tax rulings

Court decision clarifies residency issue for New Zealand expats

by Ray Clancy on September 24, 2014

Kiwi expats with property investments in New Zealand should be breathing a collective sigh of relief following a High Court decision on residency.

The New Zealand High Court has overturned a 2013 Taxation Review Authority (TRA) decision that a New Zealander living and working overseas for more than 10 years was still a New Zealand tax resident and had taken an unacceptable tax position by claiming that he was not.

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The decision by the High Court could help set a precedent for other New Zealand expats

At the TRA, the ownership of a New Zealand investment property was considered a sufficiently strong tie to New Zealand to establish his tax residence under New Zealand’s residence rules.

This was despite the fact that the taxpayer, Mr. Diamond, had been living outside New Zealand for a significant period and had never lived in the investment property.

The TRA found that the rental property investment was an available dwelling to Diamond and was in proximity to where his ex-wife and children lived, the inference being that it was likely that he would choose to live there were he to move back to New Zealand.

In contrast, the High Court focused on the actual use of the investment property by Diamond and his intentions in relation to that property, finding that as he had never lived there, it could not be considered his home in New Zealand and was therefore not a PPOA in the normally recognized sense.

Of significant concern was the TRA’s decision to uphold penalties imposed by Inland Revenue on Diamond for taking an unacceptable tax position on the basis that his claim of non-residence did not meet the standard of being ‘about as likely as not’ to be correct.

According to Rebecca Armour, head of KPMG’s International Executive Services tax team, it is pleasing that the High Court recognised the inherent complexity of the residency rules.

She said that the outcome of the High Court decision is largely consistent with the approach being taken by the Inland Revenue in its recent Interpretation Statement on Tax Residence, which acknowledges that investment properties and holiday homes will not generally be treated as a person’s permanent place of abode, although the existence of such properties in New Zealand could still be taken into account in considering the strength of a person’s ties to New Zealand.

She pointed out that it is not clear whether the Interpretation Statement (and/or accompanying Inland Revenue Operational Guidance) will be updated to reflect the High Court’s decision.  However, the Interpretation Statement is intended as guidance only and any residency decision will still need to be made based on the facts.

‘The decision should provide New Zealanders who are currently living and working overseas and have investment property in New Zealand with some additional comfort, particularly if they have never lived in the property,’ said Armour.

‘Caution will still need to be exercised by expats if their investment properties were ever their primary residence, or if they intend to return to New Zealand and use the property as a home in the future,’ she added.

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