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Weekly Comment 2 May 2014

1. Interpretation Statement IS 14/01 Tax residence issued on 6 March 2014 (Tax Information Bulletin Vol. 26, No. 3, April 2014) applies from 1 April 2014. I reviewed the draft version as it applied to individuals in Weekly Comment 11 January 2013, and as it applied to companies in Weekly Comment 18 January 2013. There have been some changes between the draft and the final version.

2. At the same time as IS 14/01 was issued, Inland Revenue issued Interpretation Statement 14/01 – Tax residence – Transitional operational position ("the transitional position") in Tax Information Bulletin Vol. 26, No. 3, April 2014), including a number of Frequently Asked Questions. IS 14/01 replaces Inland Revenue’s previously published statement “Income Tax Amendment Act (No 5) Rules 1989: New Residence Rules” (Public Information Bulletin No 180, June 1989). The transitional position sets out how Inland Revenue will apply interpretations based on the previous statement in future, and on the implications of having followed the approach in IS 14/01 in the past (contrary to the previous statement).

3. This week I look at the residence rules as they apply to natural persons. I continue this next week, when I will look at the transitional position and company tax residence in IS 14/01.

4. The discussion this week is organised under the following headings:

1. Relevance of residence;


2. Residence of natural persons;


3. Permanent place of abode;


4. Examples on permanent place of abode;


5. The count tests;


6. The government service rule;


7. The tiebreaker tests in double tax agreements;


8. Changes to the tiebreaker test examples from the draft version; and


9. The transitional resident rules.

Relevance of residence

5. IS 14/01 contains a new introductory section on “Relevance of residence”. Apart from determining a person’s liability to tax in New Zealand, reference is made to the importance of residence in applying the new foreign superannuation tax rules (discussed in the first 4 Weekly Comment issues this year: 3 to 24 January), and the proposed relief from the individual tax residence backdating rule for GST purposes in the Employee Allowances Tax Bill discussed in Weekly Comment 14 February 2014.

Residence of natural persons

6. IS 14/01 contains a new flowchart which “sets out the matters to be considered in establishing if an individual is tax resident in New Zealand, and shows the interrelationship between the various residence tests for individuals”.

7. The starting point in the flowchart is the 183-day rule: if a person has not been in New Zealand for 183 days, then whether the individual has a “dwelling in NZ that he/she could live in on an enduring rather than temporary basis” and whether that dwelling is a permanent place of abode becomes important.

8. The importance of a relevant double tax agreement is recognised at the outset: if a person is tax resident in New Zealand and also in a country with which New Zealand has a double tax agreement, the double tax agreement will determine what taxing rights each country has.

Permanent place of abode

9. The comment in the draft version that “the primacy of the permanent place of abode test reflects the underlying objective of the residence rules, namely to make it easier for individuals to become resident and more difficult for them to become non-resident” has been removed. Instead, there is a statement in paragraph 54 that “the goal of making it easier for people to become tax resident in New Zealand and harder to lose that status was achieved by broadening the permanent place of abode test (to include the words “whether or not they have a permanent place of abode outside New Zealand”), and also by bolstering the personal presence test”.

10. There is a discernible change in emphasis towards the permanent place of abode test making it more difficult for New Zealanders to become non-residents (as opposed to non-residents of NZ becoming NZ tax residents). It is stated in the Overview in paragraph 20 that: 11. The Commissioner’s view of what constitutes a permanent place of abode is unchanged from the draft version: it is “a place where the person dwells and sleeps and that is used as a base for their daily activities” (paragraph 35). However, it is now clearly stated, in paragraph 57 that having a dwelling in New Zealand is a pre-requisite to having a permanent place of abode here.

What is a “genuine error”

12. The Commissioner’s view is that the goal of making it more difficult to lose NZ tax residence is not undermined by requiring a dwelling in New Zealand. This is because it will be possible to retain a permanent place of abode in NZ whether or not the person has another permanent place of abode outside NZ.

13. The Commissioner prefers the “narrower interpretation” – i.e. a specific dwelling which is a “current focal point of one’s living” (a phrase use by Judge Barber in Case Q55 (1993) 15 NZTC 5,313). However, this is qualified in paragraph 67 by recognising that: 14. It is made clear that although a person must have a dwelling in New Zealand to have a permanent place of abode here, the existence of a dwelling is not determinative, and a dwelling will not, of itself, give rise to tax residence in New Zealand. It must be established that the dwelling is their permanent place of abode.

15. Since the draft was issued, case TRA 43/11 [2013] NZTRA 10 was heard in December 2013. A taxpayer working overseas following retirement from the Army and continuing to pay child support to his ex-wife and children in NZ was held to have a permanent place of abode in NZ because he had a dwelling here in the form of an investment property rented out on a periodic tenancy. The case is on appeal to the High Court. The Commissioner states at paragraphs 74 and 78 that: 16. The “material factors for determining permanent place of abode” are essentially the same as in the draft version:

1. Continuity and duration of presence in New Zealand;


2. Durability of association;


3. Nature and use of the dwelling and the person’s connection with the dwelling;


4. Intention;


5. Family and social ties;


6. Employment, business interests and economic ties; and


7. Other factors.

17. In the discussion on continuity and duration of presence, specific reference is now made to:

1. The shareholder remuneration case of Troon Place Investments Ltd v CIR (1995) 17 NZTC 12,175 (HC), in which the court found that the shareholders of the taxpayers, who were on an overseas trip for three years and one month, were resident in New Zealand under the permanent place of abode test for the duration of their absence. The shareholders had business interests in New Zealand (the businesses operated by the taxpayer companies), and were involved in the administration and management of the companies during their absence from New Zealand.


2. Case TRA 43/11, in which Judge Sinclair considered, despite the taxpayer living away from New Zealand for up to four years in the tax years in question, that he continued to have a permanent place of abode here in those years. However, Judge Sinclair noted that the taxpayer was not continuously absent during the four-year period. Rather, he made regular trips back to New Zealand, spending on average 42 days a year here.

Examples on permanent place of abode

18. There is an extension to Example 1 involving Cate, who is seconded to Canada for 3 years. The answer that she retains a permanent place of abode in NZ is unchanged, despite the fact that the home she lived in in NZ is owned by a family trust in which Cate’s wider family (siblings and their families) are beneficiaries and is rented out while Cate and family are in Canada. However, the conclusion in the example is qualified as follows: 19. There is also an extension to Example 2 involving Mike, who lived with his parents, then lived in a rented flat for 2 years, then left New Zealand indefinitely, but returned after 18 months: 20. There is a new Example 5, involving Melanie and family who sell their home and move to London so that Melanie can take up a job there. Melanie leaves in October, but her husband and children stay in NZ until the end of the school year. They retain a one-bedroom rental property in NZ. The circumstances very clearly indicate that Melanie ceased to have a permanent place of abode in NZ from the time she left in October.

21. Examples 5 to 7 in the draft version have been retained and renumbered 6 to 8. The facts and the conclusions have not changed, although the explanations have been slightly expanded (refer to paragraph 16 of Weekly Comment 11 January 2013).

The count tests

22. There have been no changes to the discussion on the count tests from the draft version. There are several examples illustrating how the tests work, which really need to be carefully read to understand how the count tests work.

The government service rule

23. There is an expanded discussion about the special government service rule in s. YD 1(7). This rule provides that any person who is absent from New Zealand in the service, in any capacity, of the government of New Zealand is treated as a New Zealand resident during the period of absence. There are 2 examples of circumstances relating to government employees:

1. A NZ government employee who is posted overseas for 4 years but continues to be a NZ tax resident; and


2. A NZ expatriate who commences working for the NZ government overseas who will not become a NZ tax resident merely because of that.

The tiebreaker tests in double tax agreements

24. There is a clear statement that a home that is let out on an arm’s length basis to an unassociated person will not be a permanent home of the landlord in terms of the residence tiebreaker article in tax treaties. It is stated in paragraph 268 that: 25. There is a slightly expanded (from the draft version) discussion on the personal and economic relations (centre of vital interests) test. The Commissioner acknowledges that: “In many circumstances personal relations will be more significant than economic relations because the location of a person’s family is often highly significant. However, the issue needs to be determined on the specific facts relating to the person.” However, the Commissioner’s preferred view is unchanged from the draft version: Changes to the tiebreaker test examples from the draft version

26. The changes to the examples merely reflect the Commissioner’s view that a home rented to a unassociated person will not be a “permanent home” for the purposes of the tiebreaker test.

27. Example 19 (previously example 15 in the draft version): the conclusion is different because the NZ home of the university lecturer on sabbatical is let under “a periodic tenancy under the Residential Tenancies Act 1986, so is terminable with a 42-day notice period if Stacey requires it as her principal place of residence”. Therefore, Stacey does not have a permanent home in NZ and is tax resident only in the UK for the purposes of the double tax agreement.

28. Example 21 (previously example 17 in the draft version): the conclusion is unchanged, but it is clarified that the Canada, Megan, has let her house in Canada to a tenant who “is not associated with or a friend of Megan’s”. Therefore, Megan does not retain a permanent home in Canada and is tax resident only in NZ for the purpose of the double tax agreement.

Transitional resident rules

29. There is a significantly expanded discussion regarding transitional residents. The point that is emphasised is regarding the starting date for transitional residence, and in particular, the back-dating of the starting date under the count test. It is stated in paragraph 226 that: 30. It should be noted, however, that, regardless of the starting date, under the rule in s. HR 8(3)(b), transitional residence status will not end until 4 years after the month in which the person acquired a permanent place of abode here or satisfied the 183-day rule, ignoring back-dating.

31. It is pointed out that the items “Temporary exemption from tax on foreign income for new migrants and certain returning New Zealanders” Tax Information Bulletin Vol. 18, No 5 (June 2006) at 103, and “Temporary exemption for transitional residents” Tax Information Bulletin Vol. 19, No 3 (April 2007) are not accurate in two respects:

1. Firstly, “Temporary exemption from tax on foreign income for new migrants and certain returning New Zealanders” Tax Information Bulletin Vol. 18, No 5 (June 2006) at 103 states that the period of transitional residence starts on the first day of the month in which the person migrates to New Zealand. However, the starting point for transitional residence is aligned with the start of a person’s tax residence in New Zealand, including when the period of tax residence is back-dated under s. YD 1(4).


2. Secondly, “Temporary exemption for transitional residents” Tax Information Bulletin Vol. 19, No 3 (April 2007) states that transitional residence lasts for 48 months after migration. However, it lasts till the end of the 48th month after the month in which the person acquired a permanent place of abode in New Zealand (which will not necessarily be at the time of migration here) or satisfied the 183-day rule.