A Week in Review

Hong Kong DTA Amendment

The Double Tax Agreements (Hong Kong) Amendment Order (LI 2018/118) was notified in the New Zealand Gazette on 12 July 2018 and comes into force on 9 August 2018.

The order gives effect to the Second Protocol to amend the NZ/Hong Kong DTA, which removes a present clause that prohibits the automatic exchange of information, thereby allowing both jurisdictions to meet their international commitments under the G20/OECD Automatic Exchange of Financial Account Information in Tax Matters initiative (AEOI).

“We’ll get them all with section CB 14”

Perhaps not an exact quote of the wording used when one of my colleagues was recently speaking to an IRD employee post attending a tax seminar, but regardless a word of caution to all of you out there who advise your clients on the application of the “land tax” rules to hopefully their “proposed” but unfortunately often “completed” dealings with land.

Section CB 14 in essence can apply where none of the more common land taxing provisions have application, with the exception of the major subdivision rule (CB 13) which comes last in the pecking order. It can apply when you have disposed of the land in question within ten years of the date you acquired it, you have made a gain, and 20% or more of that gain can be said to have arisen as a result of one of the factors that are listed in the taxing provision itself.

Often referred to as the “rezoning provision”, while it has actually existed since the birth of mankind (ok perhaps not quite that long), it has really only started peeking out from behind the curtain due to the release of the Auckland unitary plan. And because it is so often referred to as the “rezoning provision”, it is potentially immediately discounted therefore, when the client responds that their land has not been rezoned, which is unfortunate considering the reach of the taxing provision itself is in fact much wider.

In particular, the list of the applicable factors, includes “a consent granted under the Resource Management Act 1991”. Applying for a resource consent from council “that relates to the land” and consequently its permitted use, should put the adviser on notice that further consideration may need to be given to section CB 14, if they can manage to work their way through all of the other taxing sections (except CB 13), avoiding any tax impost on the disposal either because a particular taxing provision has no relevance or its application can be negated through reliance on one of the exclusions contained in sections CB 16A to CB 23B.

Establishing whether section CB 14 may have application to a disposal of land by your client, is made somewhat more difficult by the 20% correlation threshold. How can you adequately determine, and consequently ensure that your client takes a correct tax position at the time of filing the relevant tax return (both for their protection and yours!), whether the value of land has increased to the requisite level solely due to the effect on the land of certain land use factors (in this case the granting of a resource consent). Clearly the prudent answer must be that your client is advised to engage expert consultants (valuation, resource management, planning) to help in the “use change” assessment, if you consider there is potential for section CB 14 to apply.

So just be aware that the usefulness of section CB 14 is clearly on IR’s radar, somewhat evident in the recent case I reported on of Duthie v Roose (negligence claim against the accountants), where the grounds for the assessment (upon which the subsequent claim for negligent advice arose) was taxing the disposal under section CB 14. While the case judgement provided no real background to the basis for the original assessment by IR (considering that was not the issue), and it involved the subdivision of the land into seven separate titles, it was interesting to note however, that the original tax dispute was based on an IR assertion that the transferor company was a property developer, however ultimately the parties settled on the basis that section CB 14 applied instead. Was it a case therefore of “we’ll get them all in the end”, section CB 14 being seen as something as a safety net for IR, if they consider sustaining an argument under other taxing provisions is becoming more difficult??

Time will certainly tell, if the frequency with which we see risk reviews on land dealings by our clients heading down the section CB 14 assertion path by the IR investigator, begin to increase.

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