The Court of Appeal has held that a ship’s captain had a permanent place of abode in New Zealand in the 2005 to 2009 tax years and was therefore liable to pay tax in New Zealand on his worldwide income. The Court of Appeal also upheld the Commissioner’s imposition of a shortfall penalty on the basis that the taxpayer had taken an unacceptable tax position in the years in dispute.

The background

The taxpayer held both a New Zealand and a Dutch passport. He was born in New Zealand in 1957 to Dutch migrant parents. In January 1975, the taxpayer signed on with China Navigation as a navigating cadet. In July 1994, he was promoted to master, with the title of captain. Since then, as well as being a ship’s captain, the taxpayer had undertaken other jobs within China Navigation including, since October 2009, fleet commodore. Typically, the taxpayer was posted to a ship for a period around four months and was typically at sea for eight months every year.

The taxpayer married his first wife in 1980 and lived in the Philippines until late 1987. He adopted his wife’s two daughters from a previous relationship. Their son was born in August 1983. In 1987, the family moved to New Zealand and purchased a house where they lived until 1995 when the taxpayer and his wife separated and then divorced.

The following year the taxpayer purchased an apartment in order to have a place he could stay in when he returned to New Zealand. He stayed in the apartment on seven occasions between 1996 and 1998.

In 1998, he met and married his present wife (Mrs van Uden). Mrs van Uden had been living at 27 Evelyn Road when she met the taxpayer. In April 1997, she transferred the property to a family trust (the trust) she had established the previous year. The taxpayer and his wife had, for the most part, lived at 27 Evelyn Road from November 1998.

The taxpayer filed New Zealand income tax returns until and including the 2004 tax year but only returned approximately half of his salary in New Zealand. For the income years ended 31 March 2005 and 31 March 2006, the taxpayer filed nil income tax returns. In the year ended 31 March 2007, the taxpayer filed a non-resident tax return disclosing a small loss for the year. In the years ended 31 March 2008 and 31 March 2009, the taxpayer filed non-resident tax returns. Following an audit, the Commissioner assessed the taxpayer for income tax on his overseas income for the years ended 31 March 2005 to 31 March 2009 inclusive on the basis that 27 Evelyn Road was the taxpayer’s permanent place of abode in New Zealand during those years. The taxpayer unsuccessfully disputed the Commissioner’s assessments before the Taxation Review Authority (TRA) (reported as Case 1/2017 (2017) 28 NZTC ¶4-000, [2017] NZTRA 01).

The TRA referred to the Court of Appeal’s decision in C of IR v Diamond (2015) 27 NZTC ¶22-035, [2015] NZCA 613 and the non-exhaustive factors in that case. The TRA concluded the taxpayer had maintained an ongoing and close association with the property at 27 Evelyn Road over many years. The taxpayer had regularly stayed at the property over a period of 12 years and, while he was not a beneficial owner of the property, he was a trustee and discretionary beneficiary of the trust and the property was available to him for use. The TRA concluded that the taxpayer had a permanent place of abode in New Zealand in each of the income years in dispute so that he was resident in New Zealand for the purposes of the relevant Income Tax Acts. The TRA also concluded that the taxpayer was liable to pay tax on his interest in his employer’s superannuation and on foreign investment unit trusts owned by him under the FIF rules. The TRA accepted the Commissioner had power to amend the assessments that were otherwise time-barred for the 2005 to 2008 years inclusive. Finally, the TRA upheld the shortfall penalties proposed by the Commissioner.

The High Court dismissed the taxpayer’s appeal from the TRA decision (reported as Van Uden v C of IR (2017) 28 NZTC ¶23-037). Agreeing with the TRA, the High Court concluded that for the relevant years, the taxpayer had habitually resided at 27 Evelyn Road when he was not at sea and in New Zealand. It was more than just a place available to him. By 2004 and through to 2009, he had made it his home in New Zealand. The taxpayer appealed to the Court of Appeal.

The issues

The issues were as follows:

(1) Did the taxpayer have a permanent place of abode in New Zealand in the 2005 to 2009 tax years?

(2) If he did:

(a) was he liable to pay tax on his interest in his employer’s superannuation fund

(b) was the Commissioner’s assessment for the 2005 to 2008 tax years time-barred, and

(c) was the Commissioner right to impose an unacceptable tax position penalty?

The Court of Appeal’s decision

The Court of Appeal dismissed the taxpayer’s appeal and found as follows:

Residence

  1. The conclusion reached by the TRA and the High Court that, during the tax years in dispute, the taxpayer had a permanent place of abode in New Zealand, was upheld.

Permanent not temporary place of abode

  1. The property at 27 Evelyn Road was a permanent place of abode rather than a temporary place of abode. As the Court of Appeal noted in C of IR v Diamond, this factor refers to the continuing availability of a place on an indefinite but not necessarily lasting basis. 27 Evelyn Road was always available to the taxpayer when he returned to New Zealand. The only time it was let was informal and when the taxpayer was not in the country.

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

  1. The taxpayer 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 taxpayer spent approximately eight months a year at sea. However, when he was not on the ship or travelling, he would return to New Zealand. When he returned to New Zealand in the relevant tax years and was not visiting family, he lived at 27 Evelyn Road. This factor supported the conclusion of the taxpayer having a permanent place of abode in New Zealand.

Duration of taxpayer’s presence

  1. 27 Evelyn Road had been available to, and used by, the taxpayer for approximately 12 years — that is, from November 1998 to June 2010. This factor pointed in favour of the taxpayer having a permanent place of abode in New Zealand.

Durability of taxpayer’s association with particular place

  1. The taxpayer had maintained significant ties with 27 Evelyn Road, and these were exhibited in both practical and financial ways. The key evidence was the taxpayer’s credit card statements for the relevant yeas. These showed that, in the years in dispute, the taxpayer incurred regular household expenditure at a variety of stores near the property in question.
  2. The balance of the evidence supported this conclusion. The taxpayer acknowledged that he paid for a SKY TV account at the property during the relevant tax years. The property was also the registered address for various motor vehicles belonging to the taxpayer and his wife. The taxpayer had used the 27 Evelyn Road address as the address for bills, bank statements, insurance policies and investments. This factor pointed in favour of the taxpayer having a permanent place of abode in New Zealand.

Closeness or otherwise of taxpayer’s connection with the dwelling

  1. Although the taxpayer did not own the property, a taxpayer did not need to own a property in his or her own name to have a permanent place of abode there (Case H97 (1986) 8 NZTC 664 cited).
  2. It was reasonably evident that the taxpayer had a close connection with 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 the adjoining property signed by Mrs van Uden in her husband’s absence, 27 Evelyn Road was referred to as their home. Although a mortgage broker had filled out the form, the mortgage broker’s use of that term was indicative of his assessment of the character of the relationship Mr van Uden had with that address and one that Mrs van Uden had endorsed by signing the application.

Foreign investment fund (FIF) income

  1. The taxpayer was liable to pay tax on income earned from his employer’s non-contributory superannuation fund (the Provident Fund). By 2005, the balance of the taxpayer’s account in the Provident Fund was approximately $852,730. His interests in a Hong Kong Unit Trust were also taxable on the basis of aggregation.
  2. Section CG 15 applied to the 2005 tax year and was enacted as such in 1993 as part of the Income Tax Act 1976. Although the section had originally referred only to the aggregate cost of expenditure incurred by the person, the words “or on behalf of” were added several months later. Parliament clearly intended to include employer contributions to superannuation funds. As noted by the High Court, it was the employee who benefited from the payments so to that extent, the cost of expenditure was incurred by or on behalf of them.
  3. In the 2004 and 2007 Income Tax Acts (which applied to the 2006 to 2009 years), s CQ 5(1)(d) (the equivalent of s CG 15(2)(d)) brought an interest within the FIF rules if the total cost of attributing interests in FIFs that the person held was more than $50,000. There was no requirement that any particular person incurred a cost.

The time bar

  1. 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 on 31 March 2013. Notices for reassessment for those time-barred years were subsequently issued on 24 February 2014.
  2. Mr Young, the manager of the Inland Revenue Dispute Review 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 that opinion that was the necessary requirement for the purposes of s 108(2) rather than the language used to record it. The assessments that followed were consistent with that opinion and were validly issued.
  3. When considering a tax challenge under pt 8A of the Tax Administration Act, the TRA is obliged to review the ruling de novo. That de novo process having been followed, and the TRA having confirmed the assessments, there was no room for any further challenge pursuant to s 108 of the Tax Administration Act (Great North Motor Co Ltd (in rec) v C of IR (2017) 28 NZTC ¶23-022, [2017] NZCA 328 cited).

Unacceptable tax position penalty

  1. The shortfall penalty for an unacceptable tax position was correctly imposed under s 141B of the Tax Administration Act. The objective assessment of the evidence that had been undertaken supported the conclusion that the taxpayer’s contention that he was not a tax resident in New Zealand in the relevant years was not “about as likely as not to be correct”.

Van Uden v C of IR CA [2018] NZCA 487, 8 November 2018.