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Matters raised by submitters

Main home exemption

Issue: Reconsidering the main home exemption

Submission

(Chartered Accountants Australia and New Zealand, EY)

The main home exemption makes the rules more complex and limits the volume of information available and therefore the value of that information.

The exemption should be reconsidered. (Chartered Accountants Australia and New Zealand)

All parties to property transfers should provide IRD numbers, with no main home or other exemption. (EY)

Comment

The exemption broadly aligns with both the current rules for taxing gains from property, and the proposed bright-line test which are not targeted at a person’s main home.

Recommendation

That the submissions be declined.

Issue: Complexity of main home exemption provision

Submission

(Auckland District Law Society, Chartered Accountants Australia and New Zealand, New Zealand Law Society, EY)

The main home exemption from providing an IRD number will be difficult to apply. The main home exemption will create uncertainty and difficulties on the boundary. The provisions need to be simplified.

The uncertainty with the main home exemption means that there is a risk of dispute. This does not seem justified from a broader policy perspective. It would be preferable to focus any issues, disputes and risks on substantive income tax matters, rather than on procedural and information-gathering rules. (EY)

Comment

Officials are proposing to simplify the main home exemption by removing the requirement that the land be “residential land”. In addition, officials propose to clarify the date on which a home needs to be the person’s main home and simplify the “mainly used as a residence” test.

Officials agree that guidance on these rules is desirable. To the extent that comments in this report and the bill commentary have not clarified matters to submitters’ satisfaction, officials anticipate the usual post-enactment explanation of the rules in a Tax Information Bulletin (or by way of an earlier special report published upon enactment) should provide further clarification. Inland Revenue is also making administrative efforts to communicate the effect of the proposed legislation to key stakeholder groups. Officials would also welcome direct contact from interested parties on any areas of particular concern.

Recommendation

That the submission be accepted.

Issue: Use of “main home” rather than existing definitions of residence

Submission

(Auckland District Law Society, Chartered Accountants Australia and New Zealand, New Zealand Law Society)

There are existing terms used to define a person’s main residence such as “principal place of residence” in the Goods and Services Tax Act 1985 or the concept of “permanent place of abode” or “habitual abode” in double tax agreements.

Creating a new definition of “main home” creates uncertainty. Instead an existing definition should be used.

Comment

Officials consider it preferable to align the main home exemption with the current tax rules for land sales. This ensures that a person would only obtain the main home exemption where it is likely that the gains from the sale of the property will not be taxable.

The two key requirements for the main home test (mainly used as a residence and greatest connection) are to some extent based on existing tax rules. As a result, existing guidance on these provisions could be used to assist in the application of the rules.

Officials consider in the majority of cases, these provisions would be simple to apply. When there are situations on the boundary, plain English guidance for buyers, sellers and conveyancers will be provided.

Recommendation

That the submission be declined.

Issue: Greatest connection

Submission

(Auckland District Law Society, Chartered Accountants Australia and New Zealand, EY, New Zealand Law Society, PricewaterhouseCoopers)

A person’s “main home” is the “1 home with which the person has the greatest connection”. The concept of a “greatest connection” is imprecise and greater clarity is needed.

It should be sufficient that the home is the one home used by the person mainly as a residence, regardless of whether they subjectively have the “greatest connection” to it. (New Zealand Law Society)

Comprehensive guidance should be provided as to how it should apply. (Chartered Accountants Australia and New Zealand)

What factors are relevant in determining a person’s “greatest connection” should be listed in the legislation. (Auckland District Law Society)

“Greatest connection” is not used in New Zealand revenue legislation. It is unclear how the “permanent place of abode” test, that it appears to be trying to replicate, is applicable as a person can have more than one “permanent place of abode”. (EY)

Some common examples would be useful to illustrate the concept of “greatest connection”. (PricewaterhouseCoopers)

Comment

The definition of “main home” must broadly align with the definition to be used in the bright-line test, so that people understand what their tax obligations are likely to be now, and so that the right information is gathered as part of this process.

The core of the definition is “the 1 home that is mainly used as a residence”.

The “greatest connection” requirement is only necessary to determine which home obtains the main home exemption in circumstances where a person has multiple homes. The greatest connection requirement therefore operates only as a tie-breaker where a person has more than one home.

Officials consider in the majority of cases, these provisions would be simple to apply. When there are situations on the boundary, plain English guidance for buyers, sellers and conveyancers will be provided.

Recommendation

That the submissions be declined.

Issue: Time “main home” determined

Submission

(Chartered Accountants Australia and New Zealand)

It is unclear when a person needs to satisfy the “main home” requirement in order to obtain the main home exemption from providing an IRD number. The current drafting creates uncertainty where a person moves out of their home for a short period prior to transferring it.

Comment

It is intended that the main home exemption applies where the person did use or intended to use it as their main home. The exemption would still apply when a person moves out of their home shortly before selling it.

Officials consider that the current drafting achieves this outcome.

Recommendation

That the submission be declined.

Issue: Need for guidance

Submission

(Chartered Accountants Australia and New Zealand, PricewaterhouseCoopers)

It is critical that comprehensive guidance on the main home exemption is provided. The absence of such guidance will lead to unacceptable levels of uncertainty.

The proposed definition of “main home” is different from the “principal place of residence” test for GST. To avoid any confusion when the Bill is enacted it should be clearly communicated that these two definitions are different and must both be considered separately. (PricewaterhouseCoopers)

Comment

Officials agree that guidance on these rules is desirable. Plain English guidance for buyers, sellers and conveyancers will be provided.

Further, an explanation of the rules in a Tax Information Bulletin (or by way of an earlier special report published upon enactment) should provide clarification.

Recommendation

That the submissions be noted.

Issue: Main home of family member

Submission

(EY)

The main home exemption should be available when a property is not the transferor’s main home but is the main home of a family member of the transferor.

Comment

The main home exemption from providing an IRD number is intended to align with the current land sale rules. This ensures that a person only gets the exemption where it is likely that the gains from the sale of property will not be taxable.

The exemption under the current land sale rules for a person’s residence only applies where it is the transferor’s main home. As a result, a home used solely by other family members should not be able to obtain the exemption.

Recommendation

That the submission be declined.

Issue: Person’s family living with the person

Submission

(New Zealand Law Society)

Main home is defined as the “1 home that is mainly used as a residence by the person and any member of the person’s family living with the person…”

If a property is used mainly as a residence by the person (i.e. the owner), it should be irrelevant whether it is mainly used as a residence by any member of the owner’s family living with them.

Comment

The intention of the reference to a “person’s family living with the person” was to ensure that owners can qualify for the main home exemption when they reside in property with their family living with them. Officials accept that this can be achieved without including these words in the legislation and they should be deleted.

Recommendation

That the submission be accepted and the words “and any member of the person’s family living with the person” should be deleted from the definition of main home in s156A.

Issue: Change “exempt transfer” wording

Submission

(EY)

The wording “exempt transfer” should be changed to a different wording (such as “non-notifiable transfer”) to avoid creating the impression that no income tax liabilities will arise in relation to a particular piece of land if it meets the “exempt transfer” standard.

Comment

Officials note that the references to exempt transfer will be included in the Land Transfer Act and it is clear they only refer to the collection of information rather than liability for tax. Tax liability is dealt with under different legislation.

Officials will refer the submission to the drafter for consideration.

Recommendation

That the submission be considered by the drafter.

Issue: Vendors who use main home exemption more than twice in past 2 years

Submission

(EY)

The Bill as drafted would exclude a transfer from being an “exempt transfer” for vendors if they have relied on the main home exemption category at least twice in the last two years. This exclusion would not apply to any vendor until they make a disposal after 1 October 2017, at the earliest (assuming the Bill is enacted and its provisions come into force for transfers from 1 October 2015).

The exclusion from the main home exemption should be reconsidered and, if it is to be retained, its drafting should be clarified for the following reasons: the reference to “the date of transfer is not clear; the exclusion increases the complexity of the rules; and the exclusion may create or reinforce perceptions as to the tax liability on the disposal of property.

Comments

While the two year period would start from the enactment of this Bill (which is intended to be 1 October 2015), the provision limits exempt transfers to two in any two year period. Thus, if a person sold two main homes in any lesser period than two years, for example six months, and then shortly thereafter was going to sell their third main home, they would not be able to use the main home exemption and would need to provide a full tax statement. The Bill as drafted has the intended effect.

The relevant date is intended to be the date the transfer is registered. Officials consider that current drafting achieves this result. As noted elsewhere, this bill is about information collection and the fact that information has not been collected does not necessarily mean that there is no tax liability in any particular situation.

Recommendation

That the submission be declined.

Issue: Meaning of “arrangement”

Submission

(Auckland District Law Society, New Zealand Law Society)

It is not clear what an arrangement is. Often a contract to construct a dwelling is not entered into until after a property is transferred. The current definition also does not cover a residential section upon which a dwelling may be constructed in the future.

There needs to be a timeframe for the expiry of an arrangement. (Auckland District Law Society)

Residential land should include “land that will have a dwelling on it within X months” rather than refer to an arrangement. (New Zealand Law Society)

Comment

Officials consider that the bill could be simplified by removing the requirement that land be “residential land” to obtain the main home exemption from providing an IRD number. This would also mean that the definitions of “dwelling” and “farmland” – which are only included because they are used in the definition of residential land – are not required and could be deleted.

Recommendation

That the submissions be noted and that the definitions of “dwelling”, “farmland” and “residential land” be deleted from clause 156A of the Bill.

Issue: Meaning of “dwelling”

Submission

(New Zealand Law Society)

The definition of “dwelling” excludes a number of types of premises. These are presumably intended to capture the units/sections within the various premises listed, rather than the entire premises. If that is the case it should be clarified.

The definition of “dwelling” excludes retirement villages. This means that a person who uses a retirement village as their main home will not be able to get the benefit of the main home exemption.

Comment

As discussed above, officials consider that the bill could be simplified by removing the requirement that land be “residential land” to obtain the main home exemption.

If the Committee agrees to that recommendation, the definition of “dwelling” would be deleted. This would enable people who live in retirement villages to utilise the main home exemption.

Recommendation

That the submission be noted.

Issue: Meaning of “farmland”

Submission

(EY)

The definition of farmland should also refer to forestry, horticultural, and pastoral businesses to avoid uncertainty in the context of the Land Transfer Act 1952.

Comment

As discussed above, officials consider that the bill could be simplified by removing the requirement that land be “residential land” to obtain the main home exemption.

If the Committee agrees to that recommendation, the definition of “farmland” would also be deleted.

Recommendation

That the submission be noted.