Appendix - History of section CB 6
The profits made from the sale or disposition of real property were first deemed to be a source of “business income” in the Land Income Assessment Act 1891. It was introduced at a time when New Zealand had extensive immigration due to a booming export market, and there was high demand for land for settlement. However, since much of the freehold land in New Zealand was tied up in large estates, the Government undertook extensive land reforms to free-up land for genuine settlers.
The high demand and the scarcity of available freehold land created the prime opportunity for property speculators to make a profit from the purchase and disposal of real property, without the property speculator necessarily improving or developing the land. The Government sought to discourage this behaviour by introducing a provision to tax gains from the disposition of land, if the land was acquired for the purpose of disposing of it at a profit.[6]
The initial purpose of this provision was clarified by the Minister of Finance, Hon James B Allen, when the Land and Income Assessment 1908 Act was amended by the Land and Income Assessment Amendment Act 1912:[7]
This is not an alteration in the law, but for the purpose of making the present Act clearer. Persons who speculate in land are liable to assessment for income tax on the profits from buying and selling the land.
Legislative history of section CB 6
Due to its introduction in the late 1800s, the legislative history of what is now section CB 6 is lengthy. Over the years this provision for the taxation of property disposition profits (the “provision”) has been amended by:
- extending the provision to cover both real and personal property,[8] then dissected into two separate provisions covering real and personal property;[9] and
- adding a new subsection (now section CB 6(3)) to apply to land “whole or part of any land… or the whole or part of any such land together with other land”.[10]
The following paragraphs highlight some of the key changes during the provision’s extensive legislative history.
Removal of the “profit-making purpose” requirement
A key element in the earlier taxation of the property disposition provision was the “profit-making purpose” requirement, that is, a person would be taxed if the property was acquired for the purpose of selling or disposing of it at a profit.[11] This profit-making purpose element ensured the provision specifically targeted property speculators, rather than capturing “everybody”.
The profit-making purpose requirement was later removed by the Land and Income Tax Act 1954.[12] The explanatory note on the bill indicates that the provision was being extended to apply to all classes of property and it appears the profit-making element was removed during the drafting of this amendment.
The effect of this amendment meant the provision only required a “purpose to dispose” and the provision had widened to capture any person with the necessary purpose, not just property speculators. Therefore although the profit-making element was removed, the provision still intended to tax the gains and profits derived from the sale of land when the taxpayer’s business was dealing in land or the land was acquired for resale.
The insertion of “intention”
As mentioned above, originally the provision only required the person to have a “purpose of disposal”. However the additional subjective element of intention was inserted at the recommendation of the Taxation Review Committee, which was in 1967 assigned the task of carrying a comprehensive review of the New Zealand tax system.
The Taxation Review Committee was of the view that the provision needed to be strengthened:[13]
First, where the question to be decided is whether a taxpayer has acquired property for the purpose of selling or otherwise disposing of it the Courts have held that in law there is a distinction between purpose and intention. This has enabled taxpayers to argue successfully that, although their intention on purchasing property may have been to sell part of it at some later stage, their purpose in acquiring the property was not to sell it but to use it in some way. That being so, profits derived from the sale of part or even all of the property were not assessable for tax. The Committee considers that the distinction between “purpose” and “intention” is artificial and should be removed.
The Minister of Finance, Sir William Rowling, in a Cabinet paper on the relevant bill confirmed that the amendment would reinforce the income tax law relating to income from dealings in real property:[14]
It has always been intended that, where a person buys property with the purpose or intention of later selling at a profit, he should be assessable for tax, but Court decisions have negated this objective in some circumstances.
A new whole/part/any subsection
The introduction of “intention” also strengthened a new subsection to cover situations when land that is disposed of constitutes the whole or part of any land (now subsection CB 6(3)).
According to an Inland Revenue Head Office Circular, this subsection was recommended as a direct result of the Australian case Moruben Gardens,[15] when the Australian High Court held that it was necessary for there to be a clear “identity” between the estate or the interest acquired, and the estate or interest disposed of. The whole/part/any subsection and the test of “purpose and intention” sought to circumvent this decision.
The definition of “land”
A further key change to the taxation of property profits provision in the 1973 Act was the inclusion of a definition of “land”. The new definition of land included any estate or interest in land (whether legal or equitable, corporeal or incorporeal) and any option to acquire land or any such estate or interest in land (but not including a mortgage). Previous provisions only referred to “real property”, “property”, “land or any interest therein”, “real or personal property or any interest therein”.
This amendment has been considered by the New Zealand Institute of Chartered Accountants as an effective widening of the ambit of the provision:[16]
This new definition of “land” had a number of effects:
- It clarified the statutory meaning of the term “land” (i.e. including any estate, whether legal or equitable, corporeal or incorporeal) applied to the land speculation provision.
- It was drafted using words (i.e. “any estate or interest in land”) that linked it up with the definition of “estate” or “interest” in land contained in section 2. This clarified the application of the broader definition of “interest in land” to the land speculation provision.
- Accordingly any option to acquire land or an interest in land was within the purview of the new section 88AA.
However despite the new definition in the 1973 Act, the definition of “land” that would have applied in the absence of any specific income tax at definition is likely to have derived from the definition of land in the Interpretation Act 1888:
“land” includes messuages, tenements, hereditaments, houses, and buildings, unless there are words to exclude houses and buildings, or to restrict the meaning to tenements of some particular tenure:
From a historical perspective, it appears that Parliament had contemplated that any interest, estate or right in real property disposed of in a business context should be subject to tax.
Currently “land” for the purposes of section CB 6(1) includes any estate or interest in land, including those estates and interests specifically mentioned in section YA 1. The definition of land in the Income Tax Act 2007 uses the legal concept of land (that is, a bundle of tangible and intangible rights a person holds in land) as opposed to the ordinary usage of the word “land”, the “dirt” or geographical area of soil.
This definition reflects the doctrine of tenure, in that all land (in the geographical soil/dirt sense) in New Zealand is owned by the Crown, and an individual can only own interests or estates in the land.
The Property Speculation Tax Act 1973
Another piece of legislation targeted at the profits from property disposal was the Property Speculation Tax Act (the PST Act). The PST Act was introduced in 1973 and was designed to deter property speculation at a time when the country was suffering from high inflation and a shortage of housing.
Although the taxation of property disposition provisions in the 1954 Act and the PST Act overlapped, the 1954 Act provision had wider implications and covered more than just property speculators.
The PST Act did however provide a definition of the date of acquisition:
“Date of acquisition” in relation to the acquisition of land by any person and subject to sections 11 and 12 of this Act, means the date on which possession of the land is given and taken in respect of that acquisition or, in any case where possession is not taken by that person or where no right to possession exists, the date on which the land becomes vested in that person.
The PST Act however was short lived and repealed in 1979 by the Government on the grounds that it was irrelevant and not needed due to the taxation of property disposition provisions in the Land and Income Tax Act.
The relationship between the Income Tax Act and “other” law
In light of the core provisions contained in Part A of the Income Tax Act 2007, if the legislation wants to treat a transaction differently from “other” law (such as land law or contract law) it does so clearly. For example, contract and insurance law underpins life insurance contracts, however the Income Tax Act 2007 has specific life insurance rules to deal with income derived from these transactions.
In the context of section CB 6, the laws of equity, land and contract underpin the taxation of these transactions.
The interaction between equity, land and contract law in land transactions
For a contract for the disposition of land to be enforceable, its terms and conditions must be set out in writing and be signed by the parties.[17] The normal commercial practice is for the parties to the contract to execute a standard form of an agreement for sale and purchase.
Where an agreement is subject to “true conditions precedent”, a binding agreement will not be formed until the conditions are satisfied.[18] An agreement that contains a condition subsequent is a binding contract.[19] For example, the commonly used Real Estate Institute and Auckland District Law Society standard form of agreement provides that conditions in the agreement are conditions subsequent, unless the agreement “expressly provides otherwise”.
A consequence for the parties entering into a binding contract for the sale and purchase of land is that the rules of equity provide for an equitable interest to arise in favour of the purchaser. If the rules of equity and the law of contract are in conflict, section 99 of the Judicature Act 1908 provides for the rule of equity to prevail provided the matter applies to substantive law.[20] The Court has held that an equitable interest is “not carved out of a legal estate, but impressed upon it”.[21]
The key question in determining whether an equitable interest has arisen in favour of the purchaser is “will equity protect the rights of the purchaser’s interest under the agreement?” The equitable remedies available are the ability to compel a transfer (specific performance) or grant, or to restrain a party from dealing with the land in a manner which is inconsistent with the contract.[22] Therefore in brief, the purchaser obtains a right to enforce the contract:[23]
Now, the foundation of the doctrine of specific performance was this, that land has quite a character of its own, that the real meaning between the parties to a contract for sale of land was not that there should be a contract with legal remedies only, and that the purchaser should get the land, and should not be put off in an ordinary case by offering him damages. That is the main part of the doctrine of specific performance - that the purchaser is actually to get the land.
In Re Transphere, McLelland J held that the absolute ownership of the property cannot be precisely divided into a legal estate and an equitable estate.[24] The equitable interest impressed on the legal estate is conditional on completion of the contract.
During the period between the contract being formed and settlement being completed, the vendor holds the legal estate under a constructive trust for the purchaser. On settlement of the purchaser’s obligations, it appears that it is at this time that the rights attaching to the equitable interest then relate back to the point in time when the purchaser is able to obtain specific performance.
A purchaser is able to divest the right to enforce the contract in any of the following ways:
- by the purchaser expressly declaring himself or herself to be trustee of the equitable interest for a beneficiary;[25]
- by an express assignment by the purchaser to another, either in equity or under a statutory provision;[26]
- by a purchaser’s direction to his or her trustee requiring the trustee to hold the property on trust for another;[27]
- by a purchaser releasing, surrendering, or disclaiming his or her interest;[28] or
- by expiration of a person’s equitable interest under a trust because of the exercise of a power of revocation of the trust, or by termination of the trust by choice of the beneficiaries.[29]
The right to enforce the contract is normally merged with the conveyance unless the parties provide that the rights and obligations under the agreement for sale and purchase survive the doctrine of merger.[30] The completion of a land sale occurs on the registration of the transfer instrument (an act conferred by the state, not the parties to the contract), and it is at this point in time where the legal estate vests in the purchaser.[31]
6 Land and Income Assessment Act 1912, section 54.
7 (29 August 1912) 159 NZPD 624.
8 Land and Income Tax Amendment Act 1951, section 10.
9 Land and Income Tax Amendment Act 1973, section 8(2). Section 88(1)(c) deal with personal property only and new provisions sections88(1)(cc) and 88AA dealt with the disposition of land.
10 See Income Tax Act 2007 section CB 6(3).
11 Land and Income Tax Act 1916, section 85(c).
12 Land and Income Tax Act 1954, section 88(c).
13 Taxation Review Committee Report of the Taxation Review Committee, (1967) chapter 44, para. 659.
14 Briefing paper to Cabinet HO 744. This was approved for inclusion in the 1973 amendment bill in a Cabinet decision made 30 July 1973 [CM 73/34/23 refers].
15 Moruben Gardens Pty Ltd v Commissioner of Taxation (Cth) (1972) 46 ALJR 559; 3 ATR 225; 72 ATC 4147 (HC).
16 Letter from Aylton Jamieson (NZICA) to Inland Revenue Brochure on property purchased “off the plans”, 5 March 2010.
17 Property Law Act 2007, section 24.
18 Scott v Rania [1966] NZLR 527.
19 Waitata Holdings Ltd v Mansfield (High Court, Nelson; M3/00; 9 August 2000).
20 Mayor of Dunedin v Searl (1915) 34 NZLR 861.
21 DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 43 at 474; 40 ALR 1 at 35 per Brennan J. This decision was approved by Randerson J in Smith v Hugh Watt Society Inc [2004] 1 NZLR 537.
22 G W Hinde, D W McMorland, N R Campbell, and D P Grinlinton Land Law in New Zealand (Wellington, LexisNexis, 2003) paragraph 4.019; Bevin v Smith [1994] 3 NZLR 648, (1994) (CA), McDonald v Isaac Construction Co Ltd [1995] 3 NZLR 612 at 619 per Tipping J, Re Transphere Pty Ltd (1986) 5 NSWLR 309 at 311.
23 Re Scott and Alvarez’ Contract [1895] 2 Ch 603 (CA) at 612 and 615. This decision was cited as good authority in Loan Investment Corporation of Australasia v Bonner [1970] NZLR 724 (PC) in the majority judgement delivered by Lord Pearson.
24 Re Transphere Pty Ltd (1986) 5 NSWLR 309.
25 Comptroller of Stamps (Vic) v Howard-Smith (1936) 54 CLR 614; [1937] VLR 15; [1936] ALR 198.
26 Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, per Windeyer J.13, sections 25 and 49 of the Property Law Act 2007.
27 Rickett C., The Laws of New Zealand: Equity LexisNexis, paragraph 23.
30 Knight Sugar Co Ltd v The Alberta Railway & Irrigation Co [1938] 1 All ER 266 (PC) at 269 per Lord Russell of Killowan, Svanosio v McNamara (1956) 96 CLR 186; [1956] ALR 961; 30 ALJ 372, Griffiths v Ellis [1958] NZLR 840, and Stanford v Bayne [1923] VLR, see also DKLR Holdings Co (no 2) Pty Ltd v Commissioner of Stamp Duties (NSW) 82 ATC 4125.
31 Montgomery and Rennie v Continental Bags (NZ) Ltd [1972] NZLR 884.