Income Tax Act, 2007 is the premier tax legislation in New Zealand. The facts provided in the individual cases shall be evaluated from the point of view of Income Tax Act, 2007. Based on the findings a detailed report shall be prepared to recommend the right course of action to the specific circumstances and situations.
To,
Tim Neil.
CC: Lacey Neil.
Re: Outlining tax implications of the profits on sale of seven lots of land.
Respected sir / madam,
This letter is in reference to the above subject matter. Using appropriate provisions of Income Tax Act 2007 a detailed discussion on the tax implications are provided below.
Part A:
Issue:
Theory:
Rules:
A conditional or unconditional agreement entered into by a person with the object of acquiring or selling a property and is not an option or future contract is how an agreement for the sale or purchase of property has been defined in EZ 48 of ITA 2007 (Calitz & Van Zyl, 2016).
Section CB 6 of the act explains amount received from disposal of land will be treated as income for tax purpose of the recipient if the land was acquired for more than one purpose and one of the purposes of acquisition of the land was to dispose it off in the future (San Juan, 2017).
Section CB 13 of ITA 2007 states that an amount derived from disposing off land will be treated as income of the person receiving such amount under the section if the amount has not been assessed as income under any of sections CB 6A to CB 12 as well as section CB 14. An amount derived from a scheme or undertaking which is not exactly business will be considered as income of the person under section CB 13 of the act (Saad, 2014).
Inland Revenue Department is the statutory department of New Zealand government provided with necessary powers and rights to administer tax related matters in the country. Often it is heard that there is no capital gain tax in New Zealand. Well it is not entirely true. The tax laws in New Zealand ensure collection of taxes in different names using hidden laws on gains from buying and selling of properties in the country (Mulligan, 2015). Thus, even if not called capital gain tax but Inland Revenue Department (IRD) collects property investment tax on profit and gains of sale of properties in the country.
The perception of IRD in relation to the transaction shall be the determinant factor in ascertaining the liability to ITA 2007 in the country. In case if the perception of IRD is that a person is trading in properties. Thus, earning profits and losses from buy and sale of profit would be assessable as income from business from the property trading of such person. On the other hand the investors with the intention of earning rent from properties or dividend from equity investment, such incomes shall be assessed as taxable income and accordingly, taxed as per the provisions of ITA 2007 (Exeter, Zhao, Crengle, Lee & Browne, 2017).
IRD while assessing the taxability of such transactions associated with properties in the country, it considers the following factors to determine the nature of such transactions and assessable income from such transaction to tax accordingly.
The intention of the seller at the time of buying the property:
If at the time of buying the property the objective behind the acquisition is to resale it then irrespective of the number of properties of similar nature that the buyer had, the sale proceeds from the sale of such property at the time of selling will be liable to capital gains tax in the country (Cordery, 2018).
The period of holding:
The period of holding of a property before the sale of such property is an important factor in determining the income tax liability on sale of such property. In case the property is held for less than 2 years or 24 months before the date of sale then profit on sale of such property is automatically taxed in the country (Johnston, 2017).
The transaction history of the tax payer in buying and selling:
In case a person has particular pattern that suggests historical transactions of similar characters with properties buying and selling then the person would be regarded as a trader in property. In such case the amount of profit and losses from buying and selling of such properties would be taxed as business income and not as capital gain in the hands of the tax payer (Edeigba & Amenkhienan, 2017).
Association with property industry or with a person who works in property industry:
In case the seller is associated with the property industry in his capacity as a property developer, trader, and builder or is associated with any person who works in the property industry then the gain on sale of properties within ten years will be taxed as capital gain in the hands of the seller. Thus, the connection with the property industry is an important consideration in determining the nature of income and subsequent tax liabilities on such income (Creedy & Eedrah, 2016).
In addition to the above IRD makes it compulsory for the tax payers to provide all relevant details about the tax payers and the transactions effected by them in relation to the particular properties and historic transactions. As already mentioned that the liability to pay tax on sale of property is dependent on four key aspects, these are; intention of the tax payer at the time of acquisition of the property, the history of buying and selling of properties of the tax payer, seller’s association with the property industry and whether the asset was sold within 5 years from the date of acquisition of such asset. In case the property was brought between October 01, 2015 and March 28, 2018, inclusive of both days, then the period of 5 years have been reduced to 2 years for determination of tax liability on sale of properties by the tax payers (Pega, Blakely, Glymour, Carter & Kawachi, 2016).
The intention at the time of acquisition:
Even if the intention at the time of acquiring the residential property was to resale it, the exemption provided under main home clause is applicable to the seller. Apart from that in case of inherited property, the bright line test does not apply as is the case with the executor and administrator of a deceased estate (Huizinga, Voget & Wagner, 2018).
Summarizing from above it can be said that the income that the income tax liability of a person from sale of a property would be dependent on number of factors. Primarily a person will be liable to pay either capital gain tax or business tax depending on the nature and character of the transaction. In case the seller is a trader who is involved in buying and selling of properties then income arising on sale of such properties would be taxable as business income of the seller (Cruz & Alley, 2017).
However, in case the property was acquired with the intention to resale it or with the intention to earn long term income from such properties then, profit or loss on sale of such properties would be taxable as capital gains or capital loss as the case may be. However, the ‘personal property’ concept is applicable to the sale of such properties also and in case of a residence which is the main residence of the seller and his family then, sale of such property would not be under the purview of capital gain or business income for tax purposes (Kelsey, 2015). Thus, in case of a person selling a residential property which is his main home then the no part of sale proceeds received from sale of such property would be assessed for income tax purposes in the country. In Anzamco Ltd (in liq) v CIR (1983),
.it was established by the court that in case an asset has been brought with the intension of reselling then proceed received from sale of such asset is taxable under s CB 6. The honourable judge in Aubrey v C of IR (1984)6 NZTC 61,765, has provided that all expenditures incurred in division and subdivision of land is allowed to compute taxable income from sale of such land under s CB 13. It was further established in Morrow v CIR (1989)11NZTC 6,053, that proceeds realized from sale of land is taxable in the hands of the recipient if disposal of the objective was the motive or one of the motives of acquiring such land at the first place (Cassidy, 2017).
Application:
As per the information provided, Tim Neil and Lacey Neil, here in after to be referred to as the Neil’s only, acquired around 3.5 hectares of land with the objective of conducting dairy and poultry firming in the land. Thus, the intention of the buyers at the time of acquiring the land was pretty clear, it was to conduct dairy and poultry firming. In 1985 the 3.5 hectares land was brought by $750,000 and in 1986 the Neil’s built a house on the land where they started living since then. Construction cost of building the house in 1986 was $200,000 (Fabling, Gemmell, Kneller & Sanderson, 2014).
After 12 years of purchasing the land, Neil’s decided to form two discretionary trusts in order to transfer the land to the trusts. Neil’s were the settlor and trustees of the trusts. The valuation of the land as per the expert at the time of transfer of the property to the trusts was $2.5m excluding GST. However, since the market value was not realized at the time of transferring the land to the trusts thus, there is no question of income and subsequent tax on such income due to the transfer of the property to the trusts (Krawczyk & Townsend, 2015).
The land was subdivided into five lots after 2 years from the transfer of the property to the trusts subsequent to the grant of resource content. It costs of the trusts $100,000 to apply and get the approval for the resource content. Out of the five plots, Neil’s retained the largest lot while it was decided that the remaining lots shall be sold to the interested buyers via a confidential tender process. The trustees also signed an exclusive listing agreement to sell the remaining lots to the interested buyer (Greig, Nuthall & Old, 2018). Subsequent to the listing agreement with Roy White Real Estate, the trustees were advised to subdivide the remaining four lots into fifteen lots to improve the financial return from the property. With increased demands in the market of lots, the Real estate agent has successfully sold the seven lots with the remaining lots are still in the market for interested buyers to acquire.
From the above facts the following key points can be can be drawn as per the provisions of the ITA 2007 and the instructions and notifications of IRD:
The intention of Neil’s was not to conduct business on the land:
Initially, at the time of buying the 3.5 hectares land, the intention of the buyers was to conduct dairy and poultry firming. Thus, there was no intention to resale the land to earn capital gain from sale of such property (Kelsey, 2015).
Building of residency house on the property cannot be considered as an exemption under ‘main home’ clause:
ITA 2007 and IRD have clearly explained that in case of main home the income accruing from sale of such property would not be liable to capital gain or business tax. However, in this case the land was not acquired for building home. It was an after though to build a home on the property. Thus, the entire land would not be exempted from income tax provisions of ITA 2007 (McCluskey & Franzsen, 2017).
Transfer of property to the trusts is not a taxable transaction:
The decision of the Neil’s to transfer the property to the discretionary trusts with Tim and Lacey as the settlors and trustees of the trusts is a not a taxable event. Even though the expert valuations showed a value of $2.5m of the property immediately prior to the transfer of such property to the trusts however, since the value was not received at the time of transfer hence, it is not a taxable transaction. No tax liability will arise to Neil’s subsequent to the transfer of the property to the trusts (Greig, Nuthall & Old, 2018).
Subdivision of land:
The subdivisions of land, firstly into five lots and then another subdivision of four of the five lots into fifteen lots by the suggestion of the real estate agent do not yield any monetary and financial benefits immediately subsequent to such subdivisions. Hence, no income tax liability will arise even at the stage of sub-division of the lots of land (Bodwitch, 2017).
Listing agreement with Roy White Real Estate and subsequent sale of seven lots:
The objective behind subdivision of four lots into fifteen lots subsequent to the signing of exclusive listing agreement by the trustees with Roy White Real Estate is purely with the objective of selling fifteen lots to the interested buyers with the intention of earning profit from sale of such lots. Thus, the objective of subdivision of four lots into fifteen lots and sale of these lots was purely commercial. Hence, income from sale of seven lots will be treated as assessable income from business of the trustees, Tim Neil and Lacey Neil. Accordingly, the income from sale of such lots will be taxed in the hands of the trustees (Cruz & Alley, 2017).
For the remaining 8 lots which are currently used for horse grazing will not be considered for computing the assessable income from business of the trustees at present. However, subsequent to the sale of these lots the trustees will be liable to pay tax on the income from sale of the remaining lots (Exeter, Zhao, Crengle, Lee & Browne, 2017).
Conclusion:
Taking into consideration the discussion about the different rules and regulations governing the income tax provisions in the country, it can be concluded that the profit from sale of seven lots will be considered as assessable income of the Trustee at the time of receiving the amount from sale of such lots. It is important to note that all necessary expenditures incurred in subdivision of the land into 5 lots at the beginning and then subsequent subdivision of the four lots into fifteen lots shall be allowed as deduction in computation of taxable profit from sale of seven lots.
The resultant profit after deducting all eligible expenditures shall be considered in determining the taxable profit from sale of seven lots. The taxable profit from sale of these lots will be assessed as income from business of the trustees and accordingly tax shall be paid on such profit.
Re: Outlining tax residency of just Juices Limited.
Respected sir,
This letter is in reference to outlining the tax residency of Just Juices Limited. Using appropriate provisions of Income Tax Act 2007 the tax residency of the company shall be explained here.
Part B:
Issue:
In this case the issue is to determine the tax residency of Just Juices Limited. Taking into consideration appropriate rules and regulations of ITA 2007 and guidelines of IRD, a descriptive analysis on the tax residency of Just Juices Limited is explained below.
Theory:
Rules:
YD 2 of Income Tax Act 2007 explains four bases to be used to determine the residence of companies in New Zealand. According to the act, ITA 2007, a company is a resident of New Zealand if;
A brief discussion about the above bases will be helpful in determining the residential status of a company in the country. It is important to keep in mind that the residency of the companies mentioned here is for the taxation purpose only.
In New Zealand Forest Products Finance NV v Commissioner of Inland Revenue – (1995) 17 NZTC 12,073, the High Court of Wellington decided that the central management of an entity is to be given due consideration in determination of the residency of such entities (Chan, 2014).
In Diamond v C of IR (2015) 27 NZTC 22-035 Court of Appeal, CA505/2014, [2015] NZCA 613, the importance of permanent place of abode was given importance in determination of residential status of a person. In case of companies it is the registered head office of the company that shall be considered as permanent place of abode to determine the residential status of a company.
A company must be incorporated in the country:
A company in order to be a resident of New Zealand, it must be incorporated in the country as per the statutory acts governing the activities and operations in the country. Only if a company is incorporated in New Zealand, it would be a resident company of the country and shall be taxed accordingly (Azemar & Dharmapala, 2015).
The head office of the company must be located in New Zealand:
Head office of a company is the registered head office where the books of accounts and other important documents of a company are kept and maintained. The address of the head office is where all the communication documents are addressed by the senders to the company. Thus, the head office of a company if located in New Zealand than the company shall be considered as the resident New Zealand Company for tax purposes (Murray, 2016).
Management center of the company shall be in New Zealand:
The center of management of a company can be defined as the core management of a company. Thus, the center of management must be in New Zealand for a company to be regarded as resident of the country. The management and strategic decision to run the day to day affairs of an organization shall be said to be from a country if its management is located within the country. Thus, if the center of management of a company is not within the country then it will not be a resident New Zealand company for the tax purposes in the country (Brandts-Giesen & Kelly, 2018).
Directors and management personnel exercise controls in New Zealand even though the decisions are occurred outside the country:
The directors and key managerial personnel of a company even if take decision from outside New Zealand, the company will still be considered a New Zealand resident company provided the directors and management personnel exercise controls of the company in the country.
IRD in its official website has provided important information to determine the tax residency of a company in the country. As per IRD, a company if incorporated under the New Zealand Companies Act 1993 then it shall be a resident company of the country (Pilcher & Gilchrist, (Eds.) 2018). No other criterions are needed to be fulfilled by the company to be treated as a resident of New Zealand. If the controls of the company are within the country even if the decision of the controllers are not confined to the country, the company will be a resident of New Zealand for the income tax purpose. Also in case the day to day affairs and operations of an organization are managed from New Zealand, the company will be stated as a resident New Zealand company. The head office of the company is in New Zealand means the business of the company is directed and carried out from the country (Ward, 2015).
Application:
As per the information provided in the document about Just Juice Limited, the following assertions about the company can be made;
Thus, from the above it is clear that except one, none of the four bases as mentioned earlier that determines the residential status of a company in New Zealand have been fulfilled by Just Juice Limited. The company is neither located in New Zealand nor its directors exercise controls of the company from the country. In fact the company also does not have a registered head office within the country. However, the center of management of the company is located in 99 Sylvia Park, Auckland, New Zealand.
Nowhere in the Income Tax Act 2007, has it been mentioned that the four bases have to be complied cumulatively by a company in order to be recognized as a New Zealand resident company thus, any company even if satisfying one single basis out of the four bases outlined in YD 2 of the Income Tax Act 2007, shall be considered as a resident company in the country. The fact that the reason for managing the company from 99 Sylvia Park, Auckland is not a valid consideration in denying the residential status to the company. Thus, the reason that the company has not found any place to manage its operations and business in Australia hence, 99 Sylvia Park, Auckland is used as the center of management of Just Juice Limited, cannot be used as an excuse to deny the residential status to the company in New Zealand (Brandts-Giesen & Kelly, 2018).
Conclusion:
In this case, though Just Juice Limited is not incorporated in New Zealand nor the directors of the company exercise control of the company from New Zealand however, since the company’s center of management is located within New Zealand, i.e. 99 Sylvia Park, Auckland to be precise, thus, the company is a New Zealand resident for income tax purposes as per section YD 2 of the Income Tax Act 2007. Taking into consideration the rules and regulations as provided in the act and the instructions given by Inland Revenue Department, it can be concluded that Just Juice Limited is a New Zealand resident.
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