Residency relief for expat landlords

MEDIA RELEASE – for immediate release 23rd September 2014

Residency relief for expat landlords

Rebecca Armour – KPMG head of International Executive Services

Kiwi expats with property investments in New Zealand should be breathing a collective sigh of relief following the release of a recent New Zealand High Court decision on residency says Rebecca Armour, head of KPMG’s International Executive Services tax team.

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

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 Mr 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 Mr 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 ordinary sense of the meaning of those words.

Of significant concern was the TRA’s decision to uphold penalties imposed by Inland Revenue on Mr 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”.

Armour says it is pleasing that the High Court recognised the inherent complexity of the residency rules meant that the Court would have little difficulty concluding that Mr Diamond had not taken an unacceptable position in regarding himself as not tax resident.

According to Armour, 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. That Interpretation Statement 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.

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 says Armour. However the Interpretation Statement is intended as guidance only and any residency decision will still need to be made based on the facts.

Armour says that 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. 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.

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