A Week in Review

PPOA decision goes against taxpayer

By now, many of you will be aware of the Diamond case, a 2015 Court of Appeal decision, which had the task of determining whether the taxpayer was a NZ tax resident during the particular income years in question, as a result of application of the permanent place of abode test (“PPOA”).

For those of you who may be unaware, or are simply in need of a recap, NZ tax residency for individuals is determined via the application of one of two tests – a physical presence/absence test and the PPOA test.

Clearly the physical presence/absence test is black and white – you’re either physically in NZ or you are not, and considering these days that NZ Immigration records are electronic, and therefore available upon request, particularly to Inland Revenue, it’s pretty hard to hide your physical whereabouts. In fact often when we have a client whose residency status is being questioned by Inland Revenue, the homework has usually been done by the investigator, with the NZ Immigration records already obtained.

For those non-residents, including the ex-pats returning home to greener pastures, spend more than 183 days in NZ in any 12-month period (so not tied to an income or calendar year), and you will be deemed a NZ tax resident from your first day of presence. And just to make it more difficult to get out once you are in, your NZ tax residency status will continue until you have then been physically absence from NZ for more than 325 days in any 12-month period. Satisfy this test, and you’ll be deemed a non-resident from your first day of absence.

Straight forward isn’t it? Well not exactly, because we also have the PPOA test, and being the over-riding NZ tax residency test for individuals, regardless of your physical presence in NZ, if at any time you are deemed to have a NZ PPOA, regardless of whether you may also have one outside of NZ, you will also be deemed a NZ tax resident.

So suddenly the waters have changed from being crystal clear, to the colour of the Waipu river mouth after a good winter’s storm when you’re attempting to fish, rather murky and uncertain. Its then up to cases like Diamond, to hopefully provide some guiding principles surrounding the PPOA concept, and attempt to clear the waters again.

Let us return to Diamond therefore, which to the relief of many of us, was a decision actually in favour of the taxpayer for once. In fact the decision resulted in Inland Revenue having to review its own interpretation statement on tax residency which had just been released some 12 months before (IS 14/01), and undertake a reissue to factor in the principles of the Diamond decision, which can now be found under the title IS 16/03.

The decision in Diamond espoused the following guiding principles when determining the PPOA issue:

• The determination cannot be separated into discrete questions. Rather, the approach calls for an integrated factual assessment, directed to determining the nature and quality of the use the taxpayer habitually makes of a particular place of abode. In this assessment, the mere availability to the taxpayer of a dwelling is not sufficient by itself.  
   
• In undertaking this assessment, the following non-exhaustive factors may be useful to consider –
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• The continuity or otherwise of the taxpayer’s presence in NZ & in the dwelling;
   
• The duration of that presence;
   
• The durability of the taxpayer’s association with the particular place;
   
• The closeness or otherwise of the taxpayer’s connection with the dwelling — the situation before and after a period or periods of absence from NZ should be considered;
   
• 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; and,
   
• The existence of another PPOA outside NZ does not preclude a finding that the taxpayer has a PPOA in NZ.
   
• While in assessing a particular case the factual inquiry will be on the tax years in question, evidence of the relevant circumstances both before and after those tax years may be taken into account to the extent they bear upon the question whether the taxpayer had a PPOA in NZ in the tax years in question.
   
• Importantly the focus is on whether the taxpayer, not members of the taxpayer’s family, have a PPOA in NZ. Accordingly, the fact that a taxpayer may provide a home for his family in circumstances where the taxpayer lives elsewhere would not necessarily be sufficient to establish that the taxpayer had a PPOA in NZ.

In the most recent case, the taxpayer was posted on a ship overseas for around 8 months per year during the income years in question. He had however met his second wife in NZ, and commenced living in a property already owned by her, although subsequently transferred to her family trust, of which he became a trustee and discretionary beneficiary. Over the next 12 years, the taxpayer continued to stay at the property whenever he was in NZ and was not visiting family.

Both the TRA and the High Court agreed with Inland Revenue’s position that this property was a NZ PPOA for the taxpayer. He habitually resided at the property, it was more than just a place available to him, and it was clear that he had decided to make NZ his home.

The Court of Appeal agreed with the two lower Courts, and cited a number of consideration factors cited in Diamond in its decision, including:

• The property was a permanent not temporary place of abode (the concept referred to in Diamond to there being the continued availability of a place on an indefinite but not necessarily lasting basis);
   
• The duration of the taxpayers presence in the property – some 12 years;
   
• The continuity of the taxpayers presence in NZ – since 1957 when first employed on the ships, always returned to NZ when not at sea or travelling, and in the income years in question, always stayed at the property when not visiting family;
   
• The durability of association with the property – significant ties in both a practical & financial way – credit card expenditure reflecting shopping at stores near the property in question, SKY TV account he paid for, address for bills, bank statements, insurance policies and investments; and
   
• The closeness or otherwise of his connection with the dwelling – confirming the principle that you do not actually have to own the dwelling yourself before it can be considered your PPOA.

I actually thought the PPOA question here was relatively straight forward and I’m surprised it has made it as far as the Court of Appeal, unlike the facts in Diamond, which were substantially more grey. However as an advisor, certainly useful to have another decision of the Court to provide guidance of present thinking at the judicial level. What I found very interesting from reading the decision though, was the extent of the Revenue’s investigation and therefore a warning to your client’s if they are trying to claim they have minimal attachment to a particular residence, when the physical evidence would perhaps dictate otherwise. Trawling through credit card statements for instance, reflecting that geographically shopping was being undertaken close by to the alleged PPOA address. Loan applications for other investment properties referring to the property as the “home address” of the taxpayer. Hmm…