EXPOSURE DRAFT - FOR COMMENT AND DISCUSSION ONLY. Deadline for comment: 10 August Please quote reference: PUB00220.

Transcription

1 Deadline for comment: 10 August Please quote reference: PUB QUESTION WE VE BEEN ASKED QB XX/XX INCOME TAX DATE OF ACQUISITION OF LAND All legislative references are to the Income Tax Act 2007 unless otherwise stated. This Question We ve Been Asked is about s CB 15B. Question 1. A number of the land provisions in the Act require you to identify when a person acquired land. Section CB 15B sets out the rules about this. When is land acquired under s CB 15B? Answer 2. Section CB 15B sets out the rules about when you are treated as acquiring land for most of the land provisions in the Act. The general rule in s CB 15B is that you acquire land when you first have an estate or interest in, or an option to acquire, the land in question (the first interest ). 3. You will often acquire different interests (each being land ) in the same piece of underlying physical land at different times. What is relevant is when you acquired your first interest in the land (ie, the particular estate) that you are disposing of. This will typically be when a binding sale and purchase agreement was entered into (even if subject to conditions see further from [29]). 4. Other interests in the same underlying physical land will not be relevant. For example, if you might be taxed on the sale of a freehold estate and the date of acquisition is relevant to that, the fact that you previously had a leasehold interest in the land will not be relevant. The time at which your first interest in the freehold estate arose will be the time at which that land was acquired. 5. Where you acquire land by way of an option, the date of acquisition will be when you exercised the option. 6. Where a company acquires land under an agreement entered into on its behalf before it was formed, the company is treated as acquiring the land when the agreement was entered into (see further from [50]). 7. The date of acquisition may also be different for particular transactions (eg, transfers of relationship property, distributions on death, distributions from a trust, transfers of value from a company, and gifts of property) (see further at [53]). Also, if you acquire land from an associated person or on an amalgamation, you may be treated (for the purposes of certain provisions) as acquiring land at a different date than the date under s CB 15B. See s CB 15(2) in relation to transactions between associated persons, and s FO 17 in relation to resident s restricted amalgamations. 8. There are special rules about when the 2-year period for the bright-line test in s CB 6A starts. This is generally not the same date as the date you acquire land under s CB 15B. The 2-year period for the bright-line test will start as set out below: 1

2 Type of acquisition Start of 2-year period Standard purchase of land When the land transfer is registered and you get the legal title. Where no title registered to you before disposal When you acquire the estate or interest in the land you are disposing of. This is determined under the normal rules, discussed in this QWBA. If you acquired the land off the plans (discussed at [24]) The date that you entered into the contract to acquire the land. If you acquired land and subsequently subdivided it Whatever the start date would have been for the original undivided piece of land. Lease with perpetual right of renewal converted into freehold title The date you were first granted the leasehold estate. Explanation 9. A number of the land provisions (which are in subpart CB of the Act) require you to identify when you acquired land. For example: If you acquired land for the purpose or intention of disposing of it, the amount you derive on disposing of it might be income (if no exclusion applies). Therefore you need to look at what your purposes and intentions were when you acquired the land. The date of acquisition of land is also relevant to ss CB 7, CB 9, CB 10, CB 12, CB 14, CB 18 and CB 19. The importance of the date of acquisition to those provisions relates either: - to the start of a 10-year period (because disposal of the land, or commencing an undertaking or scheme, within 10 years of acquisition will mean that sale proceeds are included as income in some circumstances); - to the issue of whether you were, or were associated with, a developer/builder/dealer etc at the time of acquisition (which may mean that certain taxing provisions apply); or - to what your intended use of the land was at the time you acquired it. If none of ss CB 6 CB 12 apply, the 2-year bright-line test (in s CB 6A) may tax any gains from residential land if the bright-line date for your disposal of it is within two years of when you acquired the land. You need to know when you are treated as acquiring the land so you can determine if that rule potentially applies. There are special rules about when you acquire land for the 2-year bright-line test. 10. Section CB 15B was enacted to clarify the timing of acquiring land for the land provisions in subpart CB (except the 2-year bright-line test). It was suggested that further clarity on how s CB 15B operates would be useful. In particular, the Commissioner has been asked to confirm when she considers that a person will acquire an estate or interest in land for the purposes of s CB 15B, and also to provide examples of the date of acquisition of land in different scenarios. 11. It is noted that, in most cases, the date that land is acquired for the land provisions in subpart CB will not be the date at which it is disposed of by the vendor or transferor. This QWBA does not consider the date of disposal of land. 2

3 Definition of land 12. Land is defined in s YA 1 as including any estate or interest in land, and as including an option to acquire land or an estate or interest in land: YA 1 Definitions In this Act, unless the context requires otherwise, land (a) (b) (c) includes any estate or interest in land: includes an option to acquire land or an estate or interest in land: does not include a mortgage: [Emphasis added] 13. Estate, interest, estate or interest in land and similar terms are defined as meaning: YA 1 Definitions In this Act, unless the context requires otherwise, estate in relation to land, interest in relation to land, estate or interest in land, estate in land, interest in land, and similar terms (a) (b) mean an estate or interest in the land, whether legal or equitable, and whether vested or contingent, in possession, reversion, or remainder; and include a right, whether direct or through a trustee or otherwise, to (i) (ii) (iii) the possession of the land (for example: a licence to occupy, as that term is defined in section 121A(1) of the Land Transfer Act 1952): the receipt of the rents or profits from the land: the proceeds of the disposal of the land; and (c) do not include a mortgage 14. Any estate or interest in land (whether legal or equitable, and whether vested or contingent) is land, and an option to acquire land or an estate or interest in land is also land. 15. Given this, a person will often acquire different estates or interests (each being land ) in the same piece of underlying physical land at different times. For example, during the typical course of acquisition of a freehold estate in fee simple, a person will usually acquire an equitable interest in the estate prior to acquiring the legal interest in the estate. Different estates or interests in the same underlying land 16. However, while different interests that are each land in their own right may be acquired at different times, what is relevant is when the land that is disposed of, and potentially subject to tax under one of the land provisions in subpart CB, was acquired. For example, if you are disposing of a freehold estate in fee simple and the date of acquisition is relevant to a particular taxing provision, the question is when did you acquire that land (ie, the freehold estate)? 3

4 Application of the 2-year bright-line legislation 17. The 2-year bright-line test came into force on 1 October It can only potentially apply if you first acquired an estate or interest in the land on or after 1 October When you first acquire an estate or interest in land is discussed below from [29]. In a typical land sale, this will be when you enter into a binding contract to purchase the land, even if there are some conditions that need to be met. 18. Please note that when you first acquire an estate or interest in land is not necessarily the same date as the date you are treated as acquiring land for the purposes of the land provisions (for example, where land is acquired through an option, where a company acquires land under an agreement entered into on its behalf before it was formed, or in the situations mentioned at [7]). To the extent that the item Taxation (Bright-line Test for Residential Land) Act 2015 Tax Information Bulletin Vol 28, No 1 (February 2016): 78 suggests that you necessarily acquire your first estate or interest in land at the same date you acquire land under s CB 15B, that item is incorrect. The start of the 2-year bright-line period 19. As noted above, if none of ss CB 6 CB 12 apply, the 2-year bright-line test (in s CB 6A) may tax any gains from residential land if the bright-line date for your disposal of it is within two years of when you acquired it. You need to know when you are treated as acquiring the land so you can determine if that rule potentially applies. Note that there are some situations where the test will not apply for example, if you satisfy the main home exclusion (s CB 16A). 20. The bright-line date for a disposal of land is not usually the same date that you dispose of the land (which can be relevant for other land sale rules). In a typical sale of land, the bright-line date will be when you enter into a binding agreement to sell the land. 21. As also noted above, there are special rules about when you acquire land for the 2-year bright-line test. These rules differ from the rules about when you acquire land for the purposes of the other land provisions in the Act. 22. If the transfer of the land to you was registered under the Land Transfer Act 1952 (or a similar foreign law if the land is outside New Zealand) on or before the date you are treated as disposing of the land, the date of registration will be the start date for the 2-year bright-line test. In a typical land sale, this will mean that the 2-year period starts when the land transfer is registered and you get the legal title. 23. If there is no transfer to you registered on or before the date you are treated as disposing of the land, the 2-year period will start when you acquire the relevant estate or interest in land. This is determined under the normal rules, discussed below. 24. If you acquired the land off the plans (ie, you entered into a contract to acquire land that was being developed or subdivided, so there was no title for the specific land you acquired at the time you entered into the contract), the 2-year period will start on the date that you entered into the contract. 25. If you acquired land and subsequently subdivided it, the 2-year period for each of the resulting lots will start on whatever date it would have started for the original piece of land. The fact that there are separate new titles issued is not relevant. 1 Section 4(2) of the Taxation (Bright-line Test for Residential Land) Act

5 26. If you had a lease with a perpetual right of renewal that you convert into freehold land, the 2-year period starts when you were first granted the leasehold estate. The general rule on when land is acquired for the purposes of the land provisions other than the 2-year bright-line test 27. The general rule as to when land is acquired for the purposes of the land provisions (except the 2-year bright-line test discussed above) is set out in s CB 15B(1), which says: CB 15B When land acquired General rule (1) For the purposes of this subpart except section CB 6A, a person acquires an estate, interest, or option that is land (the land) on the date that begins a period in which the person has an estate or interest in, or an option to acquire, the land, alone or jointly or in common with another person. 28. Under this general rule, you acquire land on the date that you first have an estate or interest in, or an option to acquire, the land in question. When land is acquired, different interests will typically arise at different times, which are then ultimately merged when the full title is conferred. The fact that s CB 15B refers to the date that begins a period in which the person has an estate or interest in, or option to acquire, the land indicates that it is the first estate or interest in the land in question that is relevant. When do you first have an estate or interest in land under a sale and purchase agreement? 29. The legislation does not specify when you are first considered to have an estate or interest in land. However, in Bevin v Smith [1994] 3 NZLR 648 (CA) it was held that a purchaser has an equitable interest in land from the time a binding contract exists, even if it is conditional. This is when equitable remedies are available to protect the purchaser s rights under the contract, though specific performance in the strict sense (ie, for the transfer of title) would not yet be available. 30. Where there is a conditional agreement, it is necessary to consider the nature of the particular conditions to determine whether they prevent a binding contract having been formed yet, or just suspend some right or obligation until the condition is satisfied. Common conditions in agreements for the sale and purchase of land include finance, building report or LIM conditions. Those conditions would not prevent a binding contract from existing. Conditions that require directors approval or due diligence are examples of conditions that may mean there is not yet a binding contract. 31. As noted above, the date you acquire land under s CB 15B is the date you first have an estate or interest in, or option to acquire, land. In a typical land sale, this will be when you enter into a binding contract to purchase the land, even if there are some conditions that need to be met. 32. This is supported by the extrinsic materials from the time of the introduction of s CB 15B. Those materials make it clear that a person is regarded as acquiring land at the time a binding agreement for the acquisition is entered into, even if there are conditions subsequent that need to be fulfilled. See, for example, Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill: Commentary on the Bill (Inland Revenue, November 2013). 33. The Commentary on the Bill sets out indicators of when a binding agreement is entered into, saying at 99: 5

6 Indicative characteristics of the date a binding agreement is entered into (that is, the agreement has no conditions precedent, but the vendor and the purchaser intend to be bound by the terms of the contract even if there are conditions subsequent that have to be fulfilled) are: the date a binding sale and purchase agreement has been signed and executed by both the vendor or purchaser (including nominees or agents); or the Date indicated on a binding sale and purchase agreement, which is then subsequently signed by the parties to the agreement; or the date a binding oral agreement for the disposal of land was agreed to by the parties, which has then been subsequently actioned by part performance of the agreement and if required later, evidenced by a memorandum. 34. As noted above, under the general rule, you acquire land when you first have an estate or interest in, or an option to acquire, the land in question. What is relevant is the time that you acquire the first interest in the land that you are disposing of and is potentially subject to tax under one of the provisions in subpart CB. Other interests in the same underlying physical land will not be relevant. For example, if the sale of a freehold estate may give rise to taxation and the date of acquisition is relevant, the fact that you previously had a leasehold interest in the land will not be relevant. The time at which your first interest in the freehold estate arose will be the time at which that land was acquired. 35. The following examples illustrate the time of acquisition of land under the general rule in s CB 15B(1), and also note when the 2-year period for the bright-line test starts. Example 1 Binding Sale and Purchase Agreement Land acquired for provisions other than the bright-line test The 2-year period for the bright-line test starts Binding S&P Agreement entered into S&P Agreement unconditional Settlement / transfer of title registered Sally entered into a Sale and Purchase Agreement to purchase some land (the freehold estate). The Agreement was subject to Sally obtaining satisfactory LIM and building reports within a specified timeframe. Those conditions were fulfilled, and the sale was settled in due course. When Sally sold the property some time later, one of the land provisions in subpart CB potentially applied and the date that she acquired the land was relevant. For the purposes of the land provisions in subpart CB (except the 2-year bright-line test), Sally acquired the land when she and the vendor entered into the binding Sale and Purchase Agreement, even though that agreement was subject to conditions, as that was when she first had an equitable interest in the land. 6

7 The 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title is registered to Sally. Example 2 Lease prior to acquisition of freehold zz Land acquired for provisions other than the bright-line test The 2-year period for the bright-line test starts Lease entered into Binding S&P Agreement entered into S&P Agreement unconditional Settlement / transfer of title registered Tony and Cleo were renting a house that the owner decided to sell. Prior to putting the property on the market, the owner asked Tony and Cleo if they might be interested in purchasing the property. They were, and so entered into a Sale and Purchase Agreement for the property. The Agreement was subject to finance. That condition was fulfilled, and the sale was settled in due course. When Tony and Cleo sold the property some time later, one of the land provisions in subpart CB potentially applied and the date that they had acquired the land (the freehold estate) was relevant. For the purposes of the land provisions in subpart CB (except the 2-year bright-line test), Tony and Cleo acquired the land (the freehold) when they and the vendor entered into the binding Sale and Purchase Agreement, even though it was subject to finance, as that was when they first had an equitable interest in the land. It is not relevant that they previously held another interest in the underlying physical land (ie, the leasehold interest). The potential taxing event was the disposal of the freehold estate, so the issue is when the freehold estate was acquired. The 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title is registered to Tony and Cleo. 7

8 What if the person who enters into the agreement to buy the land subsequently nominates someone else as the purchaser? 36. It is often the case that someone enters into a binding sale and purchase agreement to purchase land and that person and/or nominee are named as the purchaser. Prior to settlement, the person may then choose to nominate someone else as the purchaser and that person (the nominee) then completes the purchase. 37. In those circumstances, the nominee acquires the land under s CB 15B (so for the land provisions in subpart CB except the 2-year bright-line test) on the date they are nominated as the purchaser by way of a deed of nomination. This is when the nominee first has an equitable interest in the land. The 2-year period for the bright-line test would start for the nominee on the date the transfer of title is registered to them (ie, settlement). 38. Usually, in a nominee situation, the nominator and nominee are associated. Section CB 15 may apply where land has been transferred between associated persons. If s CB 15 applies, subs (2) would alter the date of acquisition for the transferee (in this case the nominee) for the purposes of most of the land provisions (ss CB 7 CB 12, and s CB 14). Section CB 15(2) would treat the transferee (in this case the nominee) as having acquired the land on the date on which the transferor (in this case the person who entered into the sale and purchase agreement) acquired it. However, the Commissioner considers that s CB 15 will not apply to alter the date of acquisition for a nominee where the sale goes ahead. This is because the land that the transferor had (an equitable interest in the estate) is different to the land that the nominee eventually disposes of (the legal interest in the estate). 39. The date of acquisition is therefore established under the general rule in s CB 15B(1). As noted above, this will be the date they are nominated as the purchaser by way of a deed of nomination. 40. Note that if the land is residential land, the nomination of someone else as purchaser within two years of the sale and purchase agreement being entered into may mean the amount the nominator derives on the disposal (the nomination) is taxed under the bright-line test (if none of ss CB 6 CB 12 apply). This would only be the case if the market value of the land had increased between the sale and purchase agreement being entered into and the nomination of someone else as purchaser for example, this may occur if there is an extended period between the agreement and the nomination. 41. The reason the disposal (the nomination) may have tax consequences is because the land (the equitable interest) is trading stock (as defined in s YA 1) for the purposes of s GC 1. This means that if it is disposed of for less than market value at the time of the nomination, the nominator will be treated as deriving an amount equal to the market value. The nominator is disposing of the right to buy the land for the purchase price in the sale and purchase agreement. If the value of the land had increased, an unrelated third party nominee would pay a premium for the right to buy the land for the purchase price in the sale and purchase agreement. The amount they would pay for that right would be the market value of the equitable interest disposed of on nomination. This means that an increase in the value of the land between the date the sale and purchase agreement was entered into and the date the nomination is made would mean there is income to the nominator under s CB 6A. 42. The following example illustrates the time of acquisition of land where there is a nominee, and also notes when the 2-year period for the bright-line test starts. 8

9 Example 3 Acquisition of land where there is a nominee Alex and Angus acquire land (an equitable interest) for the purposes of the land provisions, and the 2-year period for the bright-line test starts for them The trustees acquire the land (the freehold) for provisions other than the bright-line test The 2-year period for the bright-line test starts for the trustees Alex and Angus enter into a binding S&P Agreement with the vendor The Jones Family Trust is settled Alex and Angus sign Deed of nomination, nominating the trustees as purchasers S&P Agreement unconditional Settlement / transfer of title to the trustees is registered Alex and Angus entered into a Sale and Purchase Agreement to buy a property they thought would be a great investment. They planned to hold the property in a trust, but had not yet settled a trust when they found the property they wanted to buy. The Sale and Purchase Agreement named Alex and Angus and/or nominee as the purchaser. Alex and Angus subsequently settled a trust (the Jones Family Trust), and signed a deed of nomination to nominate the trustees of the Jones Family Trust as the purchasers. The Sale and Purchase Agreement subsequently went unconditional when a satisfactory building report and LIM were obtained. The sale was concluded, and the title was registered in the names of the trustees of the trust. When the Jones Family Trust sold the property some years later, one of the land provisions in subpart CB potentially applied and the date that the trustees of the trust acquired the land was relevant. For the purposes of the land provisions in subpart CB (except the 2-year bright-line test), the trustees of the Jones Family Trust acquired the land on the date Alex and Angus signed the deed of nomination under which the trustees were nominated as the purchasers. This was when they first had an equitable interest in the land. Section CB 15 might apply where land has been transferred between associated persons. If s CB 15 applies, subs (2) treats the transferee as having acquired the land on the date on which the transferor acquired it. Alex and Angus are each associated with the trustees of the trust, as they are settlors of the trust (see s YB 8). But s CB 15 does not apply in this case to treat the trustees of the Jones Family Trust as having acquired the land when Alex and Angus did. This is because for s CB 15 to apply, the amount derived by the transferee (in this case, the trustees) from disposing of the land would have to have been income of the transferor (in this case, Alex and Angus) under any of ss CB 6 to CB 14 if the transferor had kept and disposed of the land. Alex and Angus never had the particular land that was disposed of by the trustees the legal interest in the estate in fee simple. They had an equitable interest in that estate (which is itself land as defined). Because Alex and Angus never had the legal interest that the trustees disposed of, they could not have retained it and disposed of it. Therefore, s CB 15 cannot apply to deem the trustees to have acquired the land they disposed of at a different time to that established under the general rule in s CB 15B(1). 9

10 For the trust, the 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title was registered to the trustees. Land includes an estate or interest in land. This includes the equitable interest Alex and Angus had once they entered into the Sale and Purchase Agreement. That interest was disposed of when Alex and Angus signed the deed of nomination that nominated the trustees as the purchasers. If the deed of nomination was signed less than two years after the Sale and Purchase Agreement was signed, the 2-year bright-line test potentially applies to Alex and Angus s disposal of the land (if none of ss CB 6 to CB 12 apply, and if the criteria for the bright-line test applying are met). For Alex and Angus, the 2-year period for the bright-line test starts on the date the Sale and Purchase Agreement was entered into. If the 2-year bright-line test applies, an increase in the value of the land between the date the Sale and Purchase Agreement was entered into and the date the trustees were nominated as the purchaser would mean there is income to Alex and Angus under s CB 6A. This is because Angus and Alex would be treated as having derived an amount equal to the market value of the equitable interest they disposed of (see s GC 1 (Disposals of trading stock at below market value)). The market value of that interest would be the amount that an unrelated third party nominee would pay for the right to buy the land for the purchase price in the sale and purchase agreement. What if you acquire land by way of an option? 43. As noted above, there is a special rule (s CB 15B(3)) that applies if you acquire land through exercising an option to acquire it. 44. An option to acquire land might be a right contained within a lease, or it might be granted separately. An option is essentially an offer to sell, together with a contract not to revoke the offer (see, for example, Alexander v Tse [1988] 1 NZLR 318 (CA), and DW McMorland, Sale of Land (3 rd ed, Cathcart Trust, Auckland, 2011) at 3.16). You may also be granted what is known as a preemptive right or first right option to acquire land eg, a right of first refusal or a right of first offer. Although these pre-emptive rights are not, strictly speaking, options, if you acquire the land through exercising such a right, it will have become an option by that point. This means that the special rule about acquiring land through the exercise of an option will also apply if you acquire the land through exercising a pre-emptive right. 45. Under the special rule for land acquired through the exercise of an option, you are regarded as acquiring the land on the date that you exercised the option. Remember, what is relevant is when you acquired the land in question (ie, the land you are disposing of). It is not relevant if you previously had a different interest in the same underlying physical land. For example, if you had a leasehold interest in the land and an option to acquire the freehold, and you exercise the option, acquire the freehold and subsequently dispose of it, what is relevant is when you acquired the freehold. In that situation it would be the date that you exercised the option. Your prior leasehold interest is not relevant. 46. Another thing to note is that an option to acquire land (or an estate or interest in land) is also itself land as defined in the Act. Therefore, if you dispose of an option to acquire land, the date the option was acquired may be relevant. On this point, see from [48]. 47. The following examples illustrate the time of acquisition of land where an option or first right option is involved, and also note when the 2-year period for the bright-line test starts. 10

11 Example 4 Option to purchase land Land acquired for provisions other than the bright-line test The 2-year period for the bright-line test starts Option acquired Option exercised / Binding S&P Agreement entered into S&P Agreement unconditional Settlement / transfer of title registered Sanjay purchased an option to buy some land for a specified sum. Sanjay exercised the option. By doing so, a binding contract for the sale and purchase of the land was created on the terms set out in the option contract. The sale was settled in due course. When Sanjay went to sell the land a number of years later, one of the land provisions in subpart CB potentially applied and the date that Sanjay had acquired the land (the freehold estate) was relevant. Because Sanjay acquired the freehold through exercising the option, the exception to the general rule (contained in s CB 15B(3)) applies. Under the special rule in s CB 15B(3), for the purposes of subpart CB (except the 2-year bright-line test), Sanjay acquired the land (the freehold) when he exercised the option. The 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title is registered to Sanjay. 11

12 Example 5 Lease with option to purchase land Land acquired for provisions other than the bright-line test The 2-year period for the bright-line test starts Lease entered into and option acquired Option exercised / Binding S&P Agreement entered into S&P Agreement unconditional Settlement / transfer of title registered Baymax Robotics Limited entered into a lease of business premises and at the same time acquired an option, exercisable within the next two years, to buy the premises for a specified sum. Baymax Robotics exercised the option. By doing so, a binding contract for the sale and purchase of the land was created on the terms set out in the option contract. The sale was settled in due course. When Baymax Robotics went to sell the premises, one of the land provisions in subpart CB potentially applied and the date that Baymax Robotics had acquired the land (the freehold estate) was relevant. Because Baymax Robotics acquired the freehold through exercising the option, the exception to the general rule (contained in s CB 15B(3)) applies. Under the special rule in s CB 15B(3), for the purposes of subpart CB (except the 2-year bright-line test), Baymax Robotics acquired the land (the freehold) when it exercised the option. The 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title is registered to Baymax Robotics. [NB If the land was used predominantly as business premises, the 2-year brightline test could not apply to the sale, as the land would not be residential land as defined in the Act]. 12

13 Example 6 Lease and subsequent option to purchase land Land acquired for provisions other than the bright-line rule The 2-year period for the bright-line test starts Lease entered into Option acquired Option exercised / Binding S&P Agreement entered into S&P Agreement unconditional Settlement / transfer of title registered Scissorhands Sculpting Limited was leasing some land from which it operated its business. As the business became increasingly successful, Scissorhands Sculpting wanted to lock in the ability to purchase the land if things continued to go well. Scissorhands Sculpting entered into negotiations with the owner and, as a result, acquired an option, exercisable within a set period, to buy the land for an agreed sum. Scissorhands Sculpting exercised the option. By doing so, a binding contract for the sale and purchase of the land was created on the terms set out in the option contract. The sale was settled in due course. When Scissorhands Sculpting went to sell the land, one of the land provisions in subpart CB potentially applied and the date that Scissorhands Sculpting had acquired the land (the freehold estate) was relevant. Because Scissorhands Sculpting acquired the freehold through exercising the option, the exception to the general rule (contained in s CB 15B(3)) applies. Under the special rule in s CB 15B(3), for the purposes of subpart CB (except the 2-year bright-line test), Scissorhands Sculpting acquired the land (the freehold) when it exercised the option. It is not relevant that the company previously held another interest in the underlying physical land (ie, the leasehold interest). The potential taxing event was the disposal of the freehold estate, so the issue is when the freehold estate was acquired. The 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title is registered to Scissorhands Sculpting. [NB If the land was used predominantly as business premises, the 2- year bright-line test could not apply to the sale, as the land would not be residential land as defined in the Act]. 13

14 Example 7 Lease with first right option to purchase land Land acquired for provisions other than the bright-line test The 2-year period for the bright-line test starts Lease with first right option entered into Offer for the sale of the land made Binding S&P Agreement entered into S&P Agreement unconditional Settlement / transfer of title registered Jimmy Chews Limited leases its restaurant premises and has a first right option (a right of first refusal) to purchase the land should the owner decide to sell it. As it transpires, the owner decides to sell the land during the term of the lease. The owner makes an offer to Jimmy Chews, which Jimmy Chews accepts, and the parties enter into a sale and purchase agreement. The sale and purchase agreement is subject to finance and to the obtaining of satisfactory building and LIM reports. Those conditions are fulfilled, and the sale is settled in due course. When Jimmy Chews goes to sell the land, one of the land provisions in subpart CB potentially applies and the date that Jimmy Chews acquired the land (the freehold estate) is relevant. When the previous owner made an offer to Jimmy Chews, the first right option became an option to acquire the freehold. Because Jimmy Chews acquired the freehold through exercising that option, the exception to the general rule (contained in s CB 15B(3)) applies. Under the special rule in s CB 15B(3), for the purposes of subpart CB (except the 2-year bright-line test), Jimmy Chews acquired the land (the freehold) when it exercised the option by accepting the offer and entering into the binding contract for the sale and purchase of the land. It is not relevant that Jimmy Chews previously held another interest in the underlying physical land (ie, the leasehold interest). The potential taxing event was the disposal of the freehold estate, so the issue is when the freehold estate was acquired. The 2-year period for the bright-line test (which may apply if none of ss CB 6 CB 12 do) starts on the date the transfer of title is registered to Jimmy Chews. [NB If the land was used predominantly as business premises, the 2-year bright-line test could not apply to the sale, as the land would not be residential land as defined in the Act]. The acquisition of an option 48. As noted above, an option to acquire land or an estate or interest in land also falls within the definition of land in the Act. 49. Because options to acquire land or estates or interests in land are land, if you dispose of an option to another party rather than exercise it, the amount you derive on disposing of the option may potentially be income under one of the land provisions in subpart CB. Depending on which taxing provision is potentially relevant, the time at which you acquired the option may be relevant. Under 14

15 s CB 15B, an option will be acquired when a binding agreement for its acquisition is entered into. This is the time from which the option exists. Example 8 Acquisition of an option to purchase land ABC Dealing Limited, which carries on a business of dealing in land, enters into an option contract under which it has the right to purchase some land within a specified period, for a specified price. ABC Dealing Limited decides to sell the option, and does so. For the purposes of subpart CB, ABC Dealing Limited acquired the land (the option) when the option contract was entered into. Because there is no registered transfer of land to ABC Dealing Limited, the 2-year period for the bright-line test also starts on the date the option contract was entered into. Acquisition of land on behalf of a company to be formed 50. Note that s CB 15B(2) provides that if a person, on behalf of a company to be formed, enters into an agreement under which the company will have land, the company is treated, for the purposes of subpart CB in relation to the land, as existing from when the person enters into the agreement. 51. Because the company is deemed to exist at the time the relevant agreement is entered into, and the person entered into the agreement on behalf of the company, the date that the person entered into the agreement (that gave rise to an interest in land) will be the date the company is treated as having acquired the land. 52. There are no bright-line test implications for a person who acquires land on behalf of a company yet to be formed, where the company subsequently ratifies the contract for the acquisition of the land. This is because s 182 of the Companies Act 1993 allows for ratification of pre-incorporation contracts, and at common law an effective ratification constitutes the relationship of principal and agent retrospectively. 2 This means that the person who acquired the land on behalf of the yet-to-be-formed company would not have themselves acquired (and subsequently disposed of) a land interest. When there may be a different date of acquisition rule 53. Note that the date of acquisition rules in s CB 15B are overridden, for a particular transaction, by any relevant provision in either subpart FB or subpart FC. Those subparts deal with transactions such as transfers of relationship property, distributions on death, distributions from a trust, transfers of value from a company, and gifts of property. 54. Also, for the purposes of certain provisions, a person may be treated as acquiring land at a different date than the date under s CB 15 if they acquire land on an amalgamation (s FO 17) or, as noted above, from an associated person (s CB 15(2)). Draft items produced by the Office of the Chief Tax Counsel represent the preliminary, though considered, views of the Commissioner of Inland Revenue. In draft form these items may not be relied on by taxation officers, taxpayers, and practitioners. Only finalised items represent authoritative statements by Inland Revenue of its stance on the particular issues covered. 2 See further in this regard: The Laws of New Zealand Agency from [42]. 15

16 References Related rulings/statements Taxation (Bright-line Test for Residential Land) Act 2015 Tax Information Bulletin Vol 28, No 1 (February 2016): 78 Subject references Income Tax, acquisition of land Legislative references Companies Act 1993, s 182 Income Tax Act 2007, ss CB 6A, CB 15, CB 15B, GC 1, and the definitions of estate, land and trading stock in s YA 1 Taxation (Bright-line Test for Residential Land) Act 2015, s 4(2) Case references Alexander v Tse [1988] 1 NZLR 318 (CA) Bevin v Smith [1994] 3 NZLR 648 (CA) Other references DW McMorland, Sale of Land (3 rd ed, Cathcart Trust, Auckland, 2011) Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill: Commentary on the Bill (Inland Revenue, November 2013) The Laws of New Zealand Agency (online ed, accessed 31 May 2016) 16