The IRD has issued a draft interpretation statement on the meaning of Permanent Place of Abode (“PPOA”). The concept of PPOA is central to that of tax residence. Even if a person is absent from NZ for a sustained period, if they retain a PPOA here they remain tax resident. If that is so, they remain liable for NZ tax on worldwide income unless a double tax agreement (“DTA”) applies to prevent that. It does not matter that you may also have a PPOA in another country. As long as you have one in NZ you are at risk of NZ taxation.
This is an obvious concern for the expat community, many of whom live and work in countries with which NZ does not have a DTA. If they retain a PPOA in NZ, their income from overseas activities may still be taxed here even if they are away from NZ for many years.
The interpretation statement addresses the elements that make up a PPOA and in particular the concept of there being a dwelling here which is available for use. The concept of PPOA is based on a broad consideration of the factors that make up one’s family, professional, business and economic life but an important element, and one without which it is arguably difficult to assert the existence of a PPOA, is that there must be somewhere that a person can physically abide in the country that is available to them with sufficient frequency and continuity and certainty to be regarded as permanent.
The obvious issue that this has always raised is how the retention in NZ of a holiday home might figure in an assessment of PPOA. But the interpretation statement is being seen to raise other risks as well, namely that more informal arrangements for accommodation during any return to NZ could signal a PPOA here, even the ability of an expat to have accommodation here with relatives.
The essential change concerning holiday homes is that the IRD is suggesting that temporary rental arrangements which prevent an expat using the holiday home while they are out of NZ will not necessarily mean that the home is not available to them so as to trigger a PPOA. The statement seems to say that because the home is or may be available at some future time, it is available throughout the relevant absence from NZ.
There are number of observations that might be made about that:
1. Residence has to be determined year by year. That is because the tax system applies periodically. Circumstances have to be considered and may change year by year.
2. If a home is unavailable to you because it is subject to a tenancy to someone else for the whole of a tax year, it is difficult to see how it is available for a PPOA consideration in and for that year.
3. The fact that the tenancy may terminate at some stage in the future could be relevant if such termination meant that the holiday home came free for use at a future time but that does not mean that it is available at any other time.
It seems, therefore, that the analysis for the suggested change to include prospective availability of a holiday home during a period of absence from NZ may not be all that strong. But that does not mean that rental arrangements will always be a robust defense to a PPOA argument. Neither will trust ownership, if the holiday home in NZ is routinely available from trustees to expat beneficiaries.
There are clear risks to expats working without the protection of DTA coverage that the IRD will use the existence of retained connections with NZ such as a holiday home to assert a continuing right to tax expat income, despite it having been earned overseas and the expat being absent from NZ for many years.
© G D Clews