A Week in Review

Richard AshbyPartner, Gilligan Sheppard

Can a fit-out be “improvements” for s.CB 11 purposes?

A draft QWBA has been released by IR (PUB00286) to discuss the question of whether the fit-out of an existing building can be deemed an “improvement” to land for the purposes of s.CB 11 of the ITA07 and therefore create potential tax consequences for the land owner should a disposal of the land occur within 10 years of the improvements being completed.

S.CB 11 is one of the ten so-called land tax provisions (s.CB 6A to CB 14). It subjects to taxation (unless one of the 3 permitted exclusions apply), amounts derived from a disposal of land within 10 years of the date improvements to the land are completed, where at the time the improvements began, either the taxpayer themselves carried on a business of erecting buildings (regardless of whether or not the land in question was acquired for the purpose of that business), or they were associated to another person who carried on such a business.

Unlike some of the other s.CB land tax provisions, where central to the relevant provision having application is the nature of activities being carried on by the taxpayer or an associated person at the time the land in question is acquired, s.CB 11 is distinguished, firstly because it is the activities carried on by the relevant parties at the time the improvements to land are begun that are critical, and secondly, because the ten year clock only starts to tick once the improvements in question have been completed.

PUB00286 restates the long-standing land law principle, that a building attached to a piece of land is considered to be a part of that land. Consequently, any improvements made to a building itself, will be improvements to land upon which that building is situated. The key consideration therefore, is whether the work undertaken by the taxpayer, is an “improvement”, and the starting point here is the statutory definition of that term for the purposes of s.CB 11, contained in s.YA 1. Primary to the definition is whether or not the improvements are “not minor” (although secondary in essence to having already asked yourself the question of whether the fit-out is permanent or temporary in nature, as the latter will not be an improvement to the building itself per se and therefore cannot be an improvement to the land).

Guidance on the “not minor” issue can be found in IG0010 (a 2005 interpretation statement “Work of a minor nature” – TIB Vol17, No1 (Feb05)), however principle factors to consider will be:

  • the importance of the improvements in relation to the physical nature and character of the land;
  • the total cost of the improvements done, in both absolute and relative terms;
  • the nature of the professional services required; and
  • the nature of the work required for the improvements (if any).

Should you eventually determine you have a potential exposure under s.CB 11, there are available exclusions for residential land and business premises, neither likely to have application however, where the land in question is simply generating investment income – rent being the most likely example.

Deadline for any commentary is November 17th, although I would not expect to see any material change to the draft, considering that there will always continue to be the murky areas of permanent versus temporary fit-out, and then whether the works themselves breach the minor threshold – for which no black and white determination can ever be provided.

Useful Guidance for Not-For-Profit’s

IR has provided an update regarding its publication of useful guidance material for not-for-profit organisations. Topics covered include:

  • Simplifying tax — claiming donation tax credits
  • The interpretation of “wholly or mainly” for the purposes of the donee organisation test
  • Proposed changes to the tax rules when a charity deregisters
  • Changes for not-for-profits that are financial institutions and have foreign account holders.

Follow the link News and updates to access the updates.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected] Ph: +64 9 365 5532 Fx: +64 9 309 5260 Mb: +64 21 823 464