The Diamond case
confirms that mere
availability of a NZ
property is not
sufficient to create a
continuing taxable
connection to NZ. It
is how that property
is used, or intended
to be used, that is
important.
Contact us
Rebecca Armour
Partner, Head of Global Mobility
T: +64 9 367 5926
Darshana Elwela
National Tax Director
T: +64 9 367 5940
1 March 2016
Issue 1 Regular commentary from our experts on topical tax issues
A Diamond in the rough:
taxpayer wins residence case
Snapshot
A New Zealand Court of Appeal decision, Diamond v CIR (2015), impacts New
Zealanders looking to move overseas, current expatriates, and those looking to
invest or spend time here.
Mr Diamond was a New Zealand citizen who left to work as an overseas security
consultant in 2003 (and continues to live overseas). Inland Revenue sought to treat
him as tax resident due to ownership of a New Zealand rental property which, in the
Commissioner’s view, amounted to a “permanent place of abode” (PPOA) here.
Inland Revenue argued that a PPOA arose as Mr Diamond could live in the property.
This was regardless of whether it was his home or whether he had actually lived
there previously.
The Court of Appeal found that a New Zealand property which a person owns, but
has never lived in, nor intends to live in, cannot be the foundation of their PPOA. Mr
Diamond had insufficient connection to New Zealand for him to have a PPOA and be
tax resident here. He was therefore not subject to tax in New Zealand on his
worldwide income.
Contact us
Rebecca Armour
Partner, Head of Global Mobility
T: +64 9 367 5926
Darshana Elwela
National Tax Director
T: +64 9 367 5940
The Court of Appeal decision is a welcome confirmation of the limits of the PPOA
rule. We understand Inland Revenue will not be appealing this latest decision to the
Supreme Court.
Why the Diamond case matters
Broad implications for those with New Zealand connections
The Diamond case has broad implications. It goes to the heart of whether someone
has sufficient connection to New Zealand, even though living offshore.
The concern for those with investment properties in New Zealand, or renting out
their family home while away, is that such property could give them a PPOA in New
Zealand. This would give New Zealand taxing rights over their worldwide income.
Permanent Place of Abode – the Inland Revenue view
A person is tax resident if they are here for more than 183 days in a 12 month
period, or have a PPOA.
To have a PPOA, the Commissioner of Inland Revenue (the “Commissioner”)
requires the availability of a dwelling in New Zealand.
In the Commissioner’s view:
• A dwelling does not need to be directly owned in order to be objectively
regarded as available.
• Properties held in trust, through corporate vehicles, or owned by other family
members (e.g. accommodation at a parent’s house) may constitute a dwelling.
• Investment properties could be considered a dwelling depending on the
circumstances. Objectively, the property could be used as a place to live.
Factors such as the property’s location, suitability and whether the person has
previously lived there would need to be considered.
The New Zealand Courts focussed on the latter criterion in the Diamond case.
The Diamond Case – a history
First the pertinent facts:
• Mr Diamond left New Zealand in 2003 to work overseas as a security
consultant. He currently resides overseas.
• Mr Diamond was separated from his wife at the time of leaving (and later
divorced) and has children. His ex-spouse and children remained in New
Zealand.
• Financial support was provided by Mr Diamond. He also visited New Zealand
every five to six months to see his immediate and extended family.
• Mr Diamond holds New Zealand property investments (including some jointly
with his ex-wife).
The scorecard
Taxation Review Authority (Commissioner wins)
The Taxation Review Authority (TRA), in 2013, ruled in favour of the Commissioner.
It held that one of Mr Diamond’s rental property investments was an available
dwelling. This, along with his other New Zealand connections, meant he had a
PPOA.
Despite Mr Diamond never having lived there, the TRA held that the rental property
theoretically could be made available at short notice to him.
Further, the property was close to where Mr Diamond’s ex-wife and his children
lived. Other links to New Zealand emphasised by the TRA were Mr Diamond’s
Contact us
Rebecca Armour
Partner, Head of Global Mobility
T: +64 9 367 5926
Darshana Elwela
National Tax Director
T: +64 9 367 5940
family connections: his continuing relationship with his children and financial
relationship with his ex-wife, including provision of financial support and regular
visits.
High Court (Taxpayer wins) and Court of Appeal (Taxpayer wins)
Mr Diamond successfully appealed to the High Court in 2014. The Commissioner
appealed that decision last year.
Both the High Court and the Court of Appeal ruled in favour of Mr Diamond. They
held that to have a PPOA means essentially to have a home, which on the facts he
did not, in New Zealand.
We understand that the Commissioner is not appealing the Court of Appeal decision
to the Supreme Court.
Our view
What are the important takeaways?
The Court of Appeal decision contains a number of important principles for
determining a person’s New Zealand tax residence:
• The mere availability of a property in New Zealand is not sufficient to create a
PPOA. How that property is used or intended to be used is what is important.
Based on the decision, a property which a person has never lived in and only
ever intends to use as an investment will not constitute a place with which they
have enduring and permanent ties.
• The focus of the analysis should be whether the person, not members of their
family, have a PPOA. The fact the person provides a home for their family in
New Zealand, while they live elsewhere, is not necessarily sufficient to
establish a PPOA for them.
• The Court recognised that the consequences of having tax residence in New
Zealand could be serious. An interpretation beyond the ordinary and natural
meaning of PPOA should not be adopted. In particular, the Court cautioned
against widening connections establishing residence to protect the New
Zealand tax base against erosion.
KPMG submission on PPOA
In its review of the legislative history, the Court referred to a KPMG submission on a
proposed 2007 legislative change to replace PPOA with “permanent home”.
KPMG argued that this change should not proceed on the basis the law would no
longer include various nuances concerning how the term PPOA applies in practice.
The Court found the retention of the PPOA wording to be instructive. Parliament did
not intend the test should depart from the concept of a “home” to broaden the tax
base. We support this very prescient view by the Court.
Care still needs to be taken
With the Commissioner not appealing, we expect Inland Revenue to update its tax
residence interpretation statement and operational guidance accordingly.
Although the Diamond case provides some welcome clarity, it does not remove the
uncertainty about tax residency completely.
For example, expatriates that have rented out their New Zealand family home, or
who buy property which could be used as the family home, are still arguably at risk.
Their status will depend on past and prospective ties to the New Zealand property,
the time away, as well as other links to New Zealand.
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This will necessarily involve a holistic understanding and consideration of a person’s
facts and circumstances. Therefore, care still needs to be taken when applying the
residence rules.
For further information
Rebecca Armour Darshana Elwela
Partner, Head of Global Mobility Services National Tax Director
Auckland Auckland
Phone: +64 9 367 5926 Phone: +64 9 367 5940
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