Court of Appeal confirms decision to assess taxpayer as liable for New Zealand income tax on the basis he has a permanent place of abode in New Zealand

Summary

This is an appeal from a decision of the High Court upholding the Commissioner of Inland Revenue’s ("the Commissioner") decision to assess Gerardus van Uden ("the appellant") for New Zealand income tax for the 2005 to 2009 tax years on the basis that he had a permanent place of abode in New Zealand in those years and was therefore liable to pay tax in New Zealand on his worldwide income. A 10 percent penalty on the basis the appellant had taken an unacceptable tax position was also imposed.

Impact

The decision confirms the interpretation of ‘permanent place of abode’ as set out in Commissioner of Inland Revenue v Diamond [2015] NZCA 613, (2015) 27 NZTC22-03 ("Diamond").

Facts

The appellant is a ship’s captain. For the past 40 years he has worked for an overseas shipping company, China Navigation Company Ltd. On average, he is at sea for approximately eight months every year.

In January 1980 the appellant married. He lived with his first wife in the Philippines until late 1987. He moved with his family to New Zealand in 1987 and lived in Mangere Bridge until 1995 when he and his first wife separated and then divorced.

The appellant remarried in 1998 and lived with his wife at 27 Evelyn Road. When the appellant met his wife she was living at 27 Evelyn Road as part of a matrimonial settlement. In April 1997 she transferred 27 Evelyn Road to a family trust. The appellant first lived with his wife at 27 Evelyn Road in November 1998 and they have, for the most part, lived there when they have returned to New Zealand thereafter. The Commissioner says that 27 Evelyn Street is the appellant’s permanent place of abode in New Zealand for the tax years 2005 to 2009.

Since January 1980 the appellant has been enrolled in his employer’s non-contributory superannuation fund (“the Provident Fund”). He also owned a small parcel of units in a Hong Kong Unit Trust.

The appellant filed New Zealand income tax returns until and including the 2004 tax year, albeit he only returned approximately half of his salary in New Zealand. For the income years ended 31 March 2005 and 31 March 2006 the appellant 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. In the years ended 31 March 2008 and 31 March 2009 he filed non- resident tax returns.

Decision

The Court upheld the conclusion reached by the Tax Review Authority (“the TRA”) and the High Court that, during the tax years in dispute, the appellant had a permanent place of abode in New Zealand. Further, the appellant was liable to pay tax on his interest on his employer’s superannuation fund and an unacceptable tax position penalty.

Was 27 Evelyn Road a permanent place of abode in New Zealand for the appellant in the 2005 to 2009 tax years

The Court considered s OE of the Income Tax Act (“ITA”) 1994. Subsections (2) and (3) of s OE 1 ITA 1994 provide two bright line tests, based on aggregate days in New Zealand in any period of 12 months. However, subsection (1) provides an overriding provision as to residence.

The Court referred to the meaning of the term “permanent place of abode” as discussed in Diamond. The Court considered the Diamond test calls for “an integrated factual assessment, directed to determining the nature and quality of the use the taxpayer habitually makes of a particular place of abode.” The Court found the objective, integrated factual assessment did not support the appellant’s characterisation of 27 Evelyn Road as a convenient place to stay and that he did not have the intention of using it as a home

The Court found that it is unrealistic to allow the Trust structure to obscure the fact that Mr van Uden availed himself of 27 Evelyn Road while he was in New Zealand and made it his home.

The Court was satisfied that the appellant had a permanent place of abode in New Zealand. The individual factors listed in Diamond supported this conclusion:

Continuity or otherwise of the taxpayer’s presence in New Zealand and in the dwelling

The appellant has had a continuous presence in New Zealand since 1957 except for a short stint in the Netherlands and later the Philippines. In the relevant tax years the appellant spent approximately eight months a year at sea however when he was not on the ship or travelling he would return to New Zealand and when he was not visiting family he lived at 27 Evelyn Road.

The duration of that presence

27 Evelyn Road has been available to, and used by, the appellant for approximately 12 years from November 1998 to June 2010.

The durability of the taxpayer’s association with the particular place

The appellant maintained significant ties with 27 Evelyn Road exhibited in both practical and financial ways. The appellant incurred regular household expenditure at a variety of stores near the 27 Evelyn Road. Further the 27 Evelyn Road address was used for SKY TV, motor vehicle registration, bills, bank statements, insurance policies and investments.

The closeness or otherwise of the taxpayer’s connection with the dwelling

While the appellant does not own the property, as seen in Case H97, a taxpayer does not need to own a property in his or her own name to have a permeant place of abode there. It is reasonably evident that the appellant had a close connection to 27 Evelyn Road. Whenever he returned to New Zealand and was not staying on the ship, travelling or visiting relatives he would stay at 27 Evelyn Road. Unlike the four rental properties owned by the trust, 27 Evelyn Road was not formally let until 2010. In a loan application for funding to purchase 29 Evelyn Road, 27 Evelyn Road is referred to as their home.

Permanent not temporary place of abode

The Court found 27 Evelyn Road was a permanent place of abode rather than a temporary place of abode. The property was always available to the appellant when he returned to New Zealand. The only time it was let was informal and when the appellant was not in the country.

Other permanent place of abode

The appellant no longer maintains that he has a permanent place of abode outside of New Zealand.

Mr Van Uden’s superannuation account: taxable foreign investment fund income

The appellant argued that because contributions to his account in the Provident Fund are paid by his employer, and he is not required to make any contributions himself, then there is no "cost of expenditure incurred by or on behalf of the appellant as regards the Provident Fund".

Section CG 15 ITA applies to the 2005 tax year and was enacted as such in 1993 (as part of the Income Tax Act 1976). The section had originally referred only to the aggregate cost or expenditure incurred by the person. The words “or on behalf of” were added several months later. The Court found the explanatory note to the Taxation Reform Bill (No 7)1993 makes the point clear. Parliament clearly intended to include employer contributions to superannuation funds. As Venning J noted in the High Court, it is the employee who benefits from those contributions – to the extent, the cost or expenditure is incurred by or on behalf of them.

In the ITA 2004 and ITA 2007 (which apply to the 2006 to 2009 years), s CQ 5(1)(d) (the equivalent of s CG 15(2)(d)) brings an interest within the FIF rules if the total cost of attributing interests in FIFs that the person holds is more than $50,000. The Court agreed with the Commissioner’s submission that there is no requirement that any particular person incurred a cost, a comprehensive answer to the appellant’s challenge as regards those tax years.

The time bar

The assessment for the 2005 to 2008 tax years became time barred from reassessment pursuant to s 108(1) of the Tax Administration Act 1994 ("the TAA") on 31 March 2013. Notices of reassessment for those time barred years were subsequently issued on 24 February 2014. The Court considered whether, before that, the Commissioner had exercised the power under s 108(2) to lift the time bar.

The Court adopted the description of events from Venning J’s judgment in the High Court. The Court found that there can be no challenge to Venning J’s reasoning that Mr Young (of the Disputes Unit) had an authority to make an opinion under s 108(2) and he expressly stated he exercised his delegation under that section. It was, the Judge said, that opinion that was the necessary requirement for the purposes of s 108(2) rather than the language used to record it

Further, as noted in Great North Motor Company Ltd (in rec) v Commissioner of Inland Revenue [2017] NZCA 328; (2017) 28 NZTC 23-022 at [33], when considering a tax challenge under part 8A of the TAA, the TRA is obliged to review the ruling de novo. That de novo process having been followed, and the TRA having confirmed those assessments, there is no room for any further challenge pursuant to s 108 of the TAA.

The unacceptable tax position penalty

The Court found that the objective assessment of the evidence supports the conclusion that the appellant’s contention that he was not tax resident in New Zealand in the relevant years was not “about as likely as not to be correct”.