Critically examine the impact of selected contemporary tax issues on practice.
Critically reflect on the framework in which taxation is administered in New Zealand.
Understand and evaluate fundamental tax concepts relating to income and deductions.
Analyze and evaluate relevant New Zealand legislation and case law to compare and contrast the tax obligations of individuals, partnership, trusts and companies.
Critically reflect on taxation problems arising in relation to individuals, business entities, trading structures, and communicate appropriate technical advice in relation to these problems.
Critically examine the impact of selected contemporary tax issues on practice.
The current market of the land before to its transfer was $2.5m excluding GST. This value was used as a foundation to settle the land to the trust. On settlement, debt acknowledgements were executed by trusts to Neil, and a gifting deed was prepared by Neil subsequent to this. After two of settling the land, a resource consent application was made by trusts to subdivide the land. Further the same was granted after three months which charged $100,000 for the resource consent. Largest slots were retained by Neil, and other lots were sold to buyers through the secret tender process.
They have been advised by the real estate agent that the trustees must subdivide the other four lots in fifteen lost due to higher returns. Within 3 months, application of resource consent for the new subdivision was acquired, because of the high demand for lots. Further Roy White succeeded in selling seven lots. The remaining market and land lots are put in use of horse grazing.
The issue is taxability provisions of the above-cited transaction to respond to Inland Revenue Department as under the letter if the voluntary disclosure was made by trusts, then they will be allowed a reduction in imposed fees.
In accordance with the taxation provisions of New Zealand profits generated from the sale of real property is generally not taxable. They are taxable at normal income tax rates only if one or more following circumstances are satisfied:
- the business of the taxpayer comprise dealing in concerned property,
- the property was attained with the objective of selling the property and
- The profits is derived from the carrying out of an undertaking scheme with the objective of making profits.
CB7 of the ITA 2007deals with land transaction business of Deals, dividers or dealers of land on the period of acquisition or related taxpayer. Under this, the acquired land meant for the business purpose, wherein the question lies with dealer by considering its nature, financial outcomes, transactions frequency and pattern.
In accordance with the provisions of ITA 2007, tax gains received from the residential land disposal is disposed from the time period of two years after the date on which the interested person of the land carries the transaction (Kelsey, 2015). As per Bright line test, this date is earlier of:
- the date whereby an individual makes an agreement on land disposal, or
- the date whereby the land is gifted by the individual, or
- the date on the which land is mandatorily obtained by the Crown or public/local
Along with this, the date of a bright line is the most primitive of the dare land disposal is made by the mortgage due to the default of mortgagor, if these above mentioned for key categories are not applicable then the date on which the residential land is disposed on the state or interest.
CB 9 & 10 states that amount received from the land disposal is considered as income if the disposing of land was done within the time period of ten years of acquisition or from the date the acquisition, or rated party is conducting the business of trading/developing/subdividing land (Kelsey, 2015). It is applicable if or if not the land was obtained with the intention of the transaction, development or subdivision of business.
The rule of bright-line stays as stable as per these rules and the Income Tax Act in a more general manner. The provision placed in ss CB 6 to CB 23 is covered in four aspects:
- Acquiring land for the purpose of disposal
- doing business on land
- policies meant for development and division
- land put into sale within ten years of land acquisition, in which at least 20% of total profit was because of planning control.
The most reliable provision for the intention of this article will be s CB 6. Further, provision believes that “[a]n amount derived by a person while disposing of land is considered as the income of the individual if the land is acquired by the, for the intention of disposing of.
According to the s CB 6, it not relevant that the intention of disposal is neither the main reason and nor the intention of the taxpayer on the date of purchase. Along with this, the section has laid insufficient time limit by which a purchase is not considered made and for the resale purpose (McCluskey and Franzsen, 2017). Thus, a taxpayer can retail a property piece for the time period of 50 years and nevertheless be found to have bought it with the intention of resale.
The subjection of Section CB 6 is done to multiple exemptions. Exemptions will be given to taxpayer if the land is taken into account as a residence. However these exemptions will be applicable in case the taxpayer was involved in the common buying and selling pattern of land. Moreover, exemptions will also be given to the taxpayer of the land is employed for business premises.
During 1990, the decision was made by the high court that Jurgens and Doyle v Commissioner of Inland Revenue and created that the intention of the taxpayer according to the s CB 6 and is determined on the basis of the subject. This creates complexity while applying the test.
According to the s 149A (2) of the Tax Administration Act 1994, the stress will be put on the taxpayer of the proof falls, not on the commissioner (Cassidy, 2016). On the other hand, it is every time unrestricted to the seller to make the argument that they have not purchased the property with the target of selling. As the taxpayer who stated the purpose will not have the power of deciding, they have significant evidence.
The test’s subjective nature states that no sole aspect will be convincing the intention of the taxpayer. A statement was released by Inland Revenue in 2011 stating the intention of the taxpayer while purchasing the property is determined (Tax on land transactions, 2009).. These aspects consideration contain, but are not restricted to the property number that an individual has purchased or sold.
The consideration was made by the court, not in the presence of a general tax on capital gain, under section CD 1 (2)(a). It is the section in which the treatment of land is provided same as a trading asset (Ward, 2015). The mandatory intention of acquisition would not be apparent in developments plans or in light of initiative like to acquire zoning changes.
In accordance with the CB 11, income is considered when the amount gained from the land of disposal is done within the time period of 10 years of the closure of improvements and the at the starting time of improvements, the supplier, or associated party, conducted business of erecting buildings (Levy, Dong and Young, 2016). It is applicable if or if not the land was obtained with the intention of the building business.
Further the CB 16 q related with CB 6 states that, residential exclusion is applicable to acquired land with the presence of dwelling house or erection of the dwelling-house by a person on the land, and the dwelling house was acquired predominantly as a residence by the taxpayer and family members residing there, or the beneficiaries of the trust wherein the trustee is taxpayer.
According to the CB 16, Exclusion is applicable only if the total land area is 4500 square meters or less, or the majority of the area is needed for reasonable business or for entertainment purpose (Tax on land transactions, 2009). Further, the taxpayer is not accessible to the general acquiring pattern, and disposing-erecting and dwelling house are disposing of.
The CB 17, relates to sections CB 12 and CB 13, CB 12 and CB 13 is not applicable in case the undertakings or policies are tentative to impact an improvement, development or division for the utilization or intention of the taxpayer or any of its family member to reside on land (Dixon, 2016). Furthermore, CB 12 and 13 is also not applicable if the land is from the division of land to 2 or more lots and the value of lot was lesser than 4,500 meters before to its subdivision and occupancy predominantly as dwelling land by the taxpayer and the living family members. The exemption of trusts is not inclusive under CB17.
Under this act, three exemptions are included to the rule; property disposal that is the main house of the transferor, natural property disposal, transferring done as per the agreement of relationship property.
(1) Main home
It is not the responsibility of transferor to make payments of tax according to the rule of bright-line in case the disposed of the property is considered as main home. Further, this exemption is most probably to increase flexibility in the rule. The family sanctity present in New Zealand is properly recorded and reflected in regards to that the past tries to initiate a detailed CGT which have a frequent exemption in taxation.
(2) Inheritance of property
(3) executor or administrator of a deceased estate
Residence occupied by owners are exempted from capital profit rules in Canada, Australia, UK and US, however, the latter holds a threshold exemption. Moreover, the exemption stays as stable as with the Income Tax Act as a large. , like the regimes of land-sale usually, eliminate the sale of the main home of the person. While giving no exemption to the family home will certainly offer a clear test on objectives, officials have articulated that the property is also mentioned as non-likely to be purchased with the purpose of resale if it the main home of the seller.
In the first transaction, the tax will not be appealed and charges, as there is no intention of the person to sell the property and the other exemptions are also complied by the same. In this case, the land is not acquired for the purpose of selling; the main reason for purchasing the property was to do farming on the land. Henceforth this will not attract the taxation aspect even if the land is transferred for the benefit of two unrestricted trusts.
In transaction second, the tax will not be attracted since the decision of subdivision was made. No selling is involved in the second transaction thereby no tax will be charged. Further; one portion of land is owned by family members. In this transaction, only settlement of land and subdivision of land was done, which states that there is no intention of the person to sell the land which will further not attract the tax. This transaction is supported by provision CB 17, relates to sections CB 12 and CB 13, CB 12 and CB 13 is not applicable in case the undertakings or policies are tentative to impact an improvement, development or division for the utilization or intention of the taxpayer or any of its family member to reside on land . Furthermore, CB 12 and 13 is also not applicable if the land is from the division of land to 2 or more lots and the value of lot was lesser than 4,500 meters before to its subdivision and occupancy predominantly as dwelling land by the taxpayer and the living family members.
In the third transaction, the tax will be attracted as the land was subdivided into seventeen lots and from which the seven lots were sold. According to the rule, if the land or property is sold, then it is mandatory to pay tax on capital gains. If there is the intention of selling the property and the property is sold, then there is an exemption that attracts the tax. This transaction satisfies definition of income as, tax gains received from the residential land disposal is disposed from the time period of two years after the date on which the interested person of the land carries the transaction. It is because; amount derived by a person while disposing of land is considered as the income of the individual as the land is acquired by them, for the intention of disposing of to earn financial gain. Henceforth rule of acquiring land for the purpose of disposal is clearly satisfied. This will not be covered under exemption of main home as it not satisfies the rule of residence.
It can be concluded that the firm must comply with the above-described aspects to work in a legal manner. Applicability of provisions shows that third transaction is subject to taxation in New Zealand as the purpose of subdivision was to earn a profit, and seven units have been sold thus income received from the sale of those units. Assesse can take a deduction of cost on a proportionate basis in voluntary disclosure of taxable income. It is because; Income-generating expenses are allowed for deduction for computation of taxable income of assesse. Applicable tax rate is 33% as taxpayer is not a company (Reeves, 2017).
Provisions covered in the letter is supported by the provisions of ITA 2007, relevant case laws, Key statutory provisions under Land Transactions and Key statutory “Income” provisions for “schemes for profit” and “personal property”.
Cassidy, J. (2016). The New Zealand taxation of real property owned by non-residents (offshore persons). In Taxing Non-Residents: A Global Response to BEP? International Tax Conference.
Dixon, B., (2016). Land transactions. Property Law Journal, 25(1), pp.55-68.
Kelsey, J. (2015). Reclaiming the future: New Zealand and the global economy. Bridget Williams Books.
Kelsey, J. (2015). The New Zealand experiment: A world model for structural adjustment?. Bridget Williams Books.
Levy, D., Dong, Z. and Young, J., (2016). Unintended consequences: the use of property tax valuations as guide prices in Wellington, New Zealand. Housing Studies, 31(5), pp.578-597.
McCluskey, W.J. & Franzsen, R.C., (2017). Land value taxation: An applied analysis. Routledge.
Reeves, I., (2017). Know the Tax Rules Before Buying or Selling Land. [Online]. Available through < https://hendersonreeveslawyers.co.nz/know-tax-rules-buying-selling-land/ >. [Accessed on 18th April 2018].
Tax on land transactions. (2009). Know the Tax Rules Before Buying or Selling Land. [Online]. Available through < https://hendersonreeveslawyers.co.nz/know-tax-rules-buying-selling-land/ >. [Accessed on 18th April 2018].
Ward, A., (2015). An unsettled history: Treaty claims in New Zealand today. Bridget Williams Books.
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