A Week in Review

An improvement or not…that is the question?

IR has released QB 18/01, a QWBA on the issue, “Can a fit-out of an existing building be “improvements” for the purposes of s CB 11?”

The question has significance for either those taxpayers in the business of erecting buildings on land who acquire land not for the purpose of that business (“other land”), or taxpayers associated with someone in the business of erecting buildings, who have themselves acquired land, not for the purpose of any business of erecting buildings (“tainted land”).

S.CB 11 can have application, where improvements have been made to the other land or tainted land, and the land is disposed of within 10 years of the improvements being completed.

There are 3 important components to the taxing provision – has there been improvements to land; are the improvements “not minor”; and, have the improvements been made while erecting a building or otherwise.

It is a long-standing common law principle, that whatever is affixed to the soil, belongs to the soil, and consequently buildings and items permanently attached to them (fixtures) become part of the land itself. Therefore, where the work or operations done to the land involves the erecting of a building or fixture which enhances the value of the land, there has been an improvement to the land itself. Equally the removal of a building or fixture that enhances the land value, can similarly be an improvement to land.

Whether an improvement to land will start a 10 year clock ticking, will depend on whether the works are “not minor”. IR refer us in this regard, to their 2005 interpretation guideline IG0010, which considered the “work of a minor nature” issue for the purpose of the development or division work taxing provision – s.CB 12. The following factors were provided as a guide in this regard:

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

IR consider that the “not minor” concept is similar in principle under both taxing provisions.

In respect of the specific question at hand, whether a fit-out to an existing building will be caught by s.CB 11, will require two considerations (before even getting to the “not minor” determination). Firstly, does the fit-out involve the permanent attachment (or removal of previously permanently attached) of items to the building, thereafter referred to as fixtures and part of the building itself? Secondly, does the addition and/or removal of the fixture, enhance the value of the building – therefore prima facie an improvement, or is the work done simply repairs and maintenance? Guidance in this regard can be found in the 2012 interpretation statement – IS 12/03, which sets out general principles for determining whether work is repairs and maintenance or a capital improvement.

Those of you who work with this area of the legislation, will appreciate the answers are never black and white, and it will always be the borderline cases that will require a judgement call to be made one way or the other. QB 18/01 provides 4 examples to assist with your interpretation in this regards.

Some closing comments on s.CB 11 in general, to alert you to two significant differences to those exposed to potential taxation under either s.CB 9 (land dealing business) or s. CB 10 (land development/subdivision business):

• Tainting by association is tested at the time the improvements are commenced, and not the time the land is acquired.
• Any gain on disposal is potentially taxable, where the disposal is within 10 years of the date the improvements were completed, and not 10 years of when the land was acquired.

Fine Tuning the Hobbit Law…

Not exactly tax (although arguably with a sprinkling of the flavour if you drill down to the differing taxation consequences for the parties involved), but topical nonetheless, with the new Government’s well publicised grumbling over its predecessors bowing to the pressures of Hollywood, a new working group has been established, to “find a durable solution to restore collective bargaining rights for film production workers, without necessarily changing the status of those who wish to continue working as independent.” One waits with eager for what may come next, and any potential extension to other employee versus independent contractor situations.

Richard Ashby BBus, CA, CPA PARTNER

Em: [email protected] Ph: +64 9 365 5532 Fx: +64 9 309 5260 Mb: +64 21 823 464