Clarifying the acquisition date of land

Section CB 15B of the Income Tax Act 2007

The land provisions contained in subpart CB of the Income Tax Act 2007 have been amended to clarify the time at which land is considered to have been acquired for tax purposes.

Background

New section CB 15B clarifies the acquisition date of land for the purposes of the land disposal provisions in the Income Tax Act 2007, in particular section CB 6, which has caused considerable uncertainty for taxpayers, their agents and Inland Revenue.

Section CB 6 deals with land acquired for the purpose of, or with the intention of, disposal and the taxation of income derived from disposing of the land. If a taxpayer acquires the land with the intention or purpose of disposal and subsequently disposes of the land, any profit made is taxable.

Uncertainty arose around the timing of when the taxpayer's intention or purpose should be determined. The Courts held that "intention" or "purpose" should be tested when a taxpayer has acquired the land in question (known as the date of acquisition). However, because the definition of "land" in the Income Tax Act 2007 includes estates and interests in land, and the taxpayer acquires different interests and estates in "land" at different times under a typical sale and purchase agreement (which are then merged when the title is registered), neither the legislation nor common law provided sufficient clarity over which interest in "land" the date of acquisition should apply to.

To address this uncertainty, as part of Budget 2013, officials released the issues paper Clarifying the acquisition date of land. The issues paper discussed two possible interpretations of the provisions. It concluded that the "first interest" interpretation whereby the date of acquisition is the date when the first equitable or legal interest in land arises in a sale and purchase agreement (typically in the early phases of a sale and purchase agreement), would provide greater certainty and be more economically efficient. This interpretation also more closely reflected the policy underlying this provision when it was first introduced in the late 1800s (that is, to target property speculators), as it is the initial decision-making that informs how a person intends to use the property. It would be unusual for a property speculator to enter into a sale and purchase agreement unless they thought at the time of acquisition that it was likely that the purchase and its subsequent disposal would be profitable.

The new legislation is intended to provide taxpayers with greater certainty about the timing of land acquisition for tax purposes.

Key features

New section CB 15B is a general rule for subpart CB (income derived from land) and provides that the date a person acquires land is the date that begins a period in which the person has an estate or interest or option in that land.

There are two exceptions to this general rule.

The first exception, contained in subsection CB 15B(2), provides that if a person on behalf of a company (that is yet to be formed) enters into an agreement whereby the company will eventually have the land, the purpose and intention of the person is imputed on the company as if the company existed at the time of entering into the agreement.

The second exception contained in subsection CB 15B(3) provides that if a person has an estate or interest in land, and subsequently as a consequence of the person exercising an option obtains a new estate or interest in the same land, the person is treated as acquiring this new estate or interest from the time this person exercised the option.

New subsection CB 15B(4) provides that the timing provided for in new section CB 15B is overridden by any timing provided for in subpart FB or FC (which relates to transfers of property).

Detailed analysis

General rule of when land is acquired

New section CB 15B(1) provides that a person acquires land at the beginning of a period in which the person has an estate or interest or option in that land. Practically, this means that the date the taxpayer's purpose or intention is tested for the land sale provisions, will be the date a binding agreement is entered into.

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.

As noted above, the policy underlying the general rule is the "first interest" principle, whereby the date of acquisition is the date when the first equitable or legal interest in land arises in a sale and purchase agreement, as typically it is the initial decision-making that informs how a person intends to use the property.

Exceptions to the general rule of when land is acquired
Acquisition of land by company yet to be formed

One exception to the general rule clarifies when a person, on behalf of a company that is yet to be formed enters into an agreement whereby the company will have the land, the purpose and intention of the person is imputed on the company as if the company existed at the time of entering into the agreement.

The purpose of this exception is to ensure that new section CB 15B is not circumvented on the basis that the company did not have the requisite purpose or intention as they did not exist at the time that the nominator, transferor or assignor entered into an agreement for the land. This is despite the nominator, transferor or the assignor having some form of decision-making authority to form the company or decision-making authority once the company is formed.

Further land from the exercise of an option

Another exception to the general rule provides that where a person has a previous (first) interest in land, and exercises an option that is related to that land, the person has entered into a new acquisition and sections CB 6 and CB 15B should be applied, as if the previous interest did not exist.

This situation is only likely to occur when there is an option to exercise a right to acquire another estate or interest in land.

In this example Brian has a number of interests and estates - the leasehold land, the option and once the option is exercised, a contingent equitable interest in the land that eventually merges into an estate in fee simple. Without this subsection, Brian's intention or purpose is only tested when he acquires the unregistered leasehold interest. However because an unregistered leasehold interest does not merge into the legal estate in fee simple, if Brian had the intention to acquire the estate in fee simple to dispose of it, and Brian disposes of the estate in fee simple, any gain Brian makes from this disposal falls outside the ambit of section CB 6. This is because when Brian acquired (the leasehold) he did not have the intention to dispose of the leasehold, despite making another active decision to exercise the option and acquire the estate that is eventually disposed of.

This outcome is not consistent with the underlying policy intent of section CB 6 or the first interest principle, as Brian has made another active decision to enter into an agreement to acquire the estate in fee simple. The new subsection therefore treats the subsequent acquisition as a separate acquisition of land, and Brian's intention or purpose should be tested at this time (when he exercises the option). As stated in the officials' issues paper:¹
 

• ...the policy intent of section CB 6 is to capture property speculators, arguably the most appropriate time to assess a taxpayer's intention and purpose should be when a person decides to enter into a sale and purchase agreement. It is the initial decision-making that informs how a person intends to use the property. It would be unusual for a property speculator to enter into a sale and purchase agreement unless they thought it very likely that the purchase and its subsequent disposal would be profitable.
  [Emphasis added]

The example described above is distinct from the situation when a person just has an option to acquire land but no other previous interest in land. As described in the officials' issues paper, the appropriate time to test their intention or purpose in relation to the option is when the option is granted.

Application date

New section CB 15B applies to disposals of land from 22 November 2013, the date the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill was introduced. Therefore, section CB 15B can be applied retrospectively to land acquired before the 22 November 2013, as long as this land has not yet been disposed of.

For land that has been disposed of, the Commissioner's current interpretation of section CB 6 still applies (that is, the disposal interpretation - where the date of acquisition is determined by the "land" that is disposed of, usually at the later stages of a sale and purchase agreement).

Although the officials' issues paper acknowledged that the "first interest" interpretation is the preferred tax policy interpretation, the current interpretation is not a totally unreasonable interpretation that it is warranted for the Commissioner to "unwind" previous positions taken by both the taxpayer and Inland Revenue when the land has already been disposed.

¹Clarifying the acquisition date of land at para 3.5, http://taxpolicy.ird.govt.nz/publications/2013-ip-acquisition-date-land/overview.