A Week in Review

It’s Been a Quiet Week

Not a lot was going on in the world of tax last week, so I thought I would use this week’s edition to shamelessly promote our advisory services offering again, and also to revisit the residential land bright-line rules with just some reminder tips, further to the recent extension of the requisite ownership period to 5 years.

Tax Advisory Services

For just nigh on two years now, we have been offering advisory services to those who either may not have their own internal tax resource, or do, but need to seek a second opinion or simply would like a sounding board to confirm their own views on a specific issue.

It is a simple pay as you use it service – express an interest in using the offering, we set you up as an advisory client, and then for any month during which you use the service, we issue an invoice with a WIP report attached so that you have complete transparency with respect to how the charges have arisen, and for on-billing to your own client naturally. There is no “minimum” charge and equally we do not bill for every 30 second call – in our view there has to have been value provided and we are focussed on developing long-term relationships with you, not making a quick buck in the short-term.

There are predominantly three parts to the service –

• Q&A – by far the most popular to date – providing answers to those niggling questions we all have, usually via written email so easy for you to save for future reference – charged usually just on a time & cost basis;
• Detailed opinions – land transactions and tax residency the two most common, where we provide a comprehensive written detailed opinion on the potential issues as we see them, the likely taxation implications and any recommendations to mitigate – charged usually on the basis of a cost estimate up-front, which you can get your client to agree to prior to us proceeding; and,
• IRD assistance – a service which has two main aspects to it – risk review/audit and tax debt management. The services provided can range from simple strategy advice to full management of the task at hand. For this engagement, we also try to provide an up-front cost estimate, although as many of you will appreciate with IRD involvement, how long is a piece of string, and consequently we usually estimate on a staged basis – attending initial interview, preparing a NOPA, completing a statement of position for a hardship write-off application etc.

I am often asked, do we engage directly with your clients, to which I respond, no, not unless you specifically request us to do so. You are our client and therefore we are acting on your behalf whenever engaging with either your client or an external party such as the IRD.

So please give me a call to discuss further if the offering is of interest to you.

Bright-line revisited

On the 29th March 2018, the residential land bright-line period was extended from two to five years. The rules themselves are quite draconian, in the sense that there are basically no carve outs, so unless the land you are disposing of contains your main home (and the land has been used in that capacity for most of the time you have owned it), you will be exposed to tax on any gain you make upon disposal.

To more fully understand the harshness of the rules, compare this to say the rule our Politicians tell us Brightline was introduced to assist – section CB 6 – land acquired for purpose or with intention of disposal. The taxing provision itself has no time limit, so if IRD forms a view (with taxpayer onus to prove otherwise) you originally acquired the land with the requisite disposal purpose or intention, then the land is taxable whenever sold (unless one of the legislative exclusions can then be claimed). To negate potential application of the taxing provision, and support say a long term investment purpose/intention, naturally the longer the land is owned, the easier it may be to dispel any alternative contention by IRD. However, as we all know, our future is never certain and things just happen that were never anticipated, no matter how good our planning is in advance of making the investment decision.

Take the example therefore, of our current Government’s effort to effectively stunt the Auckland property market to make it more affordable for first home owners (excuse me, but I would suggest it is a bit late for that!). Let us say that they achieve their goal and house prices in Auckland fall 10%. The bank calls in your loan on the investment property because you bought near the height of the market, were heavily geared and your debt/value ratio no longer satisfies your banking covenants. So you have to sell, but manage to eek out a small capital gain in the 18 months you have owned the property. Under CB 6, you would have had sufficient evidence to show an external market force effectively forced you to sell, and arguably the taxing provision should have no implication to the capital gain, because of your original investment purpose/intention at acquisition. Not so forgiving under Bright-line however – disposed within the requisite two year window, not your main home, so the gain is fully subject to tax. Hmmm.

However, the rules are unfortunately what they are, and only future legislative amendments can fix that. So just some reminders about Bright-line –

• If you acquired the land prior to 1st October 2015, then it cannot be subject to Bright-line;
• If you acquired your first interest in the land (often the date you sign a binding agreement) post 1st October 2015 but prior to 29th March 2018, then you are only subject to the two year bright-line period;
• Remember the pecking order for the Bright-line rule within the land tax provisions – its application comes after consideration of all other land tax provisions (including CB 6), with the exception of the major development/division and land use change taxing provisions. This is important from the perspective of greater deductions against the disposal proceeds which may be obtained by accepting one of the earlier taxing provisions should apply, as opposed to taxation under Bright-line which has various quarantining rules;
• As I alluded to earlier, to claim the main home exclusion, the residential land must have been used in that capacity for most of the time you have owned it. So if you have owned the land for four years of the five year bright-line period, it is no good to simply attempt to occupy the land as your main home for the last year of the four years in an attempt to claim the exclusion, because at the time of the disposal, you are only going to have used the land 25% of the time as your main home so the exclusion will not be available;
• Appreciate the fact that the Bright-line rules do not contain the same associated period concession that other land tax provisions have. For example, when applicable, the associated persons rules permit the transfer of residential land between associated persons with the transferee able to claim the benefit of the transferor’s ownership period, which can be very useful in situations where you are considering say the application of a 10 year rule. There is no such concession under Bright-line, so the time clock resets upon transfer. Be careful of deemed disposals in this regard, say a trust distributing the residential land to a beneficiary;
• Remember the usual acquisition date is the date the land transfer is registered, but the disposal date is usually the date a binding agreement to sell is entered into. There are also special timing rules for option agreements and selling “off the plans” scenarios etc; and,
• For your offshore owners, do not forget the potential residential land withholding tax rules that they will be subject to if disposing of the land during the Bright-line period.

Richard Ashby BBus, CA, CPA
PARTNER

Em: [email protected]

Ph: +64 9 365 5532

Fx: +64 9 309 5260

Mb: +64 21 823 464