Case Q55

Facts

The taxpayer was a university professor on a sabbatical leave to Europe between January 1990 and January 1991. While oversea, he was engaged in academic research and his income for that year included his university salary, interest on investments, dividends, rents from investment properties and overseas investment income. During this time, his house in New Zealand was rented out to tenants on a fixed term contract that could not be terminated unilaterally prior to the expiry date of 25 January 1991.

Issue

The issue in this case is that the taxpayer argued that he was not a New Zealand tax resident for period from January 1990 to January 1991. His argument was based on the facts that he left New Zealand for a period more than 325 days in a 12-month period and he did not have an “available house to use” as his home was rented out on a fixed term contract. However, the Commissioner did not agree with his argument.

Tax laws

Section YD 1 of Income Tax Act 2007

• YD (2) Permanent place of abode in New Zealand: Despite anything else in this section, a person is a New Zealand resident if they have a permanent place of abode in New Zealand, even if they also have a permanent place of abode elsewhere.
• YD (5) Ending residence: 325 days outside New Zealand: A person treated as a New Zealand resident only under subsection (3) stops being a New Zealand resident if they are personally absent from New Zealand for more than 325 days in total in a 12-month period.
• Reasons for going overseas;
• Whether the objector established a permanent place of abode out of New Zealand;
• Arrangements made by the objector concerning his home in New Zealand;
• Employment;
• Financial ties with New Zealand;
• Other ties with New Zealand;
• Length of time out of New Zealand.
• When determining residency, it is important to look at 2 tests: permanent place of abode and 325 days test. However, the permanent place of abode test is more important and can override the day test.
• In permanent place of abode, it is vital to look at the taxpayer’s house, as this can determine the position of the case. In most case, a house can determine the permanent place of abode of taxpayer and their residency.
• The court also investigate the facts and follow the checklist below:
  • Reason for going overseas
  • Whether the objector established a permanent place of abode out of New Zealand
  • Arrangements made by the objector concerning his home in New Zealand
  • Employment
  • Financial ties with New Zealand
  • Other ties with New Zealand
  • Length of time out of New Zealand
• The intentions of the taxpayer also need to take into consideration.

Taxpayer’s argument

The taxpayer argued that his house was on let for a fixed term agreement while he was overseas, thus he did not have a permanent place of abode in New Zealand for that time. He also claimed that he was overseas most of the time during that year (368 days from 21 January 1990 until 25 January 1991). Therefore, he was not a New Zealand residence for that period.

Commissioner’s argument

The Commissioner claimed that the taxpayer’s permanent place of abode was still in New Zealand, as he did not a permanent place in New Zealand and his intention was to go back to New Zealand anyway.

Court decision

In order to determine residency, the court make a checklist as following:

The judge said that although the house was on let, it is still under possession of the taxpayer. The intention of the taxpayer was also clear that their time overseas was only temporary and they intended to return to the house “They kept possession of the small basement room for storage purposes and a street level garage in which, presumably, the wife’s car was stored”.

Moreover, the taxpayer still remained a strong relationship with New Zealand: continued employment with New Zealand University, retained membership of a medical care society and other associations and clubs, maintained NZ bank accounts, derived dividends from 11 New Zealand companies.

Thus, they decided that the taxpayer was still a New Zealand residence for that period.

Decision

• When determining residency, it is important to look at 2 tests: permanent place of abode and 325 days test. However, the permanent place of abode test is more important and can override the day test.
• In permanent place of abode, it is vital to look at the taxpayer’s house, as this can determine the position of the case. In most case, a house can determine the permanent place of abode of taxpayer and their residency.
• The court also investigate the facts and follow the checklist below:
 Reason for going overseas
 Whether the objector established a permanent place of abode out of New Zealand
 Arrangements made by the objector concerning his home in New Zealand
 Employment
 Financial ties with New Zealand
 Other ties with New Zealand
 Length of time out of New Zealand
• The intentions of the taxpayer also need to take into consideration.

Reference

Case Q55 (1993) 15 NZTC 5,313