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Inland Revenue clarifies “clarifying legislation” on acquisition date of land

Tax Alert - September 2015

By Phil Stevenson and Aran Bailey

Inland Revenue have issued an exposure draft PUB00220 Income Tax – Date of Acquisition of Land.

This is the latest in a long line of documents about determining when land is acquired for the purposes of the land taxing provisions in the Income Tax Act 2007 (“the Act”).

The date of acquisition is important because many of the taxing provisions require an assessment of the taxpayer’s intention for the land at the time of acquisition.  Other provisions apply only if land is disposed of and land related activity has occurred within a 10 year period (e.g. a scheme of development or division of the land commences within 10 years of acquiring the land).  Accordingly, we need to know at what point the land is actually acquired.

With the overheating property market in Auckland and other buoyant markets throughout the rest of the country, such as Queenstown, the potential for large gains from the disposal of land exists.  Inland Revenue have an increasingly well-resourced Property Compliance Unit who have been paying close attention to taxpayers’ intentions with respect to their land transactions and finding the correct point in time to measure those intentions remains a point of contention.  

The date of acquisition is particularly important where a section is purchased in a subdivision “off the plans” subject to title later being issued. A substantial period of time may pass between the agreement being signed up and title being available.  During this period a taxpayer’s purpose or intention can change (for example, a couple who purchase a section with the intention of building and retiring there, however an unexpected injury or illness requires a change in plans and the couple decide to on sell the section).  At the time of signing the agreement there was no purpose or intention of disposal, however, at the time of title becoming available the couple intended to dispose of the property.  If the later time is considered the date of acquisition the sale proceeds would become taxable.

Until recently, most tax advisors would have been reasonably comfortable advising their clients as to when land was acquired for the established land taxing provisions.  There was case law establishing that an equitable interest in the land was sufficient and therefore it was generally understood that land was acquired when an agreement to purchase the land becomes unconditional.  This is the logical time to assess the purpose or intention given that this is the time when the purchaser commits to purchase the land.        

However, Inland Revenue started adopting a different interpretation of when land was acquired arguing that a taxpayer acquires different interests in land at various points in time and that the relevant time to consider the taxpayer’s purpose or intention is determined by the interest that is being disposed of.  Where a section was bought subject to title, the date of acquisition was deemed to be the date that title passed to the purchaser.  Inland Revenue’s view lead to the Department seeking to reassess the tax returns for the typical couple scenario described above.  After extensive debate, Inland Revenue consulted the public by issuing a discussion document as part of Budget 2013 and then proceeding with legislative changes.  Section CB 15B of the Act was enacted with effect from 22 November, 2013.

Section CB 15B provides a general rule for when land is acquired, being:  

 “(1)     For the purposes of this subpart, a person acquires an estate, interest, or option that is land (the land) on the date that begins a period in which the person has an estate or interest in, or an option to acquire, the land, alone or jointly or in common with another person.”

The stated intention of the section was to clarify the position and confirm that a taxpayer’s purpose or intention should generally be tested at the date a binding agreement is entered into.  However, this could not be construed by reading the provision and the clarification could only be found in the accompanying officials’ report.

In our February 2014 Tax Alert we noted that we did not think that section CB 15B would provide the intended clarity.  When submitting on the amending legislation we suggested that, if the amendment was to proceed, the details contained in the officials’ report needed to be included in the legislation.  We suggested that the legislation specifically set out that land is acquired by the purchaser when a binding agreement is entered into and also define what constitutes a binding agreement (rather than leaving this fundamental content to the officials’ report which is much less authoritative).

Officials failed to heed our advice and have now issued the current exposure draft (PUB 00220), stating that the exposure draft has been issued because:

“It has been suggested that further clarity on how the new provision operates would be useful.  In particular, we have been asked to confirm when the Commissioner considers that an estate or interest in land will arise for the purposes of s CB 15B…”

The problem with providing clarification by way of exposure draft rather than actually providing clear and unambiguous legislation is that officials can change a taxpayer’s outcome simply by revising their published interpretation statements.  Taxpayers would have been much better served and would have more comfort with their tax positions if the amending legislation had been better drafted.

The conclusion is that a purchaser has an equitable interest in land from the time a binding contract exists, even if it is conditional.  This is when equitable remedies are available to protect the purchaser’s rights under the contract, though specific performance in the strict sense may not yet be available. This is earlier than what practitioners previously understood the position to be.  An agreement subject to conditions (such as finance or building reports) will still trigger acquisition under the exposure draft as long as the agreement is binding.

However, just as some resolution emerges from this unnecessary and protracted process the recently proposed bright-line test appears.  The bright-line test will apply to residential land disposed of within 2 years of acquisition and it is intended to help cool the overheated markets by taxing disposals occurring in the 2 year window.  The date of acquisition will have a completely different test to the one contained in the exposure draft for determining when land is acquired for the existing land taxing provisions in the Act.

The date of acquisition proposed for the bright-line test will generally be the date of registration of title because it provides a definitive date, which is recorded independently by Landonline, and can be used by buyers and sellers for withholding tax purposes.  Tax professionals are questioning the logic of this approach which is inconsistent with the exposure draft.  It is fair to say the current proposals do nothing to simplify the answer for taxpayers who want to work out for themselves when they acquired their land for tax purposes

Additionally, persons like the couple in the scenario above, buying off the plans but having a change in circumstances, may find themselves back in a tax paying position.  All the work to get to the sensible answer with section CB 15B is undone, if the 2 year bright-line period cannot start until title is registered.  People in this position will now find themselves casualties of the attempt to cool the Auckland housing market.

Deadline for comment on the exposure draft is 17 September 2015.  However, don’t expect to see the exposure draft finalised in the same form.  Officials have already indicated that it will be revised and qualified once the bright-line test is enacted.

 

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