Court clarifies residence tax laws

Greg Neill

Those living overseas, or planning to do so in the near future, recently received some welcome clarification from the Court of Appeal regarding our tax residence laws.

The tax residence of individuals has become a somewhat difficult issue for advisers given the apparently conflicting positions taken in the IRD's published view of the law in 2014 and the subsequent decision of the High Court in the "Diamond" case.

In December 2015, the Court of Appeal confirmed the conclusions of the High Court in that case.

Under New Zealand tax law, an individual may be tax resident here on one of two basis. First, on the basis of a "day count" test, which measures how many days an individual is present in New Zealand during a 12-month period.

Secondly, residence may also arise where an individual has what is known as a "permanent place of abode" in New Zealand. This test is less black and white and involves an evaluation of the nature and significance of an individual's connections with New Zealand.

One of the key considerations in determining whether an individual has a permanent place of abode in New Zealand is whether the individual owns or has access to property in New Zealand and the nature of the individual's connection with that property.

The IRD had caused a degree of concern in its published statement by suggesting that dwellings such as residential investment properties or holiday homes could trigger a permanent place of abode at a slightly lower threshold than many advisers would have anticipated.

That position was also somewhat at odds with earlier published statements of the IRD which said that residential property acquired exclusively for investment purposes should not be taken into account as an available dwelling for these purposes.

The Court of Appeal in "Diamond" has in many ways reinforced that earlier approach.

The Court held that "permanent place of abode" means something more than mere availability of a place to stay and implies actual use of the property by the taxpayer for residential purposes.

While the Court of Appeal's approach is welcomed, tax residence and a consideration of whether an individual has a "permanent place of abode" often remains a difficult balancing exercise and is highly dependent on the factual circumstances. It is recommended that individuals speak with their adviser if they have any concerns regarding tax residence status.

Greg Neill is head of tax advisory at Crowe Horwath in Hastings, Napier and Waipukurau. This information is general in nature and readers should seek specialist advice before making financial decisions.