Land

Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill

Officials' report to the Finance and Expenditure Committee on submissions received on the Bill

February 2001

Land

Overview
Habitual buying and selling of land
Cost of revenue account property
- Issue: Support for the amendment
Land transfer tax statement
- Issue: Direct information sharing between LINZ and Statistics NZ
- Issue: Support for the amendment to move LTTS content to regulations
Other issues
- Issue: Definition of “dwelling” and related terms
- Issue: Future amendments

OVERVIEW

Existing provisions in the Income Tax Act 2007 tax sales of land by land developers, dealers, builders, and connected persons. In addition, there is the so-called “intention test”, which applies to all taxpayers. If a person sells a property that was acquired with the purpose or intention of disposal, they are taxed on the income arising from that disposal. There are limited exclusions for properties used as a residence or business premises. However, these exclusions do not apply if the person has a regular pattern of buying and selling land (“regular pattern restriction”).

The bright-line test was introduced in 2015 as an additional charging provision in the land sale rules, with the aim of buttressing the intention test. Initially, it applied to disposals of residential land made within two years of acquisition but has since been extended to five years for land acquired on or after 28 March 2018.

At the same time as the introduction of the bright-line test, additional reporting requirements were introduced for land transactions – in particular, the introduction of the Land Transfer Tax Statement, which must be completed by buyers and sellers alike.

The Bill includes proposals that emerged out of the first tranche of the previous Government’s review of the current land rules undertaken in 2019. In particular, the Bill proposes:

to amend the regular pattern restriction outlined above to ensure that it cannot be circumvented simply by changing ownership patterns and what is done to the land. At the same time, the proposal limits the regular pattern restriction to those who acquire land with a purpose or intention of disposal. The proposal would apply to land acquired on or after the enactment of the Bill, but land acquired before this date could be considered for determining whether there is a pattern;
to clarify that the cost of revenue account property is deductible, even if, at the time the costs were incurred, it was not known that the disposal would be taxed or if the property was used privately. This is particularly relevant in the context of the land sale rules, as someone may not know at the time they purchase a property or make improvements that they will sell it within the bright-line period. This proposal would apply from 1 April 2008, being the commencement date of the Income Tax Act 2007, as it is a taxpayer-friendly measure that would align the law with current practice; and
to relocate the content of the Land Transfer Tax Statement to regulations. The content is currently prescribed in primary legislation in the Land Transfer Act 2017. The proposed change would enable the content of the form to be updated in the future in a timely manner.

In this report, officials recommend a technical amendment to the definition of “dwelling” to ensure that vacant properties are within the scope of the term. This proposed amendment should be retrospective to the introduction of the bright-line test, 1 October 2015, to ensure that the law aligns with the practical application to date.

Overall, there were nine submissions that covered the land sale rules. Four submitters explicitly expressed support for the first proposal (regular pattern restriction), three for the second (deductibility of revenue account property), and one for the third (relocating the contents of the Land Transfer Tax Statement).

Regarding the regular pattern restriction proposal, three submitters do not consider that it should impact the business premises exclusion. Officials consider that there needs to be consistency with the other exclusions, and note that genuine commercial transactions would not be caught as the proposal would also require that the land be acquired with a purpose or intention of disposal.

No submitters were opposed to the proposals regarding the deductibility of revenue account property and relocating the contents of the Land Transfer Tax Statement.

Technical submissions were made on proposed new terms and how they are defined. For example, four submitters considered that the term “significant involvement” used in the regular pattern restriction should be defined. However, as an anti-avoidance rule, it would not be appropriate to have a prescriptive test as it could be easily structured around. Three submitters suggested that instead of referring to a group of persons, it would be better to have an explicit link to the established “associated persons” rules. The intent of the rule is to capture slightly different relationships than those provided for in the associated persons rules.

A number of submissions were made in relation to aspects of the land sale rules that are not within scope of the proposals contained in the Bill. Officials note that these issues would require prioritising and resourcing as part of the Government’s tax policy work programme but could be considered as the land review progresses.

HABITUAL BUYING AND SELLING OF LAND

(Clauses 5, 6 and 7)

Issue: Support for the amendments

Submission

(Corporate Taxpayers Group, Deloitte, EY, Navtej Singh)

Four submitters support the proposed amendments. The submitters note that the amendments are aimed at ensuring the land sales rules are suitably robust, are reasonable and in line with the intention of the overall legislative change in this area, proactively address abuse of the regular pattern rules, which is crucial without a broad-based capital gains tax, and will bring more opportunities for first home buyers.

Recommendation

That the submissions be noted.

Issue: Support for purpose of disposal limitation

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte)

Three submitters support the proposal that land must be acquired for a purpose or intention of disposal before the regular pattern restrictions will apply. The submitters note this will ensure that the rules are suitably targeted in the first instance and should help ensure that genuine transactions are not unintentionally captured by the proposed rules.

Recommendation

That the submissions be noted.

Issue: Amendment to business premises exclusion not necessary

Submission

(Chartered Accountants Australia and New Zealand, EY, KPMG)

The proposed amendments should not be made to the business premises exclusion in section CB 19.

There is no evidence to suggest that the current regular pattern restrictions in the business premises exclusion are not operating as intended. The requirement in the business premises exclusion that the land must be used for a substantial business already provides sufficient restriction.

Larger taxpayer groups are likely to be disadvantaged by the proposed grouping rule since transaction frequency can be expected to be higher across more related/controlled entities.

Any specific concerns regarding a person or group and their pattern of behaviour should be addressed under the current anti-avoidance provisions in Part G of the Income Tax Act 2007.

Comment

The substantial business requirement in the business premises exclusion does restrict a taxpayer’s ability to rely on that exclusion. However, the current business premises exclusion also already contains a regular pattern restriction. To clarify – the amendments do not propose to change that overall policy setting.

Instead, the proposal to amend the regular pattern restriction in the business premises exclusion aims to ensure that there is consistency with the other regular pattern restrictions. It also ensures that the current regular pattern restriction cannot be structured around by, for example, using subsidiaries to carry out different transactions in order to avoid a pattern being established. This ensures that the current restriction operates as intended.

The inclusion of the requirement that the regular pattern restrictions will not operate unless land is acquired with a purpose or intention of disposal will ensure that large taxpayer groups will not be disadvantaged by this amendment simply due to the scale of their transactions. The regular pattern restrictions are not intended to capture genuine commercial transactions where there was no intention to dispose of the land when it was acquired.

Recommendation

That the submissions be declined.

Issue: Group of persons – clarify “significant involvement or control”

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, New Zealand Law Society)

The term “significant involvement” should be defined.

The word “significant” is imprecise and it is not clear what type of involvement is required. The word “control” is also imprecise, and it is not clear what type of control is required (New Zealand Law Society).

Comment

Given the context of the regular pattern restrictions as anti-avoidance provisions, it is considered appropriate not to have a prescriptive test that could be structured around. The ordinary meaning of the words “significant involvement” and “control” provide sufficient guidance as to the types of relationships that will give rise to a “group of persons”. As stated in the Commentary to the Bill, 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.

Recommendation

That the submissions be declined.

Issue: Group of persons – “significant involvement” is not necessary

Submission

(KPMG)

The term “significant involvement” should be omitted from the definition of a “group of persons”, or the definition should be modified so that it reads “significant involvement, and control in”, similar to section CW 12 of the Income Tax Act 2007.

If a person is “able to direct, alone or as part of a group, the relevant trust or entity’s decision-making process”, it appears to us that the person would have “control” of the relevant trust or entity and therefore the term “significant involvement” is redundant.

It is possible for a person to have “significant involvement” in a trust or entity and not have control of the trust or entity. The term materially expands the meaning of “a group of persons” without clear definition.

Comment

The use of both “significant involvement” and “control” in the definition of “a group of persons” was intended, as the terms can differ in meaning. As an anti-avoidance rule, the proposed definition of “group of persons” should refer to both.

The use of the terms in section CW 12 of the Income Tax Act 2007 arises in a slightly different context. The provision provides for an exemption from tax for share disposals by certain foreign investors. For a foreign partnership to qualify for the tax exemption, there needs to be at least one general partner who has significant involvement in, and control of, the business activities.

Tax exemptions are generally naturally tighter in scope to ensure they are contained, while anti-avoidance rules need to be broader to ensure they cannot be structured around. Therefore, although requiring both significant involvement in business activities and control thereof may be appropriate for a tax exemption, officials do not consider this appropriate for the “group of persons” definition and it should continue to refer to “significant involvement in, or control of”.

Recommendation

That the submission be declined.

Issue: Group of persons – better to use associated person test

Submission

(Corporate Taxpayers Group, Deloitte, KPMG)

It would be better to have a clear link to the associated person rules. As currently drafted, the “group of persons” test could capture situations where people are not associated, such as where entities have a common employee but no common ownership, or where a parent and adult child own and occupy a series of properties.

Comment

It is intended that the “group of persons” test capture relationships where people would not ordinarily be “associated persons”, such as those raised in the submissions. The purpose of extending the regular pattern restrictions to a “group of persons” is to capture situations where people are acting together in a way that results in land being regularly bought and sold without being taxed. This requires capturing different relationships from those already caught by the associated person rules. Concerns about the test being broader than the associated person rules should be mitigated by the requirement that land must first be acquired for the purpose of disposal before the regular pattern restrictions apply.

Recommendation

That the submission be declined.

Issue: Meaning of “regular pattern” – term does not achieve policy intent

Submission

(KPMG)

The High Court considered the meaning of “regular pattern” in Parry v Commissioner of Inland Revenue and considered that it “denotes a similarity or likeness in the transactions”. The Bill commentary states that the policy intent is that the transactions are not required to be similar, so the use of the term “regular pattern” would not achieve this outcome. The word “pattern” should be deleted and the phrase “regularly engaged” should be used instead.

Comment

The concern being addressed by the current amendment is not the fact that the term “regular pattern” requires a similarity or likeness, but the fact that the current definition, and that considered by the High Court in Parry, required a regular pattern of either acquiring and disposing, or erecting and disposing of dwellinghouses. This led the Court in Parry to consider whether there was a regular pattern of erecting dwellinghouses, rather than focusing on whether there was a regular pattern of acquisition and disposal of land.

It is considered that amending the regular pattern restrictions in sections CB 16 and CB 19 to only refer to acquiring and disposing of land used as a residence or business premises will ensure that the focus is on the similarity or likeness of the acquisition and disposal transactions, rather than on whether similar activities (for example, building, renovating, etc) have been done on each piece of land while it is owned.

Recommendation

That the submission be declined.

Issue: Group of persons – minor clarification

Submission

(Matter raised by officials)

As currently drafted, the reference to a “trustee of a trust or another entity” in the second limb of the definition of “group of persons” in the regular pattern restrictions for the main home exclusion (section CB 16A) and the residential exclusion (section CB 16) could give rise to confusion because a trustee of a trust is not a legal entity.

Comment

The second limb of the definition of “group of persons” in the main home and residential exclusions is intended to ensure that persons who are not natural persons can form part of the group of persons where a natural person living in the property has significant involvement in, or control of, the activities of the non-natural person. The reference to a “trustee of a trust or another entity” should be amended to refer to a person that is not a natural person to provide more clarity that this covers all non-natural persons (including persons in their capacity as trustees), whether or not they can be described as an entity.

Recommendation

That the submission be accepted.

Issue: Sale and leaseback transactions

Submission

(EY)

The proposed changes should specifically exclude sale and leaseback arrangements from the intention test for the purposes of the business premises exclusion. Large retail businesses are often required to acquire land and undertake the development of their own business premises because of the scarcity of capital and development capability in the New Zealand market. Sometimes land will be acquired and developed with an intention that once the development is complete, the land will be sold to a third-party landlord and leased back to the retailer. Given the land can be acquired with an intention of disposal, and these types of transactions can be repeated, these transactions could fall outside of the amended business premises exclusion in section CB 19. Such transactions should be considered acceptable and within the business premises exclusion provided there is a substantial business that continues to operate on the premises which is not centred on property development/improvement.

Comment

The current business premises exclusion contains a regular pattern restriction. Under that restriction, a large retail business is not entitled to rely on the business premises exclusion if it regularly acquires land with an intention of entering sale and leaseback transactions once the land is developed. There is no intention to change this policy setting. The amendments simply ensure that large retail businesses that undertake such transactions cannot avoid this outcome by using separate subsidiaries to enter into each transaction.

Recommendation

That the submission be declined.

Issue: Guidance

Submission

(Chartered Accountants Australia and New Zealand, EY)

An education campaign should be undertaken when the legislation is introduced, including publication of the policy intent and examples illustrating the application of the legislation.

Comment

Officials note that following enactment of the proposed amendments, Inland Revenue will provide guidance through a Tax Information Bulletin.

Recommendation

That the submission be accepted, noting that guidance will be provided.

COST OF REVENUE ACCOUNT PROPERTY

(Clause 14)

Issue: Support for the amendment

Submission

(Corporate Taxpayers Group, Deloitte, Chartered Accountants Australia and New Zealand)

Three submitters support the proposed amendment.

Comment

Officials note that the proposed amendment would have retrospective effect from 1 April 2008, to coincide with the introduction of the Income Tax Act 2007. The proposed amendment ensures that the legislation aligns with the policy intent and how deductions are currently being allowed. The proposed amendment should therefore not have any real impact on taxpayers.

Recommendation

That the submissions be noted.

LAND TRANSFER TAX STATEMENT

Issue: Direct information sharing between LINZ and Statistics NZ

Submission

(Matter raised by officials)

The Bill proposes changes to the Land Transfer Act 2017 to amend the Land Transfer Tax Statement provisions to allow the content of the Land Transfer Tax Statement (LTTS) to be set by regulations.

The LTTS is used to collect tax details and residency information of transferors and transferees of property in New Zealand. This information is provided to Land Information New Zealand (LINZ) at the point of property transfer. LINZ provides this information to Inland Revenue to assist in administering the tax system, particularly in relation to compliance with tax obligations.

The information is also used to prepare quarterly releases on property transfers. The releases include information on the citizenship, visa status, or tax residency of people and companies involved in property transfers. The role of preparing these releases moved from LINZ to Statistics NZ in May 2018.

Currently LINZ is only able to share the data collected from the LTTS with Inland Revenue in accordance with the legislative provisions set out in the Land Transfer Act 2017. To facilitate Statistics NZ’s role in preparing the quarterly releases, Inland Revenue currently on-shares the information collected on the LTTS with Statistics NZ under information sharing provisions contained in the Tax Administration Act 1994.

Officials recommend that an amendment be made to the Land Transfer Act 2017 to allow LINZ to share the information collected on the LTTS with Statistics NZ directly.

Comment

This amendment will improve the information flows between agencies using the data collected on the LTTS by allowing LINZ as the agency collecting the information, to share this directly with Statistics NZ.

Permitting direct information sharing in the Land Transfer Act 2017 is more transparent and will reduce the double handling of information.

LINZ and Statistics NZ have an existing information sharing Memorandum of Understanding (MOU), and currently share other data. Following this amendment, the information-sharing MOU would be amended to facilitate this information sharing.

Officials consulted with the Office of the Privacy Commissioner on this item, which did not have any issues with the proposed change.

Recommendation

That the submission be accepted.

Issue: Support for the amendment to move LTTS content to regulations

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the amendments to the Land Transfer Act 2017 to allow the content of the Land Transfer Tax Statement to be moved to regulations.

Recommendation

That the submission be noted.

OTHER ISSUES

Issue: Definition of “dwelling” and related terms

Submission

(Matter raised by officials)

The definition of “dwelling” and related terms in the Income Tax Act 2007 should be amended to ensure that vacant residential properties are subject to the same tax rules as occupied residential properties, consistent with the policy intent.

Comment

The term “dwelling” is used in the definition of other terms such as “residential land” and “residential building” to determine whether a property is subject to the bright-line test, residential land withholding tax and the residential rental loss ring-fencing rules, and whether building depreciation and separate depreciation of commercial fit-out are available.

The bright-line test taxes sales of residential property that occur within five years of acquisition, and the residential rental loss ring-fencing rules ensure that a property owner is not able to use losses arising from rental properties to offset other income tax liabilities. It was intended that these rules apply, broadly speaking, to land with a house on it regardless of whether the house is used or not used at all. The bright-line test uses the concept of “residential land”, which relies on the term “dwelling” with a few modifications.

The existing definition of “dwelling” requires that a property be used predominantly as a place of residence or abode. There are concerns that the focus on actual use as a residence excludes residential properties that are predominantly vacant. This means they would not be subject to the bright-line test and rental loss ring-fencing rules, which is not consistent with the policy intent.

Officials consider that the definition of “dwelling”, and potentially “residential building” and “residential land”, should be amended to include vacant residential properties.

As this was an unintended oversight in the original drafting and it was never intended that a property could be outside the scope of the bright-line test by keeping it vacant, the amendment should be retrospective to the introduction of the bright-line test, 1 October 2015, to ensure that the law aligns with the practical application to date.

Recommendation

That the submission be accepted.

Issue: Future amendments

Submission

(Corporate Taxpayers Group, PwC, EY, Chartered Accountants Australia and New Zealand, Russell McVeagh)

It is important that a comprehensive review of the rules be undertaken in the future to address distortions which may have arisen from ad hoc amendments over time, and to ensure that the rules are both coherent and fit for purpose. (Chartered Accountants Australia and New Zealand)

In particular, the following issues are raised for future consideration:

The business premises exclusion should be extended to apply where:
- Premises are leased to, and occupied by, a company in the same wholly owned group as the landowner. (Corporate Taxpayers Group, PwC)
- Franchisees should be counted as agents for the purpose of “occupied” in section CB 19. (Corporate Taxpayers Group)
- Space leased and occupied by third parties who provide services integral to the operation of the landowner’s business (for example, a hotel) should not be apportioned out under section CB 19, if these spaces are only a small part of the overall property. (Corporate Taxpayers Group)
A specific disclosure regime should be introduced to monitor land transactions and provide evidence of a purpose or intention of disposal. (EY)
The bright-line test in section CB 6A should be amended to disregard transfers of land by a person to the trustee of a trust of which the person is a beneficiary and the principal settlor. (Russell McVeagh)

Comment

Officials acknowledge the matters raised in these submissions but note that it would require prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submissions be declined, subject to officials’ comments.