Section CB 1 and CB 6
- Should Tim Neil and Lacey Neil (referred to as “the Neils” in this report) be considered to be in business?
- If the sale of the seven lots is considered as a business proposition, what are the tax implications for “the Neils”?
- When should the commencement of their business be considered for taxation purposes?
- Will the profits earned by “the Neils” be considered as “Ordinary Incomes” or “Capital Gains”?
- Section YA1 of the Income Tax Act of 2007
- Section CB1 of the Income Tax Act of 2007
- Section CB 4 of the Income Tax Act of 2007
- Section CB 5 of the Income Tax Act of 2007
- Section CB 6 of the Income Tax Act of 2007
- Section CB 7 of the Income Tax Act of 2007
- Section CB 16 A of the Income Tax Act of 2007
- Section CB 17 of the Income Tax Act of 2007
- Section CB 19 of the Income Tax Act of 2007
- Section DA1 of the Income Tax Act of 2007
- Anzamco Ltd v Commissioner
- Aubrey v Commissioner
- Bates v Commissioner
- Morrow v Commissioner
- Vuleta v Commissioner
- Wellington v Commissioner
My advice to “the Neils” is broadly based on the derivations which I arrived at from the various judgements of the learned judges, both from the High Court as well as the Supreme Court of New Zealand in the cases which I have mentioned above in my Theory Section. I have inferred from these judgements that apart from the directives laid down by the Taxation Laws in the Income Tax Act of 2007 (ITA, 2007), these historical as well as milestone judgements are equally responsible for making any aspiring learner of the law of the land in understanding what, when and where do statutes of law need to be applied when arriving at a just remedy for addressing the grievances of the taxpayers in New Zealand, (CCH New Zealand (ed), 2013). My detailed advice shall be set in the chronical order of the issues stated above.
- Issue of Business
This issue is addressed for taxation purposes under Section CB 1 of ITA, 2007 and the definition given is quoted here –
“CB 1 – Amounts derived from business
Income
- An amount that a person derives from a business is income of the person.
Exclusion
- Subsection (1) does not apply to an amount that is of a capital nature”.
However, in the case of “the Neils”, the following statute, as per (CCH New Zealand Ltd (ed), 2013), is more appropriate and the definition is quoted below –
“CB 6 – Disposal: land acquired for purpose or with intention of disposal
Income
- An amount that a person derives from disposing of land is income of the person if they acquired the land—
- for 1 or more purposes that included the purpose of disposing of it:
- with 1 or more intentions that included the intention of disposing of it.
“The Neils” had acquired the land for residential purposes, hence the following Exclusions are applicable and I quote –
- Subsection (1) is overridden by the exclusions for residential land in section CB 16 and for business premises in section CB 19”.
I am citing the following statute to make it clear that “the Neils” were not intending to carry on a business in the trade of land.
Hence, I quote –
“CB 7 – Disposal: land acquired for purposes of business relating to land
Income
- An amount that a person (person A) derives from disposing of land is income of person A if—
- both the following apply:
- at the time person A acquired the land they, or an associated person, carried on a business of dealing in land; and
- person A acquired the land for the purpose of the business; or
- both the following apply:
- at the time person A acquired the land they, or an associated person, carried on a business of developing land or dividing land into lots; and
- person A acquired the land for the purpose of the business; or
- all the following apply:
- at the time person A acquired the land they, or an associated person, carried on a business of erecting buildings; and
- person A acquired the land for the purpose of the business; and
- before or after acquiring the land person A, or the associated person, made improvements to it.
Exclusions
- Subsection (1) is overridden by the exclusions for residential land in section CB 16 and for business premises in section CB 19.
This exclusion clause proves my point, (Scully & Caragata (ed), 2012).
- Tax Implications
This issue is addressed for taxation purposes under Section DA 1 of ITA, 2007 (Littlewood & Elliffe (ed), 2017) and the definition given is quoted here –
“DA 1 – General Permission: Nexus with income
- A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is—
- incurred by them in deriving—
- their assessable income; or
- their excluded income; or
- a combination of their assessable income and excluded income; or
- incurred by them in the course of carrying on a business for the purpose of deriving—
- their assessable income; or
- their excluded income; or
- a combination of their assessable income and excluded income”.
This issue is addressed for taxation purposes under Section YA 1 of ITA, 2007 (CCH New Zealand (ed), 2013) and the definition given is quoted here –
“YA 1 Definition
In this Act, unless the context requires otherwise, 12 month ASAP—
- means an agreement for the sale and purchase of property or services (ASAP) for which an amount paid or payable for property or services is pre-paid (the prepayment) by reference to the rights date, and the prepayment is paid 12 months or more before the rights date, except if the prepayment is only—
- a payment for progress made on either making or constructing property, or providing services:
- a deposit for property or services paid within the first 3 months of the ASAP that, when aggregated with all other deposits paid within those first 3 months, totals 10% or less of the amount paid or payable for property or services”.
Disposal within 2 years
- An amount that a person derives, say (Lymer & Hasseldine (ed), 2012), from disposing of residential land is income of the person, if the bright-line date for the residential land is within 2 years of—
- the date on which the instrument to transfer the land to the person was registered—
- under the Land Transfer Act 1952; or
- under foreign laws of a similar nature to the Land Transfer Act 1952, if the land is outside New Zealand; or
- their date of acquisition of the land, if an instrument to transfer the land to the person is not registered on or before the bright-line date.
Start of 2-year period for transfers by registration if trustees change
- If the person referred to in subsection (1)(a) or (2)(a) is a trustee of a trust who has been transferred the land or undivided land from a trustee of the trust, the date on which the instrument was registered is treated as occurring on—
- for subsection (1)(a)—
- the earliest date (first date) on which an instrument to transfer the land to a trustee of the trust was registered under the relevant law referred to in the subsection, if there has been no intervening transfer to a person who is not a trustee; or
- the first date following the intervening transfer, if there has been an intervening transfer to a person who is not a trustee:
- for subsection (2)(a)—
- the earliest date (the undivided date) on which an instrument to transfer the undivided land to a trustee of the trust was registered under the relevant law referred to in the subsection, if there has been no intervening transfer to a person who is not a trustee; or
- the undivided date following the intervening transfer, if there has been an intervening transfer to a person who is not a trustee (Lymer & Hasseldine (ed), 2012).
The explanations given in the above three issues (2, 3 & 4) make it clear that “the Neils” did not carry out a business but the transactions which they carried out for disposal of the land held by them were indeed for the purpose of earning a profit. Hence, the income derived by them would be treated as “Ordinary Income” in their hands and taxable accordingly.
Section DA 1 and YA 1
Here I am again giving the confirmation, with the citation of Statues CB 4 and CB 5 that “the Neils” do have a tax liability from the transaction which they carried out through the sale of their Personal Property, (James, Sawyer & Budak (ed), 2016).
CB 4 – Personal property acquired for purpose of disposal
Any amount, which a person has derived after disposal of its personal property shall be considered as income of that person in case the property is acquired for the purpose of disposal.
CB 5 – Business of dealing in personal property
Any amount, which a person has derived after disposal of its personal property shall be considered as income of that person in case it is their business to deal in property of that type.
The following explanation, which is part of the Land Transfer Act of 1952, also confirms that “the Neils” would be liable for taxation on the income derived from the sale of the subdivided land, (CCH New Zealand (ed), 2013).
An amount which is derived by a person from disposing of the residential land and which results because the person has subdivided the undivided land, shall be considered as income of that person, provided the bright-line date of the residential land is within 2 years of the date on which the person obtained the instrument to transfer that undivided land under the Land Transfer Act 1952.
An amount which is derived by a person from disposal of a freehold residential land, which has been acquired as a result of a land development or subdivision, shall be income provided the bright-line date of the freehold estate lies within 2 years of acquiring the interest in the land.
Conclusion
Apart from the explanations provided above, which have proved beyond doubt the tax liability of “the Neils”, I would also like to mention the following statutes of the ITA, 2007 in support of my discussion, (CCH New Zealand Ltd (ed), 2013).
- Section CB 16A explains that the meaning of bright-line date, for the disposal of any residential land is –
- the earliest of:
- The date on which “the Neils” enter into the agreement of the disposal.
- The date on which “the Neils” gift the residential land.
- The date on which the residential land of the “the Neils” is compulsorily acquired by the Crown, a local authority, or a public authority under any Act.
- If there is a mortgage secured by “the Neils” on their residential land, then the date on which the land is disposed of as a result of their defaulting.
OR
- If none of the above apply, the date on which the Neil’s interest in their residential land is disposed of, then the date of acquisitionon which the other person acquires the residential land.
- Section CB 6A defines the term trusteeas the entity described under s.62(2) of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017.
To further explain the situation of the Neils and to strengthen their case from the taxation point of view, I have extracted certain similar case studies from the archives of the New Zealand High Court and Supreme Court judgements, which I am reproducing below.
- Anzamco Ltd (in liq) v Commissioner of Inland Revenue
High Court of NZ Case No. (1983) 6 NZTC 61,522
The holding company purchased the property with an intention of farming and not for the purpose of reselling it. The taxpayer’s cited the relevant section 67 which is applicable only to developments into lots and this was not done by the taxpayer.
- Aubrey v Commissioner of Inland Revenue
Statutes CB 4 and CB 5
High Court of NZ Case No. (1984) 6 NZTC 61,765
Aubrey operated a family farm and in 1964 he received Council approval of subdividing the farm into lots. The approval was on condition that the taxpayer carry out the development work for a cost of $20,280. The Commissioner submission of correct application of s.67 was upheld and the profits of Aubrey were rendered taxable.
- Bates v Commissioner of Inland Revenue
Supreme Court of NZ Case No. SCNZ (1955) 11 ATD 96
Bates had converted some of the properties into flats and rented them to tenants. When the commissioner included some of the properties in his Land Tax returns, he stated that his business consisted of buying, renovating and selling houses. However, learned Henry, J. held that the appellant was not carrying on business of dealing in land within the meaning of s. 79 (1) (c).
- Morrow v Commissioner of Inland Revenue
High Court of Hamilton Case No. (1989) 11 NZTC 6,053
Morrow admitted that his intention related to the sale of the land and the seven acre block was sold to developers. The Commissioner submitted that one of the purposes of acquisition was the subsequent sale of the land.
- Vuleta v Commissioner of Inland Revenue
Supreme Court of NZ Case No. (1961) 13 ATD 41
It was held by the court that the appellant was into the scheme devised for the purpose of making a profit and these profits were assessable income within s.88 (c) of the Land and Income Tax Act 1954.
- Wellington v Commissioner of Inland Revenue
High Court of NZ Case No. (1981) 5 NZTC 61,101
Wellington submitted before the High Court that the subdivision of the amalgamated block back into the original lots was not covered under s.88AA(1)(d). He also contended that, even if the subsection was applicable, the profits would be exempt under s.88AA(3) as the subdivision of land occupied was principally a residential land.
References
CCH New Zealand (ed). (2013) New Zealand Master Tax Guide (2013 edition). Auckland: CCH New Zealand Limited.
CCH New Zealand Ltd (ed). (2013) New Zealand Income Tax Act 2007 (2013 edition). Auckland: CCH New Zealand Limited.
ird.gov.nz. (n.d.) The Inland Revenue Department of New Zealand. Extracted on 12 October 2017 from https://www.ird.govt.nz/?id=201405MegaMenu
James, S., Sawyer, A. and Budak, T. (ed). (2016) The Complexity of Tax Simplification: Experiences From Around the World. Hampshire: Springer.
Littlewood, M. and Elliffe, C. (ed). (2017) Capital Gains Taxation: A Comparative Analysis of Key Issues. Cheltenham: Edward Elgar Publishing.
Lymer, A. and Hasseldine, J. (ed). (2012) The International Taxation System. New York: Springer Science & Business Media.
Scully, G.W. and Caragata, P.J. (ed). (2012) Taxation and the Limits of Government. New York: Springer Science & Business Media.
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