A Week in Review
Potential Changes to Land Taxing Rules
Did your heart skip a beat when you read the title?
Mine did when I was checking my emails for the nth time on the weekend (as most of us do in this modern tech era I suspect, rather than completely switching off from work as we did back in the good old days), and an IR update glared back at me with the title “Feedback sought on rules for taxing certain land sales.”
Ignoring the family grumbles in the background (because this was really important to read right then and there!), the heart rate soon normalised as a quick skim read of the commentary in the article attachment, confirmed that IR were simply looking to tinker with the rules surrounding the proviso contained within the main home, residence and business premises exclusions, which limits the claiming of the exemption where the taxpayer exhibits a pattern of “habitual buying & selling of land.”
The problem which has been identified by IR with respect to the present legislative drafting, is the ability for taxpayers to structure themselves around the regular pattern restrictions, achieved by either using associated persons to carry out separate transactions or by varying each transaction so that there is effectively no pattern. This structuring opportunity is provided as a result of the narrow wording used in the legislation, where when considering the existence of a pattern or not, it is only the activities of the single person that are able to be taken into account.
To illustrate this point, in a scenario where the person acquires the first piece of land, has their wife acquire the second, their family trust acquire the third and then they again acquire the fourth, there presently exists no legislative pattern, as the person themselves has only undertaken 2 transactions (noting IR’s present view that a person must have had at least 3 prior transactions before the 4th will be considered reflective of a pattern).
IR’s proposed solution to the issue, is to amend the law to ensure that the regular pattern restrictions apply where a person, or a group of people or entities has a regular pattern of buying and selling land that has been:
- occupied by the person or group of people as their main home, residence or business premises (as applicable); or
- occupied as a main home, residence or business premises (as applicable) by the person or group of people that controls the entity or entities that own the land.
To ensure the effect of the change does not have a wider reach than intended however, it will be necessary that the same person or group of people or entities all occupy each of the properties.
In addition to the associated parties’ issue, IR has also expressed concerns that the “pattern restriction” in both sections CB 16 & CB 19, has been interpreted too narrowly to apply only where there is a similarity or likeness between the transactions. For example, two scenarios will not be considered as being part of a pattern, where in the first, the property is bought, lived in and sold, but in the second, the property is also renovated while it is lived in and sold.
Consequently, to address this potential shortcoming in the existing drafting, IR is suggesting that an amendment be made to broaden the scope of the regular pattern restrictions in these two sections, to ensure they apply to all patterns of buying and selling land used as a residence or business premises.
Finally, IR are interested in your views, as to whether the existing restriction contained in the main home exclusion for the bright-line rules, which limits the use of the exclusion where it has already been used twice within the two year period prior to the current sale, should also be extended to be included in the section CB 16 & CB 19 exclusions.
The deadline for comment is 18th October 2019.
Geurnsey TIEA Amendment Signed
Most of you will probably be aware, that along with the numerous double tax treaty agreements (DTA) that NZ has with foreign taxing jurisdictions (which usually already contain mutual exchange of information articles), we also now have a reasonable number of tax information exchange agreements (TIEA) with various non-DTA countries.
TIEA’s are devoted solely to information exchanges, and are more detailed in that respect, and we have seen a proliferation of these bilateral documents in recent years, amid a growing concern espoused by the G20 countries over the loss of tax revenue to tax havens. Those concerns resulted in the creation of an OECD black list of jurisdictions, who were considered to have engaged in harmful tax practices. For those unfortunate enough to make the List and desirous to create a cleaner image for themselves, they could qualify for removal from the list by entering into at least 12 TIEA’s.
Guernsey is one such jurisdiction, and NZ recently signed a protocol to amend the existing TIEA it has had with the region since 2009, to include model treaty provisions to prevent tax treaty abuse and improve dispute resolution as recommended by the OECD and G20. The agreement will come into force once both countries have given it legal effect.
Reckless Trading – Legitimate Trading Risk
I wanted to include a brief comment on this recent case law update I received, as while not tax related itself (although arguable considering it is often IR left out of pocket as a result), I appreciate that we often get asked questions by clients who have taken on the role of company director, as to what actions may or may not create a personal liability exposure for them, should their company get into financial difficulty at some point.
This particular case was a Court of Appeal decision, where the liquidator (in essence acting for IR who was the major creditor in respect of non-paid GST) was trying to take a personal action against the director for reckless trading, because he had made a decision to continue trading when the company was already in financial difficulties, to complete and sell four houses that his company had been building.
The decision of the Appeals court, confirmed the principle, that trading while insolvent does not automatically equate to a directors liability. The risk and loss to the company as a whole is relevant, not on a transaction by transaction basis. The terms “likely” and “substantial” which are used in the legislative provision, must be given weight, so too the section’s heading “reckless trading”. Risk must be considered alongside the potential advantage, and exercising hindsight judgment is cautioned against, as this does not “fully and realistically comprehend the difficult commercial choices facing the directors”.
In the present case, the Court held that the decision to complete the houses and sell them for fair market value was a sensible business decision. The alternative, walking away and leaving unfinished houses was the less sensible commercial option. Therefore, the Court concluded that the director did not act in bad faith and was not reckless.
Interestingly, the Court also observed that it was unclear whether IR in fact, suffered any loss from the director’s actions.