For many years there has been a debate about what is the acquisition date of land for tax purposes.
OPINION: This is important for many reasons, including:
Determining whether a taxpayer has an intention or purpose of disposal at the time of acquisition - section CB 6 of the Income Tax Act 2007.
Determining when land on revenue account is acquired by associated persons for most of the land provisions in subpart CB - section CB 15.
Sections CB 7, CB 9, CB 10 and CB 14 - which determine when the 10-year period begins for a business dealing in land (including land development, subdivisions and change of land use under the Resource Management Act 1991).
Whether a subdivision involving work of more than a minor nature is commenced within 10 years of acquisition - section CB 12.
Section CB 15B has been added to provide certainty. The general rule for the purposes of subpart CB is that: "a person acquires an estate, interest, or option that is land (the land) on the date that begins a period in which the person has an estate or interest in, or an option to acquire, the land alone or jointly or in common with another person."
There are separate provisions dealing with acquisitions by yet- to-be incorporated companies and options to buy land.
The general rule reflects what happens under property law, that the point of acquisition is when the transferee (buyer) has an enforceable right such as title being issued or finance being approved.
I accept that this is an appropriate stance for determing acquisition date for the purposes of sections CB 7 to 15. I do not accept, however, that this is an appropriate test for section CB 6.
Given the definition of acquisition in section CB 15B the test of a taxpayer's intention or purpose for a conditional contract will not be the date that the contract is signed. To me that situation is counter-intuitive and may lead to unexpected tax bills. Consider the following example:
Sue and Ted sign a contract to acquire a section in a new development in Wanaka. The intention is to build a home for their retirement.
Before title is issued, Ted has a stroke and is put into long-term care in Invercargill. Sue no longer wishes to build on the section and will stay living in Invercargill to be close to Ted; and
Once the title is issued, the section is sold at a profit. That profit will be taxable.
I acknowledge that the certainty created by section CB 15B will be of great assistance for sections CB 7 to 15, but it does not necessarily result in an equitable result for section CB 6. I believe that a separate definition of acquisition date, being the date of entering into the contract, should apply as it did in the former Property Speculation Tax Act.
Murray McClennan is a director of Tax Central Ltd, a specialist tax consulting firm. Email firstname.lastname@example.org for contact. The above comments are of a general nature only and are not a substitute for specific advice
- The Southland Times