- Habitual buying and selling of land
- Cost of revenue account property
- Content of the land transfer tax statement
(Clauses 5, 6 and 7)
Summary of proposed amendment
The proposed amendments expand the regular pattern restrictions in the main home exclusion, the residential exclusion and the business premises exclusion to apply to regular patterns of buying and selling land by a group of persons acting together. The amendments will ensure that taxpayers cannot structure around the regular pattern restrictions by using different people or entities to carry out separate transactions, or by varying what is done to the land in each transaction so that there is no “pattern”.
The proposed amendments also clarify that the regular pattern restrictions in the residential and business premises exclusions will only apply when the land was acquired with a purpose or intention of disposal.
The proposed amendments would apply to land acquired after the date of enactment. However, land acquired before the application date would be able to be considered for the purposes of determining whether a group of persons have a regular pattern.
The proposed amendments will:
- expand the regular pattern restrictions in the main home, residential and business premises exclusion so they apply to a group of persons undertaking buying and selling activities together, rather than the activities of a single person;
- expand the regular pattern restrictions in the residential and business premises exclusions so they apply to a regular of pattern of buying and selling land, focusing on the regularity of the transactions rather than what is done on the land while it is held; and
- clarify that the regular pattern restrictions in the residential and business premises exclusions apply only when the land was acquired with a purpose or intention of disposal.
The land sales rules in subpart CB of the Income Tax Act 2007 contain various exclusions for land used as a main home, residence or business premises. If one of these exclusions applies, an amount that would otherwise be subject to tax under one of the land sales rules, will not be taxable. For example, an amount derived by a land dealer from selling land is usually subject to tax, but will not be taxable if the land dealer used the land as their residence while they owned it.
However, the following exclusions do not apply when there has been a regular pattern of buying and selling land used for such purposes:
- main home exclusion in section CB 16A (which applies for the bright-line test in section CB 6A);
- residential exclusion in section CB 16 (which applies for some of the other land sales provisions); and
- business premises exclusion in section CB 19.
The restrictions assume that a person who has a regular pattern of buying and selling land primarily acquires that land for sale and should be taxed on any gain, whether or not they used the land as their residence or business premises while they owned it.
There are concerns that the current regular pattern restrictions allow taxpayers who habitually buy and sell land to structure around the rules. This can be done by using different people or entities to carry out separate transactions, or by varying each transaction so that there is no “pattern”. This undermines the integrity of the tax system by allowing people to take advantage of the exclusions in circumstances when this was not intended.
Group of people acting together
All of the current regular pattern restrictions apply quite narrowly to the activities of a single person. This allows taxpayers to circumvent the application of the regular pattern restrictions by buying and selling land using different people and entities each time (for example, the first property is purchased by the person, the second is purchased by their partner, the third by their family trust, and so on).
The proposed amendments will expand all of the regular pattern restrictions so they apply to a group of persons undertaking buying and selling activities together.
For the main home and residential exclusions, a group of persons will be treated as undertaking buying and selling activities together when:
- all the people occupy all of the properties together as their residence; and
- where a property is owned by a trustee or other entity, at least one of the people who occupy all the properties has significant involvement in, or control of, the trust or other entity.
Example 10 illustrates a regular pattern involving a group of persons for the main home or residential exclusions.
Example 10: Residential and main home exclusions
Mr and Mrs A occupy all of the properties together as their residence. As a trustee of Trust A, Mrs A has significant involvement in, or control of, Trust A. As a trustee of Trust B, Mr A has significant involvement in, or control of, Trust B. Because Mr and Mrs A occupy all of the properties and have significant involvement in, or control of, the trusts that own two of the properties, Mr and Mrs A, Trust A and Trust B will be treated as a group of persons who undertake buying and selling activities together. Because those buying and selling activities form a regular pattern (as the properties are bought and sold at regular intervals), they will be subject to the regular pattern restriction (assuming all the properties were acquired with an intention of resale (see below)).
For the residential and main home exclusions the most important factor is that all the people in the group occupy all the properties. In example 10, if Mr and Mrs A’s daughter and son-in-law, Mr and Mrs B, lived with them in the second property for a year and then moved into their own home, Mr and Mrs B’s separate home would not form part of the pattern when it is sold because Mr and Mrs A did not occupy that property, and Mr and Mrs B did not occupy all of the other properties.
For the business premises exclusion, a group of persons will be treated as undertaking buying and selling activities together where:
- all persons in the group occupy premises mainly to carry on a substantial business, irrespective of the nature of any business carried on; and
- a person, whether or not they also occupy land as a business premises, has significant involvement in, or control of, the activities of all those in the group.
Example 11 illustrates a regular pattern involving a group of persons for the business premises exclusion.
Example 11: Business premises exclusion
Companies A, B, C and D all occupy their land as business premises mainly to carry on a substantial business. (It does not matter whether the businesses are related.) The same persons have significant involvement in, or control of, the activities of all of the companies (for example, all the companies have the same shareholders). Therefore, companies A, B, C and D form a group of persons who are treated as undertaking buying and selling activities together. Because those buying and selling activities form a regular pattern (the properties are sold at regular intervals), they will be subject to the regular pattern restriction (assuming all the properties were acquired with an intention of resale (see below)).
The terms “significant involvement” and “control” are used in other parts of the Act. In this context these terms indicate that the relevant person is able to direct, alone or as part of a group, the relevant trust or entity’s decision-making process.
Regular pattern of buying and selling
For the residential exclusion the regular pattern restriction currently applies when a person has engaged in a regular pattern of acquiring and disposing of, or erecting and disposing of, dwellinghouses occupied mainly as a residence by the person. For the business premises exclusion the regular pattern restriction currently applies when a person has engaged in a regular pattern of acquiring and disposing of, or erecting and disposing of, premises used by the person for a substantial business.
In contrast, the regular pattern restriction for the main home exclusion applies when the person has engaged in a regular pattern of acquiring and disposing of residential land used as their main home.
Because of the language used in the residential exclusion and the business premises exclusion, the regular pattern restrictions in those provisions have been interpreted very narrowly to apply only when there is a similarity or likeness between the transactions (for example, a pattern of buying land, building a home on the land and then selling). This means that the regular pattern restrictions do not apply if a person has a pattern of buying and selling land that they occupy as a residence or business premises and they carry out different activities on the land while they hold it. For example, the restriction would not currently apply where the first property is bought, lived in and sold, the second is renovated while it is lived in and sold, or the third is a bare section where a house is built and occupied then sold. This problem does not appear to arise from the more general wording used in the main home exclusion.
The proposed amendments will expand the regular pattern restrictions in the residential and business premises exclusions to align them with the main home exclusion. This will ensure they apply to any regular pattern of buying and selling land used as a residence or business premises, with a focus on the regularity of the transactions rather than on what is done on the land while it is held.
Purpose or intention
Expanding the regular pattern restrictions gives rise to an increased risk that they could catch ordinary residential transactions that occur for family reasons, and small businesses that are upgrading premises as the business grows. In particular, this risk arises for people who are associated with a person in a business involving land (such as a dealer, developer or divider, or builder). This is because they are, prima facie, subject to tax on all sales of land within ten years of acquisition, whether or not the land is used in a business or other income-earning scheme. Such people are entitled to rely on the exclusions to ensure their genuine homes and business premises are not taxed on sale.
Therefore, the proposed amendments clarify that the regular pattern restrictions in the residential and business premises exclusions apply only when the land was acquired with a purpose or intention of disposal. This ensures that the restrictions are better targeted at people who regularly buy and sell land on a speculative basis.
Summary of proposed amendment
The proposed amendment clarifies that the cost of revenue account property is deductible even if it was not known when the costs were incurred that the property would be subject to tax on sale, or if the property was used privately while it was held.
The proposed amendment would apply from 1 April 2008, being the commencement date of the Income Tax Act 2007.
The proposed amendment clarifies that section DB 23, which allows a deduction for the cost of revenue account property, supplements the general permission and overrides the private limitation.
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 (section DA 1). Whether the general permission has been satisfied is judged at the time the expenditure is incurred.
Section DB 23, which allows a deduction for the cost of revenue account property, is currently subject to the general permission. However, in some situations involving land subject to the land sale rules there may not be the required connection between expenditure on acquiring or improving the land and income. This is because, at the time the expenditure is incurred, it may not be known whether the disposal of the land will be taxed. This may be the case for land that is taxed if sold within a particular timeframe (for example, land sold within five years for the bright-line test), or if certain circumstances eventuate during the time the land is held (for example, if a division or development is carried on).
In addition, section DB 23 is currently subject to the private limitation. This means that technically, where there is private use of land that is subject to tax on sale, part of the costs of acquisition and improvements should also be denied to take into account the private benefit received.
It was clearly intended that the cost of acquiring and improving land that is taxed under any of the land sale rules would be fully deductible to ensure that only the net proceeds are income (or a loss). That is how the provisions operated before the rewrite of the 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 sales provisions.
(Clauses 95 to 100)
Summary of proposed amendment
The Bill proposes changes to the Land Transfer Act 2017 to move the content of the Land transfer tax statement (LTTS) to regulations. This change will make it easier to amend the LTTS in the future, for example to make changes that would reduce compliance costs for property transfers.
All references are to the Land Transfer Act 2017 unless otherwise stated.
The proposed amendment would apply from the date of enactment.
The current requirements in section 79 of the Act will apply until the first regulations which prescribe the content for the LTTS come into force.
The amendments propose that the content of the LTTS will be set by regulation. This will enable the content of the LTTS to be updated more easily and enable streamlining of property transfer information requirements.
The framework around the LTTS, for example, the rules around disclosure and use of information, are unchanged and remain in the Act.
From 1 October 2015, sellers and purchasers of land have been required to complete an LTTS at the time of transfer. The LTTS collects information used for assessing compliance with tax obligations. It also gathers statistics for use in housing policy. People buying and selling property may also have to complete:
- a residential land withholding tax declaration, for sellers of property sold within the bright-line period; and
- a residential land statement, for buyers of residential land acquired after 22 October 2018.
The content of the LTTS is currently largely prescribed by the Act. Making any changes to the information required on the form currently requires an amendment to the Act.
Amendments are proposed to section 77 to refer to tax information as that which is specified in a tax statement under the Act.
Section 79 is replaced with proposed new section 79 which requires that the tax statement must contain the prescribed information. Section 227(1)(3) provides that the Governor General may make regulations prescribing information to be contained in, and documents that must accompany, any instrument, application, notice, certificate, record, or any other thing for the purposes of the Act. A clarification is proposed to section 227 for the avoidance of doubt, to insert a reference to “statement” to make it clear that regulations can be made to prescribe information requirements for the LTTS.
Amendments are also proposed to section 83 to update the references to the types of information which may be released under this section. The purpose of this section is to continue the current rules regarding disclosure of information in aggregate form. This is achieved by including a definition of identifying information and allowing future regulations to deem any further information as identifying information.
Transitional provisions are proposed to specify that the current LTTS requirements apply until the new regulations are made.