TRA considers residency of individuals

Summary

This is the first case involving an individual’s residence status since the Court of Appeal's decision in Commissioner of Inland Revenue v Diamond [2015] NZCA 613 (“Diamond”). The Taxation Review Authority ("the Authority"), applying Diamond, considered that the disputant, a professional mariner, had a permanent place of abode in New Zealand in the years in dispute.

Facts

The disputant was born in New Zealand. His parents emigrated from Europe and the disputant holds a New Zealand passport as well as one from his parents' homeland.

In the mid-1960s the disputant and his family went back to his parents' homeland where they lived for about 18 months before returning to New Zealand. Upon leaving school, the disputant joined the merchant navy. Since that time he has been employed in various roles by the same shipping company. In 1980 the disputant was married in Asia. He and his wife had a son and the disputant adopted his wife's two daughters from a previous relationship. In late 1987 the family moved to New Zealand.

In 1995, the disputant and his wife separated. The matrimonial home was transferred to his wife and the disputant purchased a unit so that he had somewhere to stay on visits to New Zealand to see his son who was then at secondary school.

In 1998 the disputant met and married his present wife. His wife lived at 27 Brown Road which had previously been transferred to her as a part of a matrimonial property settlement. In 1997 she established a family trust ("Trust") and 27 Brown Road was transferred to her and her solicitor as trustees of that Trust. The disputant became trustee and beneficiary of the Trust in 1999.

In 2000 the disputant's wife began to accompany the disputant on his voyages at sea. Customs records showed that in the 2001 to 2004 tax years, he spent on average 3.5 months in New Zealand during which time he stayed at 27 Brown Road.

The disputant and his wife formed a partnership which eventually owned four rental properties. In February 2004 these properties were sold to the Trust together with furniture and other items owned by the disputant.

The disputant transferred funds to New Zealand to meet the Trust's outgoings and other expenses by transferring a portion of his US dollar salary into his Hong Kong dollar account with a "salary" notation. These funds were then transmitted from this account to the Trust’s bank account in New Zealand.

In 2006, the Trust purchased 29 Brown Road. This property was tenanted until June 2009. This house was then demolished and a new home was built and completed in mid-2010. Around this time, 27 Brown Road was tenanted and the disputant and his wife moved into 29 Brown Road. 27 Brown Road was eventually sold in October 2014.

The disputant had previously filed New Zealand income tax returns returning his salary. However, for the income years ended 31 March 2005 and 31 March 2006 the disputant filed nil income tax returns. In the year ended 31 March 2007 he filed a non-resident tax return disclosing a small loss for the year and in the years ended 31 March 2008 and 31 March 2009 he filed non-resident tax returns.

In the tax years in dispute, the disputant also had foreign investment fund (FIF) interests. In particular, the disputant was and continues to be a member of his employer’s superannuation scheme which is funded by contribution from his employer.

The Commissioner of Inland Revenue (“"he Commissioner") assessed on the basis that the taxpayer was a New Zealand resident for tax purposes and therefore was liable for income tax. The taxpayer disputed those assessments.

Decision

The Authority dismissed the disputant's challenge.

Permanent place of abode

The Authority confirmed that the test in Diamond (Diamond at [49]) was relevant and noted that the factors referred to by the Court of Appeal were not intended to be exclusive. Some factors may be more applicable than others, and what is required is an integrated and factual assessment in determining the nature and quality of the use the taxpayer habitually makes of a particular abode.

The Authority agreed with the Commissioner’s approach in examining these factors and adopted that analysis.

In summary the disputant despite his extended periods at sea was found to have maintained an on-going and close association with 27 Brown Road over many years.

His salary was used to meet the Trust’s loan obligations, pay insurances, utilities and other expenses. Vehicles belonging to the disputant, his wife and the Trust were registered to 27 Brown Road and he maintained SKY subscription for use when at the property. This address was used by the disputant for mail including mail related to the Trust’s rental properties. The disputant’s payslips were also addressed to 27 Brown Road when he was not at sea. The disputant was also registered on the Electoral Roll at this address in 2008. Credit card expenses in periods when the disputant resided at 27 Brown Road for everyday purchases were consistent with being resident at that location.

27 Brown Road was largely available for the disputant’s use apart from one occasion in 2004 when the disputant and his wife did not return to New Zealand for a lengthy period. During this time there was a house sitter who paid a peppercorn rental. Otherwise the property was not rented and friends and family stayed at the property on occasion. Apart from their absence in 2004 the Authority found that there was no particular change in pattern of usage of the property over this period.

FIF income

The disputant contended that the cost of his FIF investments did not exceed the statutory de minimis because his employer incurred the costs in relation to the superannuation scheme. The Authority considered that the de minimis exception was not restricted to cost or expenditure incurred by the person (or by the party acting as agent for that person) and that contributions made by the disputant’s employer to the superannuation fund on his behalf were intended to be included within this definition. The Authority noted that on the disputant’s interpretation a taxpayer could avoid the application of the FIF rules so that contributions made by an agent of the taxpayer had no cost is artificial and contrived as these clearly formed a part of his salary package.

Timebar/process issues

Having found the disputant to be a New Zealand resident for tax purposes in the tax years in dispute, it followed that the disputant had failed to disclose income and therefore grounds existed under s 108 (2)(a) of the Tax Administration Act 1994 ("TAA") for the Commissioner to amend the time-barred assessments.

The Authority was satisfied that the requisite opinion had been formed under s 108(2) and that it is not necessary that the same person that holds the requisite opinion makes the amended assessments. Following the decision in Edwards v Commissioner of Inland Revenue [2016] NZHC 1795, Judge Sinclair was satisfied that even if there was any invalidity in the forming of that opinion and/or in the process of exercising the power to amend the assessments under this subsection (which she did not accept), she considered that such matters are “cured” by the de novo hearing before the Authority who must reach its own conclusion.

Shortfall penalties

In weighing up all relevant factors, the Authority found that the disputant, having failed to meet the standard of being "about as likely as not to be correct", was liable for shortfall penalties under s 141B of the TAA for taking an unacceptable tax position in relation to the years in dispute (reduced by 50% for previous behaviour under s 141FB).