Acquisition date of land
Clause 7
Issue: The amendment is not needed
Submission
(Corporate Taxpayers Group, Deloitte, Ernst & Young)
The legislative amendment is not necessary, and the Commissioner of Inland Revenue should revisit her interpretation of when land is acquired to ensure it is consistent with case law. This would make clause 7 unnecessary.
Comment
The Commentary on the bill (page 100) and the officials’ issues paper Clarifying the acquisition date of land,[6] explains the uncertainty regarding section CB 6 of the Income Tax Act 2007 is caused by the timing of when the taxpayer’s intention or purpose should be determined. The Courts have held that the relevant time for determining a taxpayer’s purpose or intention is at the time the taxpayer acquired the land.[7]
There is minimal case law to provide sufficient guidance on when acquisition actually occurs, in particular when an agreement for the sale and purchase of land is initially conditional. A 1973 tax decision in the High Court held that land is acquired when the parties to an agreement become bound by the contract to purchase and to sell – that is, when the contract becomes unconditional and an order for specific performance of the land transfer is available.[8]
However, in a subsequent non-tax case, the Court of Appeal held that under the general law, a purchaser acquires an equitable interest in land if specific performance in its wider sense (that is, any form of equitable remedy) is available to protect the purchaser’s rights under the contract.[9] In other words, it is a question of whether a purchaser can, by injunction or otherwise, prevent the vendor from dealing with the property in a way that is inconsistent with the contract of sale.
The interpretation of these two cases (and those that followed) has resulted in a number of differing views over when land is acquired.
Further confusion is caused because the definition of “land” in the Income Tax Act 2007 includes estates and interests in land. In a typical sale and purchase situation, the purchaser acquires different interests and estates in “land” over time which is then merged when the title is registered. Neither the legislation nor common law has provided sufficient clarity over which interest in “land” the date of acquisition should apply to.
Within Inland Revenue, the Crown Law Office and the private sector, there are diverse views on what is the most accurate interpretation of the law and date of acquisition. The diversity of views is exacerbated when there is a significant period of time between entering into an agreement to purchase land and the registration of the land transfer title. Officials consider a clear legislative test is the best way of dealing with the current uncertainty.
Recommendation
That the submission be declined.
Issue: The drafting of section CB 15B
Submission
(Corporate Taxpayers Group, Deloitte, KPMG, New Zealand Institute of Chartered Accountants, Russell McVeagh)
The drafting of proposed section CB 15B is circular and could be improved to better convey how the test applies.
Comment
Proposed section CB 15B (1) current states:
“General rule
“(1) For the purposes of subpart CB, a person acquires land on the date that begins a period in which the person has an estate or interest in the land, alone or jointly or in common with another person.” [emphasis added]
Officials consider the wording of this proposed section is not circular even though the definition of “land” in the Income Tax Act includes estates and interests. The crucial aspect of the wording of section CB 15B (1) is that the “land” that is being acquired is identified and the “estate or interest” is in that “land”.
Furthermore, section CB 15B (1) will only be applied retrospectively, so the emphasis is in looking back to when the person had the first estate or interest. Once the taxpayer determines the point in time that they had the first estate or interest, the beginning of this period is considered to be the acquisition date for the purposes of subpart CB.
Recommendation
That the submission be declined.
Issue: The timing of the test of a person’s intention and purpose
Submission
(Corporate Taxpayers Group, Deloitte, KPMG, New Zealand Institute of Chartered Accountants, Russell McVeagh)
The drafting of proposed section CB 15B should refer explicitly to the time at which a person’s purpose or intention is to be determined (that is, when the person enters into a binding agreement for the sale and purchase of land), as opposed to when land is acquired.
Comment
The policy intent of proposed section CB 15B is to clarify the timing of when land is acquired as the Court has held that this is when a person’s purpose or intention should be tested.[10]
Officials consider that focusing the proposed section on the timing of the person’s intention or purpose will narrow the application of proposed section CB 15B just to section CB 6. This will not resolve when the date of acquisition is for the rest of the land provisions, as the date of acquisition is important for:
- section CB 15 – which determines when land is acquired by associated persons for most of the land provisions in subpart CB;
- sections CB 7, CB 9, CB 10 and CB 14 – which determine when the 10-year period begins for a business dealing in land (including land development, subdivisions and change of land under the Resource Management Act 1991); and
- sections CB 18 and CB 19 – which determine when land is acquired for the purposes of the residential and business exemption.
Furthermore, if the legislation referred more explicitly to the date the person enters into a sale and purchase agreement, the inclusion of the word “agreement” would create a proxy and would narrow the scope of the provision even further, as any other form of acquisition (outside of an agreement) will fall outside the scope of proposed section CB 15 B and section CB 6. Officials are of the view that this could create a revenue risk.
Recommendation
That the submission be declined.
Issue: Proposed section CB 15B should be deleted or reconsidered more substantially
Submission
(Ernst & Young)
Proposed section CB 15B should be deleted or reconsidered more substantially; in particular, further clarification is needed on:
- identification of the “land”;
- changes in the nature of a person’s interest or holding in the land;
- a need to deal explicitly with options, nominee and trust situations; and
- amending provisions allowing for deductions for the cost of acquiring property which is or becomes “revenue account property” under the Land Sale Provisions.
Comment
The clarification sought by proposed section CB 15B has highlighted a number of technical problems and other related areas of ambiguity with the current application of section CB 6, the definition of land and the relationship between section CB 6 and other land sale provisions.
Although proposed section CB 15B will address the main problem of when the taxpayer’s intention or purpose should be tested, further detailed analysis to address the technical issues raised by the submitter is needed. Officials consider that if further amendments are proposed to address the issues raised, this may create further ambiguities without the benefit of full consideration.
Given the time constraints for the bill, and the number of issues that would need to be worked through (and consulted on), the current bill is not the best vehicle to address the various technical issues raised. A number of these issues could be best addressed in a published statement on the interpretation and application of proposed section CB 15B given there is a range of case law that covers some of the issues raised.
For example, there are a number of cases on whose intention or purpose should be tested:
- Harkness v CIR[11] – where the purpose is the purpose of the owner of the land;
- Tilley v FCT[12] – the agent’s purpose will be imputed to the principal;
- Boanas v CIR[13] – the intention is of the partnership and not the partners; and
- CIR v National Distributors[14] – the company’s purpose is the purpose of the persons who control the decisions of the company.
Officials disagree that an explicit provision covering these circumstances should be included in the bill but further guidance in a public statement would provide further clarity.
Officials also do not agree that proposed section CB 15B be removed from the bill for the reasons noted above (the diverse views between Inland Revenue, the Crown Law Office, taxpayers and their agents). A number of other submitters are supportive of the legislative clarity.
Recommendation
That the submission be declined, subject to Inland Revenue publishing a statement on the interpretation and application on proposed section CB 15B.
Issue: Purpose and intention of the subsequent nominee, nominated transferee or assignee
Submission
(Ernst & Young)
Outside of the circumstances of section YB 21, proposed section CB 15B would not be effective in relation to the subsequent nominee, nominated transferee or assignee. For example, in the absence of any specific deeming provision, we do not understand how a subsequently incorporated company could acquire any interest in land before the company came into existence, let alone have the purpose or intentions of another legal person at that pre-existence time.
Comment
Officials agree that in the circumstance when a subsequent nominee, transferee or assignee does not yet exist it is impossible for this subsequent nominee, transferee or assignee to have any requisite purpose or intention to test under proposed section CB 15B.
Officials therefore recommend that a provision be included in the bill that clarifies the circumstance when a subsequent nominee, transferee or assignee is yet to exist, that the purpose and intention of the person who controls the nominee, transferee or assignee, be imputed onto the subsequent person once this subsequent person comes into existence. The provision is only likely to be needed in a company situation, as this is a clear example of where a “person” does not yet exist but can be created.
Recommendation
That the submission be accepted.
Issue: Definition of “interest in land”
Submission
(New Zealand Law Society)
The Income Tax Act 2007 does not define what an “interest in land” is for this purpose and there is the potential for uncertainty where “land” acquired is different from the “land” being disposed of, therefore the ambit of “land” should be clarified.
Comment
Subpart YA 1 provides a definition of “interest” in relation to land so no separate definition of “interest” for the purposes of section CB 6 is needed. A wider review of the ambit of “land” is outside the scope of the proposed amendment.
Officials also consider that the effect of section CB 6(3) is that the “land” acquired and the “land” sold need not be the same “land”. Subsection CB 6(3) states:
Land partially sold or sold with other land
(3) This section and sections CB 7 to CB 23 apply whether the land disposed of—
• (a) is part only of the land to which the relevant section applies:
• (b) is the whole of the land to which the relevant section applies:
• (c) is the whole of the land to which the relevant section applies, together with other land
As explained in the officials’ issues paper, the introduction of subsection CB 6(3) was to cover situations where land that is disposed of constitutes the whole or part of any land. According to an Inland Revenue Head Office Circular, this subsection was introduced to circumvent the Australian case Moruben Gardens,[15] where 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.
It also follows that in a typical sale and purchase agreement for the acquisition of land, all the estates and interests in land merge into the one legal title, therefore there is always a link between what “land” is disposed of and what “land” is acquired.
Recommendation
That the submission be declined.
Issue: Alignment with the definition of “land”
Submission
(Matter raised by officials)
Proposed section CB 15B should include options to acquire land, or an estate or interest in land.
Comment
The definition of “land” in the Income Tax Act includes “an option to acquire land, or an estate or interest in land”. Currently proposed section CB 15B only refers to estates or interests in land. Officials recommend that proposed section CB 15 B include an “option” to acquire land to align with the definition of “land”.
Recommendation
That the submission be accepted.
Issue: Previous interests and estates in land with an option
Submission
(Matter raised by officials, Ernst & Young)
The policy intent should be clarified where taxpayers hold an interest in one type of land (such as a leasehold interest) but then acquire another interest in that land (such as the estate in fee simple), which is later all or partly disposed of.
Comment
The policy intent of proposed section CB 15B is to test the person’s intention or purpose when they first acquire an interest or estate in the land. The submitter raised the issue that clarification is needed where a taxpayer holds an interest of one type of land in a particular block of land, such as a leasehold interest, then acquires the freehold, which is later all or partly disposed of. As currently drafted, the taxpayer’s intention or purpose would only be tested when they acquired the leasehold interest.
Officials agree that in the circumstance outlined by the submitter, this situation is only likely to occur where there is an option to exercise a right to acquire another estate or interest in land.
For example:
- Brian has an unregistered leasehold in land, with a “first right” option to acquire the fee simple estate if it is disposed of by the lessor April.
- April decides to sell the estate in fee simple, and offers the land to Brian as per the terms of the lease agreement.
- Brian agrees to exercise the option to acquire the estate in fee simple.
In this example Brian has a number of interests and estates – the leasehold land, the option and once the option is exercised, a contingent equitable interest in the land that eventually merges into an estate in fee simple. Under the current drafting of proposed section CB 15B, Brian’s intention or purpose is only tested when he acquires the unregistered leasehold interest. However because an unregistered leasehold interest does not merge into the legal estate in fee simple, if Brian had the intention to acquire the estate in fee simple to dispose of it, and Brian disposes of the estate in fee simple, any gain Brian makes from this disposal falls outside the ambit of section CB 6. This is because when Brian acquired (the leasehold) he did not have the intention to dispose of the leasehold, despite making another active decision to exercise the option and acquire the estate that is eventually disposed of.
Officials consider that this outcome is not consistent with the underlying policy intent of section CB 6 or the first interest principle, as Brian has made another active decision to enter into an agreement to acquire the estate in fee simple. Officials consider that this subsequent acquisition should be treated as separate acquisition of land, and Brian’s intention or purpose should be tested at this time (when he exercises the option). As per the officials’ issues paper:
…the policy intent of section CB 6 is to capture property speculators, arguably the most appropriate time to assess a taxpayer’s intention and purpose should be when a person decides to enter into a sale and purchase agreement. It is the initial decision-making that informs how a person intends to use the property. It would be unusual for a property speculator to enter into a sale and purchase agreement unless they thought it very likely that the purchase and its subsequent disposal would be profitable.
Officials recommend that a new provision be included in the bill that provides where a person has a previous (first) interest in land, and exercises an option that is related to that land, the person has entered into a new acquisition and the section CB 6 and proposed section CB 15B should be applied, as if the previous interest did not exist.
The example above is distinct from the situation where a person just has an option to acquire land but no other previous interest in land. As per the officials’ issues paper, the appropriate time to test their intention or purpose in relation to the option is when the option is granted.
Recommendation
That the submission be accepted.
Issue: Timing in subpart FB and FC
Submission
(New Zealand Institute of Chartered Accountants)
The new section should only apply when subpart FB or FC provide a different timing of a transaction to that provided under the new section.
Comment
Proposed subsection CB 15B (2) provides that the timing of when land is acquired is overridden by any timing set out in subpart FB (transfers of relationship property) and FC (distribution, transmission, and gifts of property).
Under the current wording, proposed subsection CB 15B (1) is only overridden if there is a timing set out in subpart FB and FC. Therefore when there is no timing specified in subpart FB or FC, the timing of subpart CB 15B (1) will apply.
Recommendation
That the submission be declined.
Issue: Section 225 of the Resource Management Act 1991
Submission
(Deloitte)
Clause 7 should contemplate arrangements subject to section 225 of the Resource Management Act 1991 and confirm land is acquired when a binding agreement is entered into regardless of any conditions.
Comment
Section 225 of the Resource Management Act 1991 (RMA) deems that an agreement to sell land or any building that constitutes a subdivision and is made before the appropriate survey plan is approved is conditional on the survey plan being deposited. A purchaser can therefore cancel or rescind the agreement if there are delays in the title separation.
The policy underlying the preferred date to test the taxpayer’s purpose or intention is founded on the “first interest” approach, where the date to test a person’s purpose or intention is the date when the first interest (equitable or legal) in land arises under an agreement for the sale and purchase of land (the “first interest” interpretation).
Therefore, an explicit provision for agreements subject to section 225 of the RMA is not needed, as the parties intend to be bound by the agreement and the Court has the ability to enforce the purchaser’s right in the agreement by ordering specific performance in the sense of requiring the vendor to submit a survey plan.
Recommendation
That the submission be declined.
Issue: Proposed section CB 15B should not apply to other land-related provisions
Submission
(Corporate Taxpayers Group)
The rule should not apply to other land-related provisions in subpart CB, but could apply for sections CB 7, CB 18 and CB 19.
Comment
As noted above, in general the timing of the acquisition date of land affects most of the land-related provisions in subpart CB:
- section CB 15 – determines when land is acquired by associated persons for most of the land provisions in subpart CB;
- sections CB 7, CB 9, CB 10 and CB 14 – determine when the 10-year period begins for a business dealing in land (including land development, subdivisions and change of land under the Resource Management Act 1991); and
- sections CB 18 and CB 19 – determine when land is acquired for the purposes of the residential and business exemption.
Officials do not agree with limiting the rule to just section CB 6 as the issue of when land is acquired for the remaining land-related provisions would be unclear. Officials consider that one rule for all the land-related provisions is the more appropriate policy approach.
Recommendation
That the submission be declined.
Issue: Correction of the application date of new section CB 15B
Clause 2(20)
Submission
(Matter raised by officials)
Comment
Clause 2(20) provides that the application date for proposed section CB 15B is from the date of the introduction of the bill whereas it has always been intended (as reflected in the bill Commentary) that proposed section CB 15B applies to disposals of land from the date the bill is introduced.
Officials recommend that the application date be corrected.
Recommendation
That the submission be accepted.
Issue: Clarify that the application date can be retrospective
Clause 2(20)
Submission
(Deloitte, Corporate Taxpayers Group)
It should be made clearer that proposed section CB 15B has a retrospective effect to determining the acquisition date or Inland Revenue should indicate it will immediately cease advancing the new interpretation of the existing law.
Comment
If the Committee agrees the application date should be corrected to apply to disposals of land from the date the bill is introduced, it will be made clear that proposed section CB 15B can apply to land that has been acquired before the date the bill is introduced, and is therefore retrospective where land has not yet been disposed of.
Although the officials’ issues paper acknowledged that the “first interest” interpretation is the preferred tax policy interpretation, the current interpretation used by Inland Revenue (that is, the disposal interpretation – where the date of acquisition is determined by the “land” that is disposed of) is not a totally unreasonable interpretation. We consider it unwarranted for the Commissioner to “unwind” previous positions taken by both the taxpayer and Inland Revenue when the land has already been disposed.
Recommendation
That the submission be accepted, subject to the Committee agreeing to the correction of the application date.
Issue: Deferral or limitation of the application date
Clause 2(20)
Submission
(Ernst & Young, Matter raised by officials)
There does not appear to be any reason for urgency in bringing in any change of rules, therefore the commencement and scope of application of any such new provision should be:
- deferred at least until enactment of the legislation; and
- limited in application to land acquired after that date.
Comment
In the officials’ issues paper, it was suggested:
“For ease of administration and in the interests of fairness, if the Government does decide to clarify the date of acquisition following feedback on the options presented here, we suggest that the date of application for any legislative option (that is, for new acquisitions as opposed to new disposals) be prospective from the date of Royal assent of the relevant tax bill.”
Submissions received on the application date in the officials’ issues paper were not supportive of the prospective application date. Two application dates were suggested by two submitters during consultation:
1. “Retrospective to allow for the reversal of previous decisions/ interpretations that are inconsistent with what is now acknowledged to be the correct interpretation.”
2. “Retrospective for all disposals where income tax has not been assessed prior to the date the preferred changes are publicly announced. This will help minimise issues with uncertainty and will ensure that neither taxpayers nor Inland Revenue need to continue protracted disputes. Applying a clarified definition only to land purchased after enactment will leave uncertainty for those taxpayers subject to the 10-year rule in the other land provisions, potentially up to 10 years after the enactment of the legislation.”
Officials considered that the current interpretation applied by Inland Revenue is not a totally unreasonable interpretation that it warrants a fully retrospective application date as suggested in the first submission.
However officials did agree with submitter 2, that the impact on the other land provisions was not ideal, and that the application date in the officials’ issues paper needed to be reconsidered. Hence the application date suggested in the bill Commentary, which we have recommended the Committee correct in the bill.
Recommendation
That the submission be declined.
6 This issues paper is available at: http://taxpolicy.ird.govt.nz/publications/2013-ip-acquisition-date-land/overview.
7 AnzamcoLtd (in liq) v CIR (1983) 6 NZTC 61,522 (HC).
8 Beetham v CIR [1973] 1 NZLR 575 (HC). See also West v Commissioner of Inland Revenue (1976) 2 NZTC 61,114 (HC), Case Y3 (2007) 23 NZTC 13,028, and Annalong Pty Ltd v FCT 72 ATC 4141.
9 Bevan v Smith [1994] 3 NZLR 648 (CA).
10 See footnote 2.
11 (1975) 2 NZTC 61,017.
12 77 ACT 4027.
13 (2008) 23 NZTC 22,046.
14 (1989) 11 NZTC 6,346.
15 Moruben Gardens Pty Ltd v Commissioner of Taxation (Cth) (1972) 46 ALJR 559; 3 ATR 225; 72 ATC 4147 (HC).