Individual Residence Test of Permanent Place of Abode Clarified

Diamond v CIR [2014] NZHC 1935
 
In a welcome clarification of the law relating to individual tax residence, the High Court has overturned the perplexing decision of the Taxation Review Authority in Case 10/2013 [2013] NZTRA 10, (2013) 26 NZTC 2-009.
 
At the heart of the argument is the meaning of the phrase “permanent place of abode” (“PPOA”), which is the overarching test of individual residence and applies regardless of the position under the so-called “day-count” tests, which have a deeming function in relation to residence.
 
The nub question for the Court was whether a property which Mr Diamond owned in New Zealand but which had never been used by him as a home here could be a PPOA. Despite Mr Diamond having strong family ties to this country, through his children being here and strong economic ties, in that most of his earned income was spent here meeting the costs of child support and mortgage payments on investment property, he lived in rented accommodation or with friends whenever he visited and did not use his investment property at all.
 
In the TRA the core decision that led to him being found to have a PPOA in New Zealand was that the investment property was available to him and so could have been used as a dwelling here at any time he had wanted to do so. That combined with the connections already mentioned meant that there was a PPOA as far as the TRA was concerned.
 
Clifford J has disagreed and in a closely reasoned and crisply expressed judgment has refocused the PPOA test as well as raising some interesting views about the day-count deeming tests.
 
The Judge approached the issue first by considering the ordinary meaning of the words comprising PPOA. Echoing a number of earlier authorities he said that “permanent” means something designed to continue indefinitely without change – the opposite of temporary. An abode is an habitual residence, house or home and to abide (from which the past tense “abode” is taken) meant to stay or remain, to reside or dwell. “Place” can mean itself a residence or dwelling but could also mean a portion of a space and the word “in” required that it be included in this country.
 
The Judge considered that taken together the phrase to have a PPOA in New Zealand means to have a home here. On this basis the investment property had never been used as a home and so could not be a PPOA.
 
The Judge then tested his conclusion against the purpose for which the legislation was enacted. He did this by considering the general legislative context and the objectives of the Income Tax Act. The historical development of the test did not support the Commissioner’s approach. Little assistance could be drawn from the Australian decision of Applegate because the Australian reference to a PPOA was an exclusion form a domicile based test of tax residence and so unlike New Zealand’s test.
 
The decision means that the “shopping list” of factors often cited by the Commissioner as leading to a decision whether there is a PPOA in this country is not the correct starting point in making that decision. Instead there must be a dwelling that can be seen to be a home. The shopping list of factors is likely to remain as indicia of permanence but even then their relevancies likely to be less when the question will be whether there is a home here or not, in the sense of the being a dwelling that is habitually used as a pace to abide in New Zealand.
 
In addition to the PPOA issue the Judge’s decision analyses the day-count test that applied in the relevant years alongside the PPOA test. He concludes that the test provides that you can be deemed to be resident and deemed not to be but that between those tests there is a no-man’s land where no deeming occurs and absent a PPOA no residence arises. This is particularly important where a person meets the 183 day threshold to become resident and then neither meets that test nor the test for deemed non-residence in a later period of 12 months. The Judge suggests that the deemed residence does not continue and has to be reconsidered on a rolling 12 month basis.
 
The law relating to individual residence was changed with the enactment of the Income Tax Act 2007. Section YD1 of that Act (effective for the 2009 income year onwards) contains a provision which specifically states that if a person is resident only as a result of the day-count test, they stop being resident if they are personally absent for a period of 325 days in total in a 12 month period. It is still not entirely clear how the two day-counts work together but it seems that the change made in the 2007 Act was intended to make it clear that the day-count to commence deemed residence would continue in effect until deemed non-residence is triggered, even if the day count for deemed residence was not met in a subsequent period of 12 months.
 
It is not yet known whether the Crown will appeal the decision. The observations of the Judge on the day-count tests are obiter and so may not be followed by IRD. The decision over the meaning of PPOA may be considered by IRD as overstating the level of connection required with New Zealand in order for tax residence to be triggered. The matter may not yet be finally determined.       
 
© G D Clews 2014