tax residence is the permanent place of abode (“PPOA”) test.  A person will be tax resident in New Zealand if they have a PPOA in New Zealand, regardless of the time spent out of the country.  As there is no definition in the Income Tax Act 2007 of what a PPOA means, tax advisors must refer to principles established by case law when determining what it means.  As an individual’s particular circumstances must be considered on a case by case basis in making this assessment, often the position is not clear cut.   

The concept of a PPOA was most recently tested in the Court of Appeal’s decision in Diamond (for the background on this, see our February 2016 Tax Alert article) where Inland Revenue asserted the taxpayer retained their PPOA in New Zealand.  In a rare taxpayer win, the Court dismissed Inland Revenue’s approach to determining whether a PPOA existed and the decision set out the principles to be applied in assessing whether a taxpayer has a PPOA in New Zealand

Inland Revenue has now updated its interpretation statement to reflect the principles provided by the Court of Appeal.  In summary, for a PPOA to exist in New Zealand:

  • A person must have a place of abode (i.e. a dwelling) in New Zealand to have a permanent place of abode here.  An “abode” means a “habitual residence, house or home or place in which the person stays, remains or dwells."
  • Deciding if a dwelling is a taxpayer’s PPOA requires an assessment of the taxpayer’s circumstances and how the taxpayer has used that dwelling.   This requires an assessment of: 
    • the continuity and duration of the person’s presence in New Zealand; and
    • the durability of the person’s association with the place of abode and how close their connection with it is.
  • A property used as a personal residence can be contrasted with one that is an investment property.  Simply renting out your personal residence in itself may not be sufficient, as you would also need to consider the use of the property before and after a period of absence.  The existence of a dwelling as a habitual abode is fundamental to the PPOA test, “it does not matter how strong a person’s ties to New Zealand are if those ties do not indicate that the particular dwelling in question is the person’s permanent place of abode.  For example, if a person has strong connections to New Zealand, but the only dwelling they have here is a property that they have never lived in and never intend to live in, that property could not be their permanent place of abode”.   

The decision of the Court of Appeal and the revised interpretation statement hopefully put an end to the uncertainty that has existed over the last few years where Inland Revenue have asserted that the mere existence of a dwelling (irrespective of how it has been used) is sufficient for a PPOA to exist in New Zealand. We now head into an era that will hopefully see greater certainty for taxpayers and a more consistent application of the law.

For those that have relied on the earlier interpretation statement and taken a tax position that would be different under the revised interpretation statement, Inland Revenue has released an operational statement which states that taxpayers can ask Inland Revenue to apply the new analysis to their circumstances and request amendments to previous tax positions in accordance with the principles set out in Standard Practice Statement SPS 16/01 – Requests to amend assessments.

If you have any questions in relation to the above, please don’t hesitate in contacting your usual Deloitte advisor.

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