Section CB 6 - date of acquisition of land and intention
2016 case note – TRA found land acquired on date of settlement and disputant did not have an intention to dispose of the land on that date – s CB 6.
This is a decision of the Taxation Review Authority ("TRA") finding that, for the purposes of s CB 6 of the Income Tax 2007 ("Act"), a land is acquired earlier than the date of registration. In this case the TRA found that the land at issue was acquired on the date of settlement and the disputant did not have an intention to dispose of the land on that date.
The TRA decision means that in terms of purchases of land before the introduction of s CB 15B of the Act (before 22 November 2013), the date of acquisition occurs earlier than the date of registration and determination of the acquisition date will depend on the facts of the case.
The disputant, who built up a successful business engaged in a property related activity, entered into a sale and purchase agreement in September 1996 for the purchase of a semi-rural property ("the Property") for $490,000.
The transaction was settled on 29 November 1996 and the transfer was registered on 14 March 1997.
In 1995 and 1996, there was publicity in the local newspapers relating to council proposals in the area. Under a draft plan released in 1996, the Property was identified for medium density residential development.
The disputant sold the Property in 2012 for $3,300,000.
The Commissioner of Inland Revenue ("the Commissioner') contended that it is the registration of an instrument under the Land Transfer Act 1952 ("the LTA") that is the event which creates or transfers a legal interest in land. On this basis, an assumption that land is acquired when an equitable interest is acquired cannot be applied in the context of s CB6 of Act.
The disputant's position was that the LTA was not authority for the date land is acquired for taxation purposes and that current case law showed an equitable interest in land can exist without the interest being registered on the title (the introduction of s CB15 has clarified the acquisition date of land for the purposes of s CB6, however, this provision only applies to purchases after 22 November 2013).
Issue 1: Acquisition of property for purposes of s CB 6 of the Act
Judge Sinclair considered that for the purposes of s CB 6(1) of the Act, the date of acquisition is to be established at an earlier stage than the date of registration. She noted that depending on the facts, this date could arguably be when the taxpayer obtains an estate or interest under the particular agreement for sale and purchase (Bevin v Smith  3 NZLR 648 (CA)) or when the agreement becomes unconditional (Beetham v Commissioner of Inland Revenue  1 NZLR 575 (HC)).
Judge Sinclair also considered the definition of "land" and considered that the definition includes both equitable and legal interests and that the word "land" in s CB 6 of the Act encompasses the acquisition of either a legal or an equitable interest in land.
Based on the evidence, she concluded that the earliest date she could be satisfied of the disputant's involvement as purchaser of the Property was the date of settlement. Therefore, for the purposes of s CB 6(1) of the Act, the date of acquisition of the Property by the disputant was 29 November 1996.
Because of her factual findings (mentioned below), Judge Sinclair did not consider it necessary to determine the earliest date when acquisition could have occurred.
Issue 2: Purpose or intention of disposal for purposes of s CB 6 of the Act
Judge Sinclair found the disputant to be a credible witness. Her Honour accepted the disputant's evidence that she had no expectation of a sale at the time the sale and purchase agreement was signed.
Judge Sinclair, having considered the totality of the circumstances, concluded that for the purposes of s CB 6 of the Act the disputant had the intention of making the Property her home at the date of the acquisition.
The Commissioner submitted that even if it was found that the disputant did intend to live in the Property, the disputant also had the intention to develop or dispose of the Property at some future time (when the zoning changed). The Commissioner referred to an Inland Revenue file note of August 1997 which stated that the disputant intended to develop the Property into 30 sections.
Judge Sinclair noted that there is no evidence of any plan for a subdivision or that such a development was contemplated. Her Honour, having found that the disputant decided not to move in to the Property before she made her Goods and Services Tax claim in May 1997, noted that the statements made in the file note relate to events after the disputant had decided not to live in the Property.
Under cross examination, the disputant stated that "ultimately years down the track" she would sell the Property. Judge Sinclair considered this to be simply a reflection of the disputant's general position with regard to property ownership
In relation to the totality of the circumstances, Judge Sinclair made the following findings:
- The nature, quality and location of the Property were consistent with the disputant's stated intention to purchase the Property as her home.
- The disputant's prior activities and experience do not extend to direct knowledge and involvement in property development so that no inference can be drawn that this was her intention at the date of acquisition of the Property.
- There was no evidence of any pattern of purchasing land to be held for development long term.
- There was no contemporaneous evidence that at the time of the acquisition the disputant purchased the land deliberately to sit on it waiting a zoning change.
- Despite the disputant's knowledge of the property market and its potential value, it could not be inferred that the disputant had the purpose or intention when she purchased the Property to hold it pending a zoning change and then dispose of it (either developed or undeveloped).
Judge Sinclair concluded the disputant had discharged the onus of proving she did not have the intention or purpose at the time of acquisition to subdivide and sell the property and therefore the amount received from the the sale of the Property was not assessable income under s CB 6 of the Act.
Income Tax Act 2007