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Inland Revenue

Tax Policy

Chapter 4 – Overriding the general permission

4.1 In most cases, there has to be sufficient connection between expenditure and income, or between expenditure and a business carried on for the purpose of deriving income before expenditure can be deducted. This is known as the general permission. Whether the general permission has been satisfied is judged at the time the expenditure is incurred.[3]

4.2 In some situations involving land subject to the land sale rules there may not be the required connection between expenditure on holding costs and income, because at the time the expenditure is incurred it may not be known whether the disposal of the land will be taxed.

4.3 This may be the case, for example, with land that is taxed if sold within a particular timeframe (that is, 5 or 10 years). The issue may also arise where land is taxed if certain circumstances eventuate during the time the land is held (for example, if a division or development is carried on, or if the land increases in value because of a zoning change, within 10 years of acquiring the land).

4.4 This issue is relevant because the provision that allows for the cost of acquisition and improvements to the land to be deducted (section DB 23) is subject to the general permission being satisfied.

4.5 It was clearly intended that the cost of land that is taxed under any of the land sale rules would be deductible, so that only the net proceeds are income (or a loss). That is how the provisions operated prior to the rewrite of the Income Tax Act, under the “profits or gains” approach. However, it seems that the splitting out of income and deductions into separate provisions may have inadvertently created some uncertainty in respect of land taxed under some of the land provisions.

4.6 In situations where it is not known or anticipated at the time land is acquired that the disposal will be taxed, but it transpires that one of the land sale rules does in fact apply, the cost of the land may not currently technically be deductible under section DB 23. This is because there is not be the requisite nexus between the cost of the land (at the time that is incurred) and expected future income.

4.7 To address this issue it is proposed that section DB 23 be amended so that it overrides the general permission for disposals of revenue account property.

4.8 Should it be decided that holding costs should be deductible where there is no income-earning current use of the land, an amendment will also be needed to allow for deductions of those costs where it is not known at the time the costs are incurred that the sale of the land will be taxable.


[3] CIR v Banks (1978) 3 NZTC 61,236 (CA).